Rent Fraud Rampant in City, Report Says

Rent Fraud Rampant in City, Report Says

Published: 
September 2011

Almost half the rent-stabilized apartments in New York City may have illegally high rents, according to a study released in August by the housing activist group Make the Road New York.

The report, “Rent Fraud: Illegal Rent Increases and the Loss of Affordable Housing in New York City,” was based on a sample of 200 apartments in Brooklyn, Queens, Manhattan, and the Bronx. The Bushwick-based organization found that 45 percent had illegally high rents registered with the state Division of Housing and Community Renewal, and one-third had missing years in their rent history. (Owners of rent-stabilized apartments must register their rents every year.) Not surprisingly, 60 percent of the apartments with gaps in their rent history also had illegally high rents.

“It ranges from small inflated rents to horror stories,” says Hilary Klein, lead organizer at Make the Road. Some of the tenants the group spoke to were charged more than $10,000 in illegal increases, she says.

The number of apartments with fraudulent rents may be even higher, the report says, because in 12 percent of the units surveyed, “landlords failed to register any rents in recent years, making it impossible to determine the existence of rent fraud.” Also, it says, owners sometimes charge tenants more than the registered rent.

Housing advocates around the city say the report confirms what they’ve been seeing. “I’ve seen the same pattern for years and years,” says Ken Rosenfeld, head of the Northern Manhattan Improvement Corporation in Washington Heights. “I think this is just the tip of the iceberg.”

“There is a lot of fraud out there,” adds Ellen Davidson, an attorney in the Legal Aid Society’s housing-law reform unit.

Common practices the study found included landlords simply raising rents without any legal justification; failing to register the apartment’s rent; raising rents more than the 6 percent a year permitted for major capital improvements; and inflating the costs of apartment renovations. 

Fraudulent increases were most likely on vacant apartments, it said. New tenants rarely know what the apartment used to rent for, explains Make the Road staff attorney Marika Dias. In one Flushing apartment, the rent was raised from $909 a month to $1,700 when a new tenant moved in in 2010—without any renovations, and more than $500 over the legal increase. 

 

Weak Enforcement

The report harshly criticizes the Division of Housing and Community Renewal, the part of the state’s housing agency that oversees rents for the state’s 875,000 rent-stabilized apartments. The DHCR’s Office of Rent Administration handled less than 1,900 overcharge complaints in 2010, according to the New York Times. About 35 percent were settled in the tenant’s favor. 

The biggest problem, the report and housing advocates say, is that the system is driven solely by tenant complaints, that the agency does not independently pursue possible fraud. “Even when DHCR sees an outrageous overcharge, they never investigate the rest of the building,” says Ed Josephson, housing coordinator for Legal Services New York. “They see their mission as responding to tenant complaints.”

Many tenants do not even know that they can complain if they think their rent is illegally high, or they don’t know to go to DHCR. Others fear that their landlords will retaliate against them for filing a complaint. Official correspondence and signs in the agency’s office are only in English, and tenants who speak Spanish or other foreign languages can rarely reach staff on the phone, the report says. And processing overcharge complaints takes a minimum of one year, usually 18 months. It can sometimes take more than two years.

The DHCR’s press office did not return phone calls.

 

Patterns of Fraud

The study was primarily based on apartments in Brooklyn and Queens, chosen to reflect the city’s mix of building sizes. The buildings “were not selected because we suspected rental overcharges,” it says. Make the Road then went door-to-door to find tenants willing to seek out their rent histories, and supplemented that information with rent histories obtained by other community groups elsewhere in the city, including Met Council.

Maria de los Santos of Bushwick found out that she had been charged $123 a month more than her legal rent for almost three years. The landlord did not register her apartment’s rent for the 12 years before she moved in, in 2005. It then retroactively registered a legal rent of $900—but by 2007, de los Santos was paying $1,050. Though DHCR took more than a year to process her complaint, in March she won $3,444 reimbursement and more than $6,800 in damages.

Luis Pelaez of Jackson Heights, an Ecuadorean immigrant, was not so fortunate. He contacted Make the Road after he fell behind in his rent and got an eviction notice. His rent history revealed he had been overcharged more than $9,000, after his landlord illegally raised the rent from $1,139 to $1,550 in 2006. However, he ran afoul of the “four-year rule,” the provision in the 1997 rent laws that largely prevents tenants from contesting overcharges more than four years old.

“By the time I found out I was being overcharged, it had been more than four years and I couldn’t do anything about it,” Pelaez said at a demonstration in Jackson Heights last winter. “But now my landlord will probably get away with overcharging me for years and he will probably win his case against me in Housing Court. There’s nothing I can do about it, and it’s very unfair.”

“There’s a lot of leeway for landlords to who choose to do illegal things,” says Marika Dias. “If they can get away with it for four years, they’re home free. The exceptions are very small.”

State courts have carved out some exceptions to the four-year rule, primarily when tenants have evidence that an apartment was fraudulently deregulated. However, the issues remain murky, and the exceptions do not apply to apartments that are still rent-stabilized.

The Make the Road study did not include illegally deregulated apartments, although housing advocates say that fraud is also rampant there. Though rents have risen sharply in upper Manhattan, Brooklyn, and western Queens in the last several years, advocates say the market there generally doesn’t yet support rents above $2,000 or $2,500, the old and new deregulation thresholds. Some landlords will claim that an apartment is deregulated while renting it out for less, in order to deny the tenant the right to renew their lease, says Robert McCreanor of the Catholic Migration Office’s Immigrant Tenant Advocacy Project in Sunnyside, Queens.

McCreanor sees different patterns of rent fraud. Small landlords, he says, are more likely to do “really egregious” things, such as simply raising the rent by $200 every year. The bigger ones, such as the predatory-equity firms Pinnacle and Vantage, are more subtle and professional, relying on inflating the costs of renovations. The DHCR, which reviews major-capital-improvement increases, often ignores its own rent-reduction orders, he says.

“The larger and more professional the real-estate company, the less likely they are to just jack up the rents without doing something to cover their tracks,” says Ed Josephson. “We’ve seen buildings where they use the same receipts and the same checks for ten different apartments. It’s frequent that you see phony documents after you file an overcharge complaint.”

 

What Needs to Be Done?

Make the Road’s main recommendation is that the DHCR should move from a complaint-driven model to actively enforcing the rent laws. The report says the agency should automatically investigate all rent increases on vacant apartments and all renewal increases above the city Rent Guidelines Board’s annual limits; investigate rents in all apartments in a building where an overcharge is found and in all buildings owned by that landlord; and deny rent increases to landlords who do not register rents. It also urges the agency to verify all increases for renovating individual apartments, a major source of fraud.

“Our vision is for them to become much more proactive,” says Hilary Klein. “By acting so passively and waiting for tenants to complain, they’re not enforcing the law.”

The report also recommends that the DHCR work with community groups to seek out rent fraud, enable tenants to request rent histories online, and hire more bilingual staff.

However, the DHCR’s ability to do this has been severely hampered by staff cuts, the report notes. The number of employees in the Office of Rent Administration is barely half what it was in 1995. Between 2005 and 2010, the number of workers addressing tenant overcharge complaints fell by almost one-third, from 83 to 58. The unit also reduced its staff that reviews landlords’ applications to increase rents, but by a smaller percentage—from 28 to 22.

“There’s an incredible lack of commitment to the kind of resources needed to administer the system,” says Ken Rosenfeld. “They consistently undercut it.” In the 1990s, he notes, DHCR prohibited landlords who didn’t register their apartments’ rents from collecting increases. It doesn’t do that any more.

All these proposals are good ideas, says state Sen. Liz Krueger (D-Manhattan), the top-ranking Democrat on the Senate’s housing committee—but they will not be possible unless the DHCR gets more staff and “a serious technological update.” The agency’s current computer system, she explains, “dates from the abacus.” 

If the DHCR had “21st-century computers,” she continues, it could focus on “bad actors” and “patterns of bad behavior.” It could investigate buildings where there are fraudulent increases in multiple apartments, and systemically review property portfolios with illegal increases in multiple buildings, such as those owned by Pinnacle and Vantage.

This could be done without legislation, she says. Gov. Andrew Cuomo promised her during last spring’s debate on renewing the rent laws that improving the DHCR’s technological capacities was a priority, she notes, as did state housing commissioner Darryl Towns. She says she hasn’t seen any specific plans, though.

The DHCR’s staff reductions, Krueger notes, began in the 1990s, just before the Pataki administration opened major loopholes in the state’s rent regulations. Albany enacted vacancy decontrol, she says, “and then decided to defund the agency responsible for oversight.”

“I think it’s clear that the current laws encourage fraud,” says Ellen Davidson. “Because DHCR doesn’t enforce any of its laws, landlords know they can get away with it.”