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Stahl York Avenue Co. LLC v. City of New York

United States District Court, S.D. New York

May 21, 2015



EDGARDO RAMOS, District Judge.

This year marks the fiftieth anniversary of New York City's Landmarks Preservation Law ("Landmarks Law"). When it was enacted, in 1965, the Landmarks Law aimed to "protect historic landmarks and neighborhoods from precipitate decisions to destroy or fundamentally alter their character"; "foster[] civic pride in the beauty and noble accomplishments of the past"; "enhanc[e] the city's attractions to tourists and visitors"; "support[] and stimulat[e] business and industry"; "strengthen[] the economy of the city"; and "promot[e] the use of historic districts [and landmarks]... for the education, pleasure and welfare of the people of the city." Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 109 (1978) (quoting N.Y.C. Admin. Code, ch. 8-A, § 205-1.0(a)-(b)) (internal quotation marks omitted). Like many urban landmarks laws, New York City's pursues these goals not by facilitating public acquisition of historic properties, but by providing incentives to encourage preservation by private owners and by placing certain restrictions on historic properties while ensuring that property owners can earn a "reasonable return" on their investments and have "maximum latitude to use their parcels for purposes not inconsistent with the preservation goals." Id. at 109-10.

This action stems from such a restriction: a decision by the New York City Landmarks Preservation Commission (the "LPC" or "Commission"), an agency created by the Landmarks Law, to designate as landmarks two buildings (the "Subject Buildings") on Manhattan's Upper East Side and limit the owner's right to redevelop those properties. Plaintiff Stahl York Avenue Co., LLC ("Stahl" or "Plaintiff") alleges that by designating these properties as landmarks and subsequently denying Stahl recourse in the form of a preliminary "hardship" finding, the Commission and the City of New York (the "City" and, together with the Commission, "Defendants") violated its substantive due process rights. In a separate action filed in the New York State Supreme Court, Stahl challenges the Subject Buildings' landmarks designation as an unconstitutional taking and claims that Defendants behaved arbitrarily and capriciously when they denied Stahl's Hardship Application.

Before the Court is Defendants' motion to dismiss the instant Complaint pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. Doc. 14. For the reasons set forth below, their motion is GRANTED pursuant to Rule 12(b)(6).


A. The Subject Buildings and the First Avenue Estate

During the early 20th century, the City and Suburban Home Company ("CSHC"), a philanthropic corporation that existed from 1896 to 1961, commissioned construction of several "light-court" style tenement complexes in Manhattan intended to diverge from the "dark and unventilated" housing typically available at that time to New York City's working poor. Stahl York Ave. Co., LLC v. City of New York, 76 A.D.3d 290, 292 (1st Dep't 2010); Compl. ¶ 27.[2] One such complex was the First Avenue Estate ("FAE"), a group of buildings occupying the full city block ("block 1459") bounded by York Avenue, First Avenue, East 65th Street, and East 64th Street. Id. ¶ 19. Comprised of fifteen six-story buildings-each featuring courtyards, stairwells, hallways, and apartments designed to receive maximal exposure to light and air-the FAE was considered "an important achievement in the social housing movement." Stahl, 76 A.D.3d at 292; Moston Decl. Supp. Def.'s Mot. to Dismiss (Doc. 15), Ex. B at 2.

Thirteen of the fifteen buildings comprising the FAE were built on a single plot of land purchased by CSHC in 1896. Compl. ¶ 28. Construction on these buildings (the "Original Buildings"), which were designed by renowned architect James Ware, was completed in 1906. Id. At the time, CSHC did not intend for the FAE to cover the entirety of the block. Id. ¶ 29. But in 1913, eighteen years after CSHC purchased the plot of land and seven years after the Original Buildings were constructed, CSHC purchased the plot of land covering the remainder of block 1459, on which the Subject Buildings now sit. Id. ¶ 29. The Subject Buildings, which were designed not by Ware, but by Philip Ohm, an "undistinguished" architect employed by CSHC, were completed in 1915. Id. Stahl alleges that, together, these two "architecturally insignificant six-story walk-up tenement-style apartment buildings" consist of "190 poorly designed, warren-like apartments." Id. ¶ 18, 21. Decades later, in 1977, Stahl acquired the entire FAE "for its future development potential." Id. ¶ 20.

B. The 1990 Landmarks Designation

On April 24, 1990, the Commission voted to designate the FAE as a landmark. Id. ¶ 31. The Commission's formal designation report (the "1990 Report") focused primarily on the historic importance of the thirteen Ware-designed Original Buildings. Id. With regard to the Ohm-designed Subject Buildings at issue here, the 1990 Report stated that "the similarities in size, scale, use of materials, and decorative detailing between the various buildings on the block creates a strong sense of visual homogeneity." Id. The Commission noted that the designation would cover "one of the only two full city block developments of light-court model tenements in the country." Id. [3]

However, the Commission's 1990 vote was not final. The Board of Estimate (the "BOE" or "Board"), a now-defunct entity which, at that time, had statutory authority to review, overturn, or modify all LPC landmark designations, voted on August 21, 1990 to modify the FAE designation by exempting the Subject Buildings, upholding landmark status only for the thirteen Original Buildings. Id. ¶ 4, 32. The Board reasoned that classifying the two later-constructed Subject Buildings as landmarks "would have precluded new as-of-right construction" on a "very large site[]... in [a] high tax-producing area, " and that "it was important to allow for such development in the future."[4] Id. Coincidentally, the meeting at which the Board of Estimate voted to modify the FAE designation was its last. Id. In 1989, the United States Supreme Court had held its structure unconstitutional, see Bd. of Estimate of the City of New York v. Morris, 489 U.S. 688 (1989)), prompting a revision to the New York City Charter that re-assigned the Board's role in reviewing landmark designations to the City Council. Stahl, 76 A.D.3d at 300; Defs.' Mem. L. Supp. Mot. to Dismiss at 4 n. 2 (Doc. 16).

Stahl did not challenge the landmark designation imposed on the Original Buildings "because its ability to develop the [Subject] Buildings was left intact, as was the option to transfer unused development rights from the [Original] Buildings to the un-landmarked [Subject] Buildings." Compl. ¶ 33. The City, meanwhile, did not challenge the BOE's decision to exempt the Subject Buildings from the 1990 landmark designation. Id. Several community groups, however, united under the name "Coalition to Save City and Suburban Housing Inc., " commenced Article 78 proceedings in New York State Supreme Court to challenge the Board's modification decision. See Coalition to Save City and Suburban Housing Inc. v. City of New York and Stahl Avenue Co., Index No. 280680/90 (Sup.Ct. N.Y. Co. 1990).[5] The Supreme Court dismissed their petition on July 17, 1991, concluding that the Board had reached an "inherently reasonable" compromise that balanced the goal of preserving Stahl's development rights with the goal of protecting the majority of the FAE, "which [was] significant not for [its] architectural merits, but the historical significance of housing created for the working poor." Compl. ¶ 33. The Coalition did not appeal. Doc. 16 at 4-5.

C. Stahl's 2004 Plans to Develop the Subject Buildings

More than a decade later, in 2004, Stahl "began to take steps" to develop the Subject Buildings. Compl. ¶ 35. By that time, Stahl maintains, the estimated potential value of the Subject Buildings, if developed, "vastly exceeded" their existing value. Id. Stahl alleges that the apartments in the Subject Buildings were, and are, "of substandard quality by modern standards": "They lack all modern amenities, appliances, and fixtures, and are extremely small, with an average of approximately 370 leasable square feet per apartment." Id. ¶ 21. Moreover, the units are arranged "in many ways unfit for modern tenants, " with bedrooms too small to fit queen-sized beds and "abnormally-shaped bathrooms that cannot accommodate normal fixtures." Id. Meanwhile, the Subject Buildings themselves, although they comply with all relevant legal requirements, lack contemporary electrical, mechanical, and ventilation systems and are not handicap accessible-problems "exacerbated by... age and decay." Id. ¶ 22. Today, to be minimally habitable and legally rentable, apartments in both of the Subject Buildings require electrical and plumbing fixture renovations, appliance repairs and replacements, and lead paint abatement. Id. ¶ 24. In addition to being less attractive, smaller, and laid-out in an inferior fashion, the Subject Buildings are allegedly less safe than the other thirteen buildings in the FAE complex as they can only be accessed via an interior courtyard invisible from the street and are farthest from amenities and businesses located on First Avenue and subway lines on or west of Lexington Avenue. Id. ¶ 25. "In sum, " Stahl alleges, "the [Subject] Buildings are sub-par, " have "a very limited appeal to a limited demographic, " and are "capable of generating only meager rental income." Id. ¶ 26.

Hence, Stahl devoted considerable resources, including retaining an architectural firm and law firm, to prepare a redevelopment plan that would entail demolition of the Subject Buildings and construction of a modern condominium tower. Id. Yet Stahl could not implement its redevelopment plan until the Subject Buildings were unoccupied, and its ability to vacate many of the units within the Subject Buildings was constrained by rent control and stabilization laws. Id. ¶ 36. Moreover, many already-vacant units could not be leased without "substantial and costly renovations" required "just to bring them to a habitable level." Id. Thus, beginning in 2000, Stahl had left units vacant as tenants exited "in order to maximize the possibility of redeveloping the [Subject] Buildings at the appropriate time and avoid needlessly incurring the expense of repairs to Buildings it planned to replace." Id. [6] Likewise, Stahl did not undertake "capital improvements" in the vacant apartments or the Subject Buildings themselves, ensuring only that they were continually maintained in accordance with the law. Id. ¶ 37.

D. 2006 Landmark Designation

After Stahl informed the Community Board representing the Upper East Side of its plans to redevelop the Subject Buildings, the Commission scheduled a public hearing to revisit the issue of the Subject Buildings' inclusion in the FAE landmark designation. Id. ¶ 38. In the Complaint, Stahl alleges that "the LPC's decision to reconsider the landmark status of the [Subject] Buildings was substantially motivated by ex parte communications and political pressure from local residents and groups." Id. ¶ 39. Following a hearing on November 14, 2006, the Commission voted to overturn the BOE's earlier decision by modifying the FAE landmark designation to include the Subject Buildings. Id. ¶¶ 41, 45. In its formal designation report (the "2006 Report"), the Commission stated that including the Subject Buildings in the FAE landmark designation would "enhance[]... understanding of the work of [CSHC] since the complex encompassed the earliest and latest examples of the light-court model tenements that characterized [CSHC's] urban development projects." Id. ¶ 47. On February 1, 2007, the City Council voted to approve the Commission's decision. Id. ¶ 48.

Shortly thereafter, on May 31, 2007, Stahl filed an Article 78 petition to contest the Subject Buildings' designation, which the New York Supreme Court denied on September 24, 2008. Id. ¶ 49. The Appellate Division, First Department, affirmed that decision on June 24, 2010, id. ¶ 50, and on November 18, 2010, the New York Court of Appeals denied Stahl's motion for leave to appeal. Id. ¶ 51. At that point, Stahl had exhausted its Article 78 challenge to the Subject Buildings' designation as landmarks. Id.

E. Stahl's Hardship Application

Once the Subject Buildings were landmarked, Stahl could not proceed with its redevelopment efforts without the Commission's approval. Id. ¶ 52.[7] Meanwhile, Stahl could not re-rent the Subject Buildings' numerous vacant units without first spending millions of dollars on renovations. Id. Consequently, Stahl sought redress-namely, permission to demolish the Subject Buildings-under § 25-309 of the Landmarks Law, pursuant to which a landowner may request a "certificate of appropriateness" authorizing demolition, alterations, or reconstruction on the ground that a parcel of land "is not capable of earning a reasonable return." Id. ¶¶ 53-54 (quoting N.Y.C. Admin. Code §§ 25-302(c), 25-309). A "reasonable return" is defined in the Landmarks Law as "an annual net return- i.e., the amount by which income exceeds operating expenses, excluding mortgage interest and amortization but including depreciation-of [six percent] of a property's assessed value in a given test year." Id. ¶ 55 (citing N.Y.C. Admin. Code §§ 25-302(v)(1)-(3)).

Stahl submitted its request (the "Hardship Application") on October 7, 2010. Doc. 15, Ex. C at 1.[8] By that time, 107 of the Subject Buildings' 190 apartments were vacant. Id. at 8.[9] Stahl intended, if its Application was granted, to replace the Subject Buildings with modern mixed-income condominium towers in which "a large number of units" would be dedicated to affordable housing. Compl. ¶¶ 57-58. Stahl further promised the Commission that the proceeds from its redevelopment project would be used to renovate the Original Buildings within the FAE, and that the Subject Buildings' remaining tenants would be relocated to comparable or superior renovated apartments in the Original Buildings without any increase in rent. Id. ¶ 59. In support of its Application, Stahl submitted reports by a real estate valuation company and a construction cost consulting firm, both of which evaluated four "renovation scenarios" entailing varying levels of building and apartment renovations ( e.g., renovations to bring the apartments "up to code, " renovations to make the apartments competitive on the rental market) and assessed whether any of these scenarios would allow Stahl to earn a reasonable return on its investment in the Subject Buildings. Id. ¶ 63.

Over the course of nearly four years, the Commission sought additional materials from and posed various questions to Stahl regarding its Hardship Application and the calculations it contained. Doc. 15, Ex. C at 3-7. In addition, the Commission held three public hearings to address the Application on January 24, 2012, June 11, 2013, and October 29, 2013. Compl. ¶ 60. These hearings, according to Stahl, "were dominated by interest groups hostile to the prospect of any development." Id. Additionally, members of the Commission made statements at the hearings "suggesting that they had prejudged Stahl's application in the face of... political pressure, and simply would not permit redevelopment or even entertain the possibility that an actual hardship existed." Id. ¶ 61. At the hearings, the Commission also heard from HR&A Advisors, a consulting company representing opponents of Stahl's redevelopment plan, which presented its own analysis regarding the possible return that Stahl could earn by leasing apartments in the Subject Buildings. Doc. 15, Ex. C at 3.

According to Defendants, the Commission then evaluated Stahl's application as follows:

LPC exercised its discretion in considering 24 renovation scenarios using some of the analyses and assumptions proffered by plaintiff, as well as many other scenarios with different assumptions that LPC determined were more reasonable. Specifically, LPC calculated income (e.g., rents and miscellaneous income) and determined the costs incurred by plaintiff in operating the property. The Commission then determined whether the sum remaining, after subtracting projected expenses and operating costs from the income, was less than six percent of the post-renovation assessed value of the property.... In each instance, the Commission determined that plaintiff was able to realize a reasonable return.... Consequently, ...

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