FEATURE ARTICLE, MARCH 2009

SRO’S: LOVE THEM, HATE THEM...AND BEND THE ENGLISH LANGUAGE
David R. Brody

A significant case was recently decided by the Appellate Division, First Department, i.e., City of New York v 330 Continental, LLC, on January 29, 2009.  While it does not state the extent to which apartment hotels in New York City may be used as transient hotels, the decision interprets various overlapping laws, including the 1961 Zoning Resolution regulations, which have been at the root of the controversy.  Over the past 5 years, our firm has been working on a parallel case, and as we review this case law, we see that our interpretation of the law, as opposed to the City’s, is correct.

Single room occupancy (SRO’s) in its various guises — including boarding houses, flop houses — has existed in New York City since at least the early 1800s and has been subject to regulation since as early as the mid-1850s.  Most of the criticism concerning SRO’s, and most of the regulation, has been leveled at buildings that serve the poor and the working class in residential areas. The Multiple Dwelling Law and the building codes were changed so that private developers could no longer create SRO’s in mid-century.  As a result, while there were about 200,000 SRO units in 1955, by 1987 there were only approximately 50,000 units. Today, it is estimated there are fewer than 40,000 units remaining.

But in 1987, at the beginning of an economic downturn in New York, city government decided that this type of housing should be preserved, and to ensure the continuation of the remaining SRO units, laws were passed to compel owners to renovate and rent out SRO’s.  Additionally, owners who wanted to perform significant work to their buildings (frequently changing them to other forms of housing), were required to obtain Certificates of Non-Harassment. Two years later, the New York Court of Appeals struck down that portion of law compelling owners to maintain and rent out such units. However, the requirements for Certificates of Non-Harassment withstood challenge, meaning as a practical matter, that an owner who wanted to perform any significant work to an SRO building faced an additional delay of at least a year in alleging and, as necessary, proving that the tenants had not been harassed. 

The problems with maintaining SRO’s is that the City’s policy towards owners who want to increase income and maximize the use of such buildings is all stick and no carrot.  Notwithstanding that taxes rise and heating costs increase, as do all other aspects of building maintenance, the last 10 years have seen rent-stabilized rents for SRO units increase at half the rate of those for regular apartments.

So it is no surprise that the owners of these underperforming assets, especially those located in residential zoning districts, are finding that tourists provide viable income for their vacant rooms. Moreover, the tourists benefit from more affordable hotel rates, which add precious revenues to our economy, in addition to having the advantage of staying in safe, residential communities.  (In Europe, for example, pensions, hostels and charming small hotels have been tourism mainstays for decades, even centuries, enhancing the residential communities in which they do business.)

The City has taken the position that all occupancies must be “permanent” occupancies and that any use of vacant rooms for tourist and transient occupancies is prohibited. Herein lies the rub: This is contrary to what the law actually states. The Zoning Resolution and the building code state that “apartment hotels” must be used “primarily” for permanent occupancy, even as transient hotels, which may only be created in commercial and manufacturing districts, must be used “primarily” for transient occupancy.  Until the recent decision (and likely until there is a final decision), the City enforced its position by way of frequent inspections with ticketing by the Department of Buildings and the Mayor’s Task Force and by commencing litigations pursuant to the City’s nuisance laws (which laws were actually intended to be aimed at welfare hotels, as opposed to European and Asian tourists). 

In the current Appellate Division decision, the Court provides a clear definition of how these buildings may be used. The requirements of the Zoning Resolution and the Building Code state these buildings be used “primarily” for permanent tenancies, but does not preclude them from transient use, albeit the Court did not provide a percentage or a length of time at which such permanent tenancies would cease to be the primary use of such buildings.  It is a decision that includes such phrases as “…there is no absolute prohibition on transient occupancy in Class A apartment hotels.”

Given the Appellate Division’s decision, which by definition permits SRO property owners to have at least some transient rentals, we will hopefully continue to see a trend in which those buildings housing SRO’s are improved to compete in the hospitality market.  As for the residents of SRO’s, who are already protected by rent regulation, they will reap the benefits of renovated common areas, upgraded infrastructures and improved security.           

David R. Brody is a senior partner at Borah, Goldstein, Altschuler, Nahins & Goidel, P.C. in New York City.

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