Developer Must Pay NYC $4.4M in Back Taxes for Running Illegal Hotel

Affiliates of Los Angeles developer CIM Group must pay $4.4 million into a special New York City fund after an investigation by the State Attorney General’s office found it had been running an illegal extended-stay hotel in Manhattan while receiving affordable housing tax breaks.
Attorney General Eric Schneiderman

Attorney General Eric Schneiderman

Affiliates of Los Angeles developer CIM Group must pay $4.4 million into a special New York City fund after an investigation by the State Attorney General’s office found it had been running an illegal extended-stay hotel in Manhattan while receiving affordable housing tax breaks.

The settlement announced by Attorney General Eric Schneiderman also calls for the owners of the 36-story building at 47 E. 34th St. to pay $275,000 in costs to the state and to convert all 110 residential units to rent-stabilized apartments.

The owners, 47 E. 34 Street (NY) L.P., were receiving tax exemptions under the state’s 421-a program that grants property tax exemptions on some multi-family buildings and was designed to encourage development of affordable housing. Buildings operated as hotels are not eligible for the program. The New York Times reported rates ranging from $239 per night for a studio to $359 per night for a two-bedroom unit were being charged at the tower.

“The 421-a program provides massive tax benefits to developers in exchange for permanent housing development, and I will continue to make sure that the prerequisites for receiving those benefits are enforced,” Schneiderman said in a news release. “I am pleased that this company has agreed to do the right things by paying back the city back taxes and offering more than 100 rent-stabilized leases to New Yorkers. My office will continue to crack down on illegal development that exacerbates the city’s severe affordable housing shortage.”

The Attorney General’s investigation found that following the 2008 economic crisis and real estate downturn many sponsors of new condominium buildings “chose to ride out the storm by illegally changing the use of their buildings from condominium to rental, or by converting to a hostel or hotel, while continuing to receive benefits under the 421-a program and failing to provide rent-stabilized leases, affordable units and prevailing wages (to building employees).”

This deal is the most recent settlement – and largest – the AG’s office has obtained since cracking down on abuses of the 421-a program. In November, Schneiderman announced agreements that returned more than $460,000 in back wages to workers, required $150,000 in restitution to the city affordable housing fund and the return of nearly two dozen apartments to the rent-stabilized rolls.

The 421-a program is set to expire soon and Mayor Bill de Blasio wants the State Legislature to renew it to increase affordable housing in the city. The New York Times reported that it has been criticized for giving developers subsidies but not doing enough to create more low- and moderate-income apartments.

The E. 34th Street property, located between Madison and Park avenues, was developed in 2007 as a condo by Esplanade Capital, which defaulted on its loan, according to The New York Times. CIM Group ended up buying the loan from Esplanade Capital’s lender, iStar Financial, in May 2011.

CIM Group, a leading real estate and infrastructure investment firm since 1994, has projects around the United States. In New York City, it has partnered with Harry Macklowe to develop the 96-story 432 Park Ave., the tallest residential tower in the Western Hemisphere.

The firm, which has not publicly responded to the settlement, most recently acquired a vacant 26-acre former University of Colorado site in Denver that has been approved for a multi-phase, mixed-use project with residential, retail, office and hotel. Also this month, construction was completed in Los Angeles on a $76.2 million mixed-use tower in Hollywood that will have 299 apartments; 36,660 square feet of office space; 12,230 square feet of retail and dining and a 523-space parking garage.