REAL ESTATE

Gary Barnett UES Site Has Another Problem: A Hold-Out Tenant

Gary Barnett and 352 East 86th Street (Google Maps)

Notorious landlords aren’t the only thing standing in the way of Gary Barnett’s vision for an Upper East Side development.

There’s also a rent-stabilized tenant still living in one of the remaining buildings at Barnett’s $80 million assemblage on First Avenue between East 85th and 86th Streets, court documents show.

But technically it’s not the tenant who’s holding up Barnett’s firm, Extell Development. It’s the state agency that administers the rent regulations, which is refusing to give Extell the go-ahead to decline the tenant’s lease renewal.

HCR Commissioner RuthAnne Visnauskas

HCR Commissioner RuthAnne Visnauskas

The position of the New York State Division of Housing and Community Renewal is that Extell must reveal its building plans for the site and prove it has the financial ability to build. Extell, which has not publicly filed plans for the site, contests that and accuses the agency of committing an error of law in an Article 78 petition filed last week in New York Supreme Court.

Barnett said his development site, now encumbered by one tenant, should serve as a “poster child” to trigger a change in DHCR’s stance.

“That makes no sense at all if we want New York to grow,” said the developer. “No matter how protective you are about tenants’ rights, there’s no conceivable justification to prevent the building of hundreds of additional housing units, including many which will likely be affordable.”

Though Barnett would not provide details on Extell’s plans for the site, he did say that whatever he builds will include “a large residential component.”

For legal experts, the case is one to watch closely. If the losing party files an appeal, the outcome would set a binding precedent for lower courts and settle a disagreement between industry attorneys.

The agency’s stance is not unique to this particular project. For decades, DHCR has asked landlords who cite demolition when applying for permission to decline to renew stabilized leases to submit their plans for the new building and evidence of project financing, according to Sherwin Belkin, a partner at Belkin Burden Goldman.

But just because DHCR’s requests have become routine — and many developers have cooperated by supplying the information — it doesn’t mean they’re legally required to, Belkin argues.

“The owner’s burden is to establish that it can and will demolish — nothing more,” he said. “I think Extell was within its rights.”

Tenants’ attorneys disagree. Steve Wagner of Wagner, Berkow & Brandt pointed to recent case law that “allows DHCR to do exactly what it did in this case.”

But both Wagner and Belkin admit that, until the matter is taken up by the appellate division, there will be no binding decision from the court. Regardless of who comes out the victor in Extell’s suit, the chance that the losing party will file an appeal seems likely as both the developer and the tenant have a strong monetary interest in doing so.

For the tenant, who has lived in the building for 17 years, the ability to receive a large payout hangs in the balance. It’s common for hold-out tenants to command millions of dollars in order to vacate buildings, and court documents allude to the tenant at Extell’s site seeking a “large payout.” The tenant did not respond to multiple requests for comment.

For Extell, which has spent seven years and nearly $82 million assembling the site, to have one renter derail its plans would be untenable.

Barnett said that should his firm lose the case, he would “absolutely” appeal.

DHCR declined to comment, citing the ongoing litigation.

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