Tenants arriving at Newcastle Realty Services’ buildings were told that their apartments were deregulated due to extensive renovations. What they weren’t told, according to state officials, is that the property manager inflated the labor costs of those improvements and accepted $1.2 million in kickbacks — some of which paid for sports cars, country club dues and au pair services.
State Attorney General Letitia James on Thursday fired off a lawsuit against David Drumheller, former head of operations at Newcastle, alleging that he illegally deregulated apartments by abusing a rent regulation program known as Individual Apartment Improvements. Through IAIs, and a few other mechanisms, landlords can increase rents on rent stabilized apartments. Once the rent reaches a certain amount — currently $2,774.76 — an apartment can be deregulated. Drumheller, with the help of contractors and some unnamed associates, allegedly set the prices of these renovations according to how much would be required to turn the apartments over to market rate — instead of the actual costs of doing the work.
The lawsuit comes just a little over two weeks before the state’s rent regulation laws are set to expire. A string of bills have been proposed to reform these laws, including one measure that seeks to eliminate IAIs. Critics of the program argue that it’s rife with abuse since landlords aren’t required to get approval from the state’s housing regulator, the Division of Housing and Community Renewal, to increase rents. HCR and the de Blasio administration have encouraged reforming the IAI program rather than getting rid of it. Thursday’s lawsuit wades into this debate.
“This system allows owners to fraudulently set IAI values at amounts that are not tied to the true cost of the improvements undertaken for the purpose of reaching the deregulation threshold,” the lawsuit states.
In a press release, the state Attorney General’s Office notes that Drumheller maintained documentation that made the renovation costs look legitimate. HCR and tenants had no way of telling that the costs were bogus, the release states.
Newcastle, founded in 2004 by Margaret Streicker Porres, operates and manages some 2,500 apartments in the city. The lawsuit describes the company’s business model as “‘uncover[ing] value’ in rent-stabilized apartments by, among other things, undertaking IAIs in order to deregulate vacant units using high-rent deregulation.”
Newcastle wasn’t named as a defendant in the lawsuit, but it has been accused of playing games with rent regulation rules in the past. In June 2015, the company agreed to pay $1.5 million in fines and legal fees, to settle allegations by the AG’s office that it offered illegal buyout agreements to rent-regulated tenants.
Newcastle could not immediately be reached for comment, but a representative told the New York Times that Drumheller was fired by Newcastle “years ago” over an unrelated matter, and that the company fired another employee after the Attorney General’s office disclosed its findings. Drumheller denied the charges.
“The allegations against me are 100 percent false, and I will be fighting them in court,” he said during a brief call on Thursday.
As part of the alleged scheme, the AG’s office says Drumheller would wait for apartments managed by Newcastle to be vacated and would then calculate how much renovations would need to cost in order to deregulate the units. He’d allegedly pay A&V Renovation Corp. — a company that received “nearly all of its business income” from Newcastle — considerably more than what was required for the job. For example, Newcastle paid A&V $52,500 to renovate a one-bedroom apartment at 921 Washington Avenue in Brooklyn. A&V’s principal didn’t understand why Newcastle paid that much, “as he needed significantly less to cover his expenses for this renovation,” according to the lawsuit.
Along with others at Newcastle, Drumheller set the price of labor for a renovation of a one-bedroom apartment at Sentinel Real Estate‘s 612 West 144th Street at $38,000, according to the lawsuit. That price allegedly included $4,500 in plumbing work that was never completed. The IAI, plus a vacancy increase, allowed the landlord to deregulate the unit, according to the lawsuit. A spokesperson for Sentinel indicated that the company is cooperating with the AG.
“These allegations are deeply disturbing,” the spokesperson said. “From the time our company was founded in 1969, we have held ourselves to the highest ethical standards and have been committed to complying fully with all laws and regulations governing our industry. We expect the same from our business partners and contractors, and are closely examining our relationship with Newcastle.”
Drumheller and an unnamed associate also developed a close relationship with the principal of OVQ Consolidated Corp. and KKA Consolidated Corp., cutting a deal in which Newcastle would pay an inflated bill for renovations, but the contractors were required to pay 10 percent back to Drumheller, the lawsuit alleges. The kickbacks were allegedly funneled to Drumheller, the associate and JBD Realty Services LLC, an entity controlled by Drumheller, while the resulting IAI rent increases were based on the original check amount.
Though named in the lawsuit, the contractors, like Newcastle, aren’t listed as defendants. A representative for James declined to comment on why they weren’t defendants but noted that there’s an ongoing investigation.
Drumheller is also accused of using false change orders to increase purported labor costs and instructing contractors to sign off on project proposals that were actually drafted by Newcastle employees, to make it look like the contractors bid on the jobs.
Drumheller’s LinkedIn, which was deactivated late Thursday, indicates that he left Newcastle in June 2016. He’s currently director of operations at GFB Management.