New York’s Destructive War on Developers

A stone’s throw away from the Brooklyn Bridge, at 70 Middagh Street, stands a charming ten-unit apartment building. Built in 1897, it’s just down the street from the former February House, the artists’ commune where notables like W. H. Auden, Carson McCullers, and Salvador Dalí once lived. But more than a century of use took its toll on the building, and few of its essential systems had been replaced. In 2019, changes to New York State’s rent stabilization laws put 70 Middagh Street at risk of falling further into disrepair by making rehabilitation even more economically infeasible.

That’s when David Gomez found a way to square the math. State law exempted buildings that were substantially rehabilitated from rent stabilization, allowing them to charge market rents. Gomez’s firm, Peak Capital Advisors, could thus restore the building and recoup their investment, assuming they followed a 1995 Division of Housing and Community Renewal (DHCR) framework outlining what qualified as “substantial rehabilitation.” There were two conditions: first, that 75 percent of major systems had been replaced, and second, that the building was at least 80 percent vacant when work started.

At the time of the renovations, state law did not require developers to obtain explicit approval from DHCR, the state agency tasked with administering rent stabilization. So Peak Capital Advisors proceeded to invest $150 million into restoring 70 Middagh and 30 other buildings across the city.

But in 2023, after updating its framework, DHCR challenged Peak Capital Advisors’ attempts to charge market rates. DHCR claimed that the buildings had not been in “substandard” condition, discarding the previous presumption for what counted and applying its new definition of the term. The state abruptly—and without notice—sought to compel Peak Capital to acknowledge that the newly renovated units were still subject to rent stabilization, forcing rents to revert to a fraction of the market rate.

Peak Capital wasn’t alone: the state also went after the owners of some 11,000 additional units that had been decontrolled in this manner over the prior three decades. The repercussions of these cases extend beyond any single developer. They risk sending a message that developers aren’t welcome in New York, even as the state desperately needs their investments to address the housing affordability crisis.

In 1974, New York State created the modern legal framework for rent stabilization. While trying to control soaring rents, legislators recognized that owners and developers still needed financial incentives to maintain their buildings. They therefore exempted certain properties from rent stabilization, provided that they were “substantially rehabilitated.” Except the law left blank just what counted as “substantial.”

That judgment fell to DHCR, which in 1995 laid out its rules in an Operational Bulletin, hoping to increase investor confidence through the clarity this would bring. To count as substantial rehabilitation, a renovation had to replace at least 75 percent of “apartment systems” (electrical, staircases, roofs, plumbing, and so on); and the building had to have been “substandard,” with any building that was at least 80 percent vacant being presumed as such. When the building met these two conditions, the law allowed a developer to proceed without a declaration from DHCR.

Between 1995 and 2023, developers renovated more than 11,000 apartments in accordance with these rules. In some cases, the owners bought out current occupants’ leases to attain the 80 percent vacancy threshold, a practice both legal and widespread. Other buildings, like 250 North 6th Street in Brooklyn (1910), already surpassed the vacancy threshold without lease buyouts.

Though DHCR’s 1995 framework did not mention lease buyouts, the agency was aware of the practice and, recognizing that benefits accrued both to tenants (who received capital and were spared from having to live in a construction site) and owners (who were able to move ahead with rehabilitations), allowed it to stand in a 2016 administrative decision.

The state tightened laws around rent stabilization significantly in 2019 but made no changes to the substantial rehabilitation framework. It was during this period (2019–2023) that Peak Capital Advisors acquired and rehabilitated its 31 buildings, investing a total of $150 million and restoring hundreds of units.

Then, in 2023, two shifts occurred. First, DHCR updated its own directive, removing the presumption that an 80 percent vacancy satisfied the condition that a building was substandard.

Second, the state changed the law again—this time, in a way that affected the substantial rehabilitation framework. As The Real Deal reported, an initial version of the law required developers to seek DHCR approval for “every building that had been gut-renovated and deregulated”—even buildings improved before the amendments went into effect—but Governor Kathy Hochul vetoed that bill. The revised and enacted version required DHCR to sign off on substantial rehabilitation for projects that commenced after January 1, 2024.

But then DHCR did something unprecedented: it disregarded both its own updated directive and its longstanding presumption that a building was “substandard” if 80 percent vacant. It began challenging substantial renovations on the ground that the vacancy presumption was no longer sufficient—even for buildings completed before this rule change. And the tenant buyouts that DHCR had previously allowed suddenly became evidence that proved those buildings had never been substandard at all.

One developer, Creas Inc., challenged this reinterpretation in court. But a New York State Supreme Court justice sided with DHCR. The court rejected photographs (viewable here, on page 238) of one allegedly substandard building on grounds that they were undated and that the building was self-evidently “habitable” (a term that the original rules don’t use to define “substandard”). Should Creas Inc. lose its appeal, the company risks insolvency and the loss of hundreds of thousands of dollars in investment prior to the rule change.

For Peak Capital Advisors, the stakes are even higher. A determination that its buildings are still subject to rent stabilization could wipe out as much as $40 million in property value.

In November 2025, Peak Capital sued DHCR in federal court. DHCR’s actions, it asserts, amount to an unconstitutional regulatory taking without just compensation, a violation of substantive and procedural due process, and a deprivation of equal protection under the Fourteenth Amendment. One week later, New York Attorney General Letitia James sued Peak Capital in the State Supreme Court, claiming that it had illegally deregulated its units and engaged in fraud by telling banks and tenants that its buildings were not subject to rent stabilization.

James Walden, the attorney representing Peak Capital Advisors, highlighted the abrupt change in enforcement. “In 30 years of administrative hearings at DHCR, not once did they seek re-regulation of units where a building met the criteria outlined in the Operational Bulletin, until 2023,” he told City Journal. Moreover, some of the rehabilitations had, as mentioned, occurred without a single lease buyout.

The crucial legal question for the state’s case is whether the rehabilitations originally qualified as “substantial” under the established rules at the time.

DHCR issued its 1995 framework in response to a State Supreme Court decision 11 months earlier that rejected an owner’s requested rent-control exemption. The court found that, despite the significant work done on their building, the owners could not show it was deteriorated enough to meet the definition of “substantial rehabilitation.”

The court’s decision risked halting further rehabilitations in their tracks: no one would want to invest if a judge could arbitrarily rule that a building didn’t qualify after a developer made improvements. The 1995 DHCR framework sought to remedy this by defining the rules for substantial rehabilitation: 80 percent vacancy and 75 percent system renovation. DHCR’s stricter enforcement and application of its own rules plunges future rehabilitations into uncertainty.

At this point in the story, we’ve strayed beyond questions of whether DHCR’s or Peak Capital Advisors’ actions were legal—because the law itself never clearly specifies to what extent DHCR’s 1995 framework was legally binding.

DHCR argues that the 80 percent vacancy standard was always just a presumption, not an iron-clad guarantee. Deciding whether DHCR should be allowed to break with that past presumption in the Peak Capital Advisors case depends on two factors—with potentially far-reaching implications for New York City.

First, DHRC must demonstrate an exceedingly strong reason why, in this specific case, its former presumption of “substandard” as 80 percent vacant cannot hold. Court filings clearly highlight previous cases when owners used buyouts to achieve the necessary vacancy rate, without DHCR objecting.

Second, Peak Capital Advisors made significant investments to renovate buildings with systems that were more than a century old in some cases. To say that these are not “substandard” in 2026—even if the building remained technically “habitable”—is to redefine the word beyond any reasonable, ordinary use.

If the courts allow DHCR’s stricter interpretation to stand, they will set a precedent that no DHCR operational bulletin or directive, past or present, provides a reliable guarantee for developers or investors. This would open the door to executive overreach: DHCR could arbitrarily decide to go after developers who are abiding by the rules as written and previously interpreted. The result would be complete paralysis.

Both the courts and DHCR should consider the economic implications of letting the stricter interpretation stand. Peak Capital Advisors’ $150 million investment ensured the structural integrity of dozens of architecturally beautiful buildings for generations to come. In the case of the building at 70 Middagh Street, its new tenants signed leases ranging between $4,750 and $6,880 a month. These tenants likely include workers in finance, lawyers, engineers, or other urban professionals who don’t fit the profile of people living paycheck to paycheck—and who don’t need rent stabilization protections.

DHCR’s actions would force Peak Capital Advisors into insolvency and push losses onto investors, banks, and even taxpayers, insofar as loans are guaranteed by Freddie Mac. All this, to provide $1,000-a-month rents to residents inhabiting what are now luxury apartments.

Both DHCR and Attorney General James’s actions are part of a pattern of targeting property owners and developers. Regardless of whether this pattern is the product of foolishness or of a calculated attempt to weaken the institution of private property and destroy equity, the result will be to turn New York into an unfriendly environment for real-estate development.