Members of the Assembly are moving quickly to kill a proposal by State Sen. Pedro Espada that would freeze rents in New York City for as many as 750,000 tenants.

According to tenant activists, the Espada bill would amount to a get-out-of-jail-free card for landlords.

The bill would allow landlords who illegally deregulated thousands of apartments while receiving special tax breaks to keep those units at market rate by simply paying back the benefits. A landmark court ruling last year found that the owners of Stuyvesant Town and Peter Cooper Village had improperly collected what are known as J-51 tax breaks while converting thousands of apartments to market rate. In the months since the ruling, tenants at buildings from Harlem to TriBeCa have filed suits to claw back millions in rent increases.

Espada’s bill would nullify those suits, saving landlords millions.

“That kind of legislation would essentially let them get away with violating the statute,” said Alex Schmidt, the lead lawyer for the tenants in the Stuy- Town case. “They gamed the system, and they made a lot of money off the system that they gamed.”

Members of the Assembly’s Housing Committee have already promised to block the bill from becoming law.

“This is preposterous,” said Assembly Member Linda Rosenthal of Manhattan. “It’s not going to go anywhere in the Assembly.”

Tenant advocates in the Assembly have quietly expressed concern that Housing Committee Chairman Vito Lopez might be willing to sign off on a bill that exempts landlords from the Stuy-Town court ruling. But one Assembly member said the tenant advocates in the chamber would block Lopez from moving a prolandlord bill to the floor.

“He may support it, but just because Vito supports it doesn’t mean it’s going to get to the floor and we’re all going to vote for it,” said the Assembly member. “He can block things, but it’s much harder to push things through.”

The proposal touches on a fresh point of anxiety in the real estate industry, just as some landlords were beginning to emerge from the crashing economy. Experts predict that anywhere from 35,000 to 80,000 units have been deregulated illegally. They believe those landlords could be liable for hundreds of millions in rent overcharges now that the court has deemed the practice illegal. As in the case of Stuyvesant Town, those liabilities could speed—or in some cases prompt—the collapse of landlords’ financing arrangements, threatening hundreds of buildings with foreclosure.

The uncertainty alone has already had a chilling effect on real estate transactions, landlords and developers say. Companies that were once in the market for distressed apartment complexes are now leery of investing in those buildings if the current landlords receive J-51 tax benefits. Those buyers say they would be unable to turn a profit if they cannot convert at least some of the units to market rate.

“It’s fraught with unintended consequences,” said Jerilyn Perine, a former City Housing commissioner and executive director of the Citizens Housing and Planning Council. “It isn’t helpful for the owner of a multifamily building to not know what his rent roll is going to be in six months.”

Allowing landlords to retroactively opt out of the J-51 program by paying back their tax benefits raises further questions that Espada’s bill, for example, does not address. Recipients of J-51 tax breaks are prohibited from raising rents based on renovations and improvement projects to the building. If the owners of a building pay back the tax breaks, Perine asked, would they then be eligible to go back and seek rent increases based on those capital improvement projects?

“It’s one of these, like, ‘if you went back in time and killed your grandfather’ problems,” she said. “It’s endless.”

As a result, real estate companies and their lobbyists have been clamoring for action by the Legislature, which they say is necessary to clarify the fallout from the Stuy-Town ruling. That way, landlords say, they would know what their liabilities are, and would be able to stave off the worst of the consequences, such as foreclosure or possible eviction of tenants.

“It would be our hope that if you pay back your benefit, then you’re not covered by J-51 anymore, and this way, you could keep just doing what you’ve been doing for the last 16 years,” said Frank Ricci of the Rent Stabilization Association, a landlord group, adding of Espada’s bill, “It’s certainly something that we’re willing to talk about and explore.”

But even if Espada’s bill dies, landlords are still likely to walk away from the Stuy- Town ruling having pocketed millions. As Schmidt noted, the statute of limitations on illegal rent increases lasts only four years. Landlords who wrongfully deregulated apartments for close to two decades will get to keep the bulk of that money.

“They’ve not only made hundreds of millions of dollars from before the four-year period, they’re still making it, because of the way the four-year rule works,” Schmidt said. “This is a huge financial windfall for the landlords who deliberately, opportunistically violated the statute.”

sgentile@cityhallnews.com