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This story is likely to bring new business to an already well-paid lawyer.
That’s not what I set out to do, of course. He didn’t pay me to write the story, or pitch it to me. In fact, he won’t even return my calls.
But the lawyer and his firm have come to dominate a lucrative corner of real-estate law in D.C., and past efforts to shed light on his controversial practices have only boosted his profile.
“I used to mention the name of the firm in my hearings,” says former Ward 1 Councilmember Jim Graham, who once subpoenaed the lawyer to a nine-hour hearing. “But their business increased so much that they had their most profitable year, and they attributed that to the publicity I gave them. So I stopped mentioning their name.”
If every law has a loophole, then every loophole has a lawyer waiting to exploit it. Every time lawmakers close that loophole, the lawyer is sure to find another.
And when it comes to questions of tenant rights when a building goes up for sale, more often than not, that lawyer is Richard Luchs.
Luchs, a founding shareholder of Greenstein DeLorme & Luchs, has mastered one particular corner of D.C.’s famously tenant-friendly housing law. For nearly 30 years, he’s made a name for himself by sticking up for the big guy: the owners of apartment buildings.
The Tenant Opportunity to Purchase Act, passed in 1980, is at the heart of the District’s efforts to protect tenants from landlords who seek to displace them. The essence of the law is simple: Before an owner sells a building, she or he must give the tenants a chance to buy it themselves. The reality is much more complex. Basic questions of definition—what’s a sale? what’s a fair price?—have taken TOPA (as it’s known) to the courts and back so many times that 35 years after the law’s enactment, still no one really knows what it means.
Luchs has routinely capitalized on this confusion, and has consequently appeared in these pages several times before. A 2006 cover profile, titled “The Painmaker,” told the story of how Luchs mastered what came to be known as the “95/5 loophole,” whereby the transfer of 95 percent ownership in a building didn’t qualify as a sale under the law, and so tenants never had a chance to make the purchase themselves. Last summer, I explored the case of Museum Square, an outdated Section 8 building whose owners, represented by Luchs, announced they’d demolish the building unless the low-income tenants came up with $250 million.
Luchs’ success has begotten its own hurdles. In 2005, the D.C. Council amended TOPA to close the 95/5 loophole. In 2010 and 2011, the D.C. Court of Appeals twice ruled that Luchs’ creative arguments didn’t override tenants’ TOPA rights. And last fall, then-Mayor Vince Gray and then-Councilmember David Catania introduced legislation to prevent exorbitant sale offers under TOPA like the one that occurred at Museum Square.
Now, in a case pending before the D.C. Superior Court, Luchs has discovered what could be another loophole, one that would bar the residents of nine recently sold buildings from exercising their TOPA rights. So far, the D.C. government agrees with him. If the courts do, too, the result could be a substantial weakening of tenant protections in the District.
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On Nov. 22, 2013, DR Resolution, LLC transferred ownership of Daro Realty, LLC., which until that day had been named Daro Realty, Inc., to IUC Daro Realty Manager.
Didn’t follow that? Here’s how that transaction is described in court papers: A week before Thanksgiving 2013, the New York-based Infinity Group bought nine D.C. apartment buildings.
If those two things don’t sound the same, it’s for a reason. TOPA is triggered by a sale of property, and the convoluted structure of this transaction, the owners contend, makes it something other than a sale.
The inscrutable jargon helps, too. Tenants may track their buildings’ ownership, but they’re unlikely to read much into a name change from an “Inc.” to an “LLC.” By the time the tenants of these nine buildings learned that the properties would have new owners, the transfer was already complete.
China Boak Terrell and Jeff Quigley both got word of the sale from a note in their respective mailboxes in late 2013, from the tenant support group Housing Counseling Services. “They said, ‘Hey, I think this is a violation of your rights,’” recalls Quigley, a resident of Sedgwick Gardens, a five-story building on Connecticut Avenue NW in Cleveland Park. He and Boak Terrell, who lives at Randall Mansions on Lamont Street NW in Mount Pleasant, both scrambled to assemble tenant associations that December; they now serve as the associations’ presidents. Together with a pair of lawyers and a third tenant association, they sued the owners last September, alleging a violation of their TOPA rights.
Exactly who those owners are is a more complicated question than it might seem. Carissa Barry, president of Daro Management Services, which manages the Daro properties, says the properties didn’t sell; rather, shares of the corporation that owns those properties, Daro Realty, may have sold. But she won’t say to whom, or to what extent. “We are a privately held company, so I’m not prepared to disclose shareholder information,” she says. Likewise, the various responses to the lawsuit from Luchs and Daro’s other lawyers make no mention of the new owners’ identity.
But all signs in public records and elsewhere point to the Infinity Group, a business investment holding company with a real-estate acquisition arm. IUC Daro Realty Manager is registered to the 30th floor of 1407 Broadway, Infinity’s address. So, as of Nov. 22, 2013, is the ownership of each of the nine buildings, according to D.C.’s property records. Infinity Managing Partner Etienne Locoh signed the certificate of formation, certificate of conversion, and confirmatory deed for Daro Realty, LLC. And Locoh and Infinity Managing Partner Steve Kassin both came to meetings with Boak Terrell and Quigley and presented themselves as the new owners of the LLC, according to the two tenant association presidents. (Infinity did not respond to requests for comment.)
The crux of the legal dispute, as usual, is the definition of the term “sale.” The D.C. Code, as amended in 2005 to close the 95/5 loophole, states that the definition of “sale” includes “the transfer of an ownership interest in a corporation, partnership, limited liability company, association, trust, or other entity which owns an accommodation as its sole or principal asset, which, in effect, results in the transfer of the accommodation.”
This clearly covers the purchase of an LLC that controls a property. The more contentious phrase is “sole or principal asset.” Because Daro Realty, LLC owns nine buildings, none of which comprises more than half the total value of the company, the owners argue that there’s no accommodation that constitutes the sole or principal asset. “The sale of interest in an entity which owns a portfolio of housing accommodations,” Luchs and a colleague state in their response to the tenants’ lawsuit, “is not a sale under TOPA.”
That’s the newest wrinkle in the law that’s supposed to protect tenants’ rights. “Daro has absolutely exploited a loophole, because if you look at what they’re saying, it’s that because they sold all of their buildings, none of what they’re selling is a building,” says Boak Terrell. “It makes no sense. It makes a mockery of the spirit of the law.”
Joel Cohn, legislative director at the Office of the Tenant Advocate, also thinks Luchs’ legal argument is dubious. “The problem with that interpretation is that the statutory language is inclusive,” he argues. “The legislature intended to capture the principal asset scenario as something that is included. The language doesn’t say that anything is excluded.”
But the District authorities with TOPA oversight have so far sided with Luchs. Last August, Lauren Pair, the rental conversion and sale administrator at the Department of Housing and Community Development, responded to an inquiry from Boak Terrell about whether TOPA applied to the sale. “It is the agency’s position,” she wrote in an email, “that the housing provider has not violated TOPA if 1900 Lamont Street NW was transferred as part of a sale of the corporate owner whose assets included a multiple property portfolio.”
Her explanation hinged on the “principal asset” issue. “The interests which were transferred were in a corporation which owned multiple assets, none of which was the corporation’s principal asset,” she wrote. “Because the transfer involved a multiple-building portfolio, TOPA was not applicable because the transfer was not deemed legally to be a sale; that is, tenants were not entitled to receive either an opportunity to purchase or a notice of transfer.”
The law may not be clear on whether such a sale triggers TOPA rights, but the question of notice to tenants appears to be spelled out more clearly. If property changes hands and TOPA doesn’t apply, the D.C. Code states, “the owner shall provide each tenant and the Mayor written notice (‘Notice of Transfer’) of the transfer of an interest in a housing accommodation or of any ownership interest in a corporation, partnership, limited liability company, association, trust, or other entity which owns a housing accommodation.”
Pair was not authorized to comment for this story. DHCD spokesman Marcus Williams says by email, “As represented to DHCD by Daro’s counsel, Daro intended to transfer its entire portfolio of properties to a third party purchaser; none of the single properties represented Daro’s sole or principal asset. As represented to DHCD, the Daro transaction appeared to be outside the definition of a ‘sale’ and TOPA does not apply to the sale of Daro’s portfolio sale.”
Graham, for one, isn’t surprised by the city’s stance. “They have always ruled for the landlords,” he says of city regulators. “What this suggests is the need for eternal vigilance by those who care about these issues.”
Luchs is a registered lobbyist, and has lobbied the city officials who make housing law on behalf of real-estate clients including Daro. According to the Office of Campaign Finance, Luchs has donated $4,750 to candidates for mayor and Council since 2000 as an individual, plus $4,500 between 2006 and 2008 under the business name Richard W. Luchs Attorney At Law. In addition, Greenstein DeLorme & Luchs contributed $13,400 to Council and mayoral candidates from 1999 to 2006.
A disproportionate number of the buildings involved in recent TOPA disputes are in Ward 3, including Sedgwick Gardens. Ward 3 Councilmember May Cheh looked into the need to address TOPA’s ambiguities after several properties in her ward were part of a big national package sale in late 2012. Those conversations died down amid concern that allowing TOPA to govern the transfer of interests in property-owning entities could have unintended consequences, like triggering TOPA whenever someone buys stock in such a company. After that, the issue “seemed to have faded,” she says.
But now it may be time to take it up again. “There are legislative fixes that might have to be done,” she says. “I don’t know why the problem was shelved. I guess we dropped the ball at the Council.”
Michael Czin, a spokesman for Mayor Muriel Bowser, says the mayor is conducting a “top-to-bottom review” of TOPA’s implementation. “We need to make sure the spirit, as well as the letter, of TOPA is being carried out,” he says.
TOPA isn’t the only area where the city’s well-intentioned housing laws have failed to prevent tenant displacement and rising rents. The core mechanism for fighting these trends is the city’s rent-control law. In theory, it should limit rent increases in apartment buildings constructed before 1975, which comprise the majority of D.C.’s rental housing stock. In practice, due to exceptions built into the law, landlords have capitalized on rising demand by pushing tenants out via lucrative buyouts and replacing them with much higher-paying renters, or by petitioning the city for rent hikes far beyond the usual limits.
But TOPA is the statute whose ambiguities are most routinely plumbed by lawyers, challenged by tenants, and decided by the courts. That’s where Sedgwick Gardens Tenants Association v. Daro Realty is headed.
Luchs and other TOPA critics have argued that the law rarely results in tenants purchasing their buildings. But to housing advocates, that’s hardly a knock on the statute. Rather than having their homes sold out from under them with no say, tenants are empowered to partner with a new owner of their choosing in exchange for financial concessions on rent or renovations. At the very least, they can use their TOPA rights as a bargaining chip, agreeing not to invoke the law if the owner promises to keep their units affordable or make repairs. Indeed, the “purposes” section of the TOPA law specifically lays out this goal, stating that it aims “to strengthen the bargaining position of tenants.”
That gives buyers and sellers of apartment buildings a strong financial incentive to circumvent TOPA whenever possible. Buyers often have to forgo a share of their profits by making concessions to the tenants. As a result, they often make sellers lower offers. And letting the whole thing play out can delay the sale process by more than a year.
If the Court of Appeals agrees with Luchs and Pair and preserves the loophole, the implications for tenant rights could be broad. Owners of multiple properties in the city could evade TOPA by simply bundling two or more of them in such a way that no one property represents more than half the total value of the package. And the residents of these buildings would lose their power to weigh in on the sale, a right granted in 1980 that has still never had the full influence its creators intended.
In the late 1970s, a group of young lawyers assembled to try to fix the most contentious line in D.C. housing law. The Rental Housing Act of 1977 had tackled an array of housing issues, but it was Section 602(b) that was causing problems. An apartment building owner, that section stated, can’t sell the building unless he or she “gives the tenants an opportunity to purchase the housing accommodation at a price which represents a bona fide offer of sale.”
“Between 1977 and 1980, there were 15 to 20 lawsuits trying to figure out what it was that that one or two sentences meant,” says Rick Eisen, a tenant lawyer who was part of the group.
The team worked to clarify that section, putting together the language that would become the 1980 TOPA law. (Among the residents testifying in favor of the law before the Council was a young representative from the tenant association of the newly tenant-purchased McLean Gardens apartment complex named Phil Mendelson, who now chairs the Council.) The lawyers didn’t imagine at the time that their work would be at the center of some of the city’s most important housing battles more than three decades later.
“If you’d asked any of us in 1980 if we’d still be discussing this in 2015, everyone would’ve laughed at you,” says Eisen, whose law partner Eric Rome is one of two attorneys representing the tenants in the Sedgwick case. (Rome is out on medical leave; the other attorney, David Fensterheim, declined to comment for this story, citing the ongoing litigation.) “I don’t think anyone would’ve thought this would be the framework for property transactions in the District for the next 35 years.”
But TOPA’s crafters did have the foresight to include one provision intended to resolve disputes over the law’s intent. The law states, “The purposes of this chapter favor resolution of ambiguity by the hearing officer or a court toward the end of strengthening the legal rights of tenants or tenant organizations to the maximum extent permissible under law.” In other words: When this law is less than clear, the courts are supposed to err on the side of expanded tenant protections.
“The courts have been somewhat resistant to doing that,” Eisen laments, “and sometimes have a tortured interpretation, saying, ‘This is not ambiguous so we don’t have to comply with that rule of statutory construction.’”
The city government has done largely the same. The housing regulation specialist at the Department of Consumer and Regulatory Affairs, which oversaw rental housing at the time, certified the exemption of at least 85 building sales from TOPA between 1999 and 2004. Those properties were worth more than $340 million, with half of that total represented by Luchs.
Elected officials repeatedly turned down opportunities to tighten the law. In 1981, DHCD considered but ultimately rejected a rule that would have set limits on the ill-defined “bona fide offer of sale” by tying that to an independent appraisal—the exact kind of change that Catania and Gray felt compelled to make 33 years later. In 1983, then-Mayor Marion Barry wrote to then-Councilmember John Ray to signal his opposition to a proposed amendment to the TOPA law that would have redefined “sale” to include the transfer of majority control in a corporation that owns housing as its major asset. “To the best of my knowledge,” Barry wrote, “this method of majority control transfer has not been used to avoid the provisions of the current law.” Perhaps Barry was swayed by the developers who backed him early in his tenure, or perhaps he just couldn’t foresee the turn D.C. housing would take 30 years later.
In recent years, two cases of Luchs’ creative machinations have come before the D.C. Court of Appeals. In the first, Waterside Towers Resident Association v. Trilon Plaza Company, Luchs represented the owners of an expansive Southwest apartment complex who created a trust that owned the property and a holding company that owned the trust, and then sold that holding company. The court ruled in 2010 that because the owners created these entities as part of the transfer, the whole package constituted a sale under TOPA.
But the victory for tenants was partial: Only those living in the townhouse portion of the property had the right to purchase. Because the trust and holding company for the towers had been created prior to the sale, the towers weren’t subject to TOPA. Even in a nominal loss, Luchs scored a big financial win for his client.
The same thing happened the next year in Richman Towers Tenants’ Association v. Richman Towers. The Bernstein family, represented by Luchs, had sold 11 apartment buildings in similarly convoluted fashion. First, the owners transferred the deeds to the properties to newly formed LLCs. Then they sold 99.99 percent of the interests in those LLCs to the apartment investment group Carmel Partners. The remaining 0.01 percent went to brand-new Quarry Enterprises, which had one member, the broker who had told Carmel about the properties. That broker testified that he formed Quarry at Carmel’s behest but didn’t know why he was instructed to create it.
Here, Luchs added a novel argument to his usual lineup. Donning the mantle of courthouse grammarian, he claimed that the placement of commas in the TOPA law meant that TOPA applied only when the owner planned to demolish the building or stop renting it out. That would clearly contradict the law’s stated intent and its legislative history, as the court pointed out.
But again, the court’s ruling against Luchs was still a partial victory for his clients. Only two of the buildings would have to go through the TOPA process, the court ruled; the other four tenant associations that had filed suit lacked standing to sue because they didn’t provide sufficient evidence that they represented at least half of the buildings’ households. Once more, even in defeat, Luchs managed to secure a financial win for landlords who were able to complete the majority of their sale without getting bogged down by TOPA—and a loss for tenants who were unable to match him in the courtroom.
The history of TOPA has been one long chase for city lawmakers trying to keep pace with the legal jujitsu of the likes of Luchs. That’s likely to continue long after the Sedgwick case is resolved.
“When a lot of money is involved and lawyers are parsing legislative language, I think you’re always in catch-up mode,” says Cheh. “Because there’s always some new argument that can be made.”
The Sedgwick case might not provide any degree of resolution to the matter, because it could avoid the courtroom altogether. Boak Terrell and her Randall Mansions neighbors have already reached an agreement with Daro, and as a result they’ll drop out of the suit. In exchange, Daro has promised to make certain improvements to the building.
Daro and the tenants also worked out a so-called voluntary agreement—the main tool used by landlords to increase rents on future tenants in rent-controlled buildings. Through that agreement, Daro promises not to raise rents on the existing tenants for two years, after which rent increases will comply with the usual rent-control limits. But for current and future vacant units, the rents will go up by between 61 percent and 438 percent. A one-bedroom whose rent is currently $538 would see it shoot up to $2,894 if vacated. Boak Terrell’s rent is protected, but if she moves out, rent in her apartment will more than double.
In other words, the current residents of Randall Mansions are getting what they wanted. But for future tenants, the building’s likely to be far more expensive, further shrinking the city’s tight supply of affordable housing.
Quigley and his neighbors are also trying to work out a settlement with Daro, though Quigley declines to disclose any details of that negotiation. Again, the residents could potentially benefit more than they would under TOPA. But these negotiations raise the prospect that the case could avoid the courthouse altogether—and the loophole could remain intact, unadjudicated, and ready for future use.
Boak Terrell and Quigley recognize the potential conflict between their personal interests and those of the city’s population of renters as a whole. Boak Terrell says she would have preferred a solution that would preserve affordable housing for future renters, but now that TOPA has been evaded, many of her neighbors “don’t have the appetite for huge litigation.”
Quigley, too, feels torn between his obligations to his neighbors and his desire for stronger tenant protections in the city. “I’m trying to balance being an advocate for my constituency of tenants and thinking about the broader picture,” he explains. “And honestly, my top priority is my tenants.”
With or without a court fight on this case, Quigley fears that the continued erosion of tenant rights is inevitable. “Lawyers are paid a lot of money to find ways to circumvent regulation everywhere,” he says. “This is just another example of that. No matter the intent of the statute and how airtight the law may seem, it’ll continue to happen.”