Mitchell-Lama Co-op Weighs Subsidy Against Profit

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Jeanne Poindexter’s apartment at East Midtown Plaza is full of signs of the controversy embroiling the Mitchell-Lama cooperative on Manhattan’s East Side. There are two large mail cartons, a long line of binders on the desk in the living room, and file drawers filled to the brim. Their contents concern just one topic: the five-years-and-counting fight over whether East Midtown Plaza should “privatize,” or leave the state’s Mitchell-Lama program. Poindexter and a group of allies say it shouldn’t, while some of their neighbors lobby just as hard for going private.
East Midtown Plaza is the latest front in the battle over the future of Mitchell-Lama, the state- and city-supported affordable housing program. Spurred by today’s real estate market, in which a $600-per-month apartment could be sold for hundreds of thousands of dollars, Mitchell-Lama complexes in New York City have been leaving the program at a rapid pace. While buyouts of rental buildings have become common, what’s new is the exit from the state program of cooperative apartment complexes, owned by their residents or “cooperators.”

Unlike subsidized rentals such as Brooklyn’s Starrett City – where government officials lobbied until a sale agreement beneficial to the working-class tenants was reached – a co-op puts the choice of whether to leave Mitchell-Lama, and trade protections for profits, in the hands of the residents themselves.

In short, the option of removing co-ops from New York City’s affordable housing stock is up to them.

State Senator Liz Krueger, who has sponsored legislation to fund Mitchell-Lama housing by taxing Mitchell-Lama co-op sales, says they shouldn’t be leaving. “These buildings were built to be long-term affordable housing for the people of New York. We want to keep it” that way, Krueger said this week.

Under state and city laws, Mitchell-Lama co-operators can convert their homes from an affordable housing corporation to one that’s for-profit. The Mitchell-Lama program, which began as a way to spur housing for low- and middle-income New Yorkers, has been giving tax breaks and low-interest mortgages to East Midtown for nearly four decades. The upshot is that the law gives residents the chance to make individual profits from their government-subsidized housing.

And a conversion could mean windfall profits for those who sell their apartments. The average amount of equity, which is the purchase price under Mitchell-Lama, is about $18,000 – and the average market value, or potential selling price out of Mitchell-Lama, is about 36 times that, or $650,000.

That sounds sweet, but a number of factors complicate the selling process, as well as the privatization plan. For one, co-operators actually don’t own their apartments; as in a private co-op, residents own shares in the co-op. Also, privatization will cost East Midtown tens of millions of dollars in forfeited tax shelters and at least $53 million in new mortgages, moving the complex from the low-risk environment of city-financed loans and government regulation, to the high-risk environment of private financing and the real estate market. Just like any other apartment residence, East Midtown must raise enough money to meet its mortgage payments and to pay operating costs. Anti-privatization residents worry that a privatized co-op might not earn enough money – from fees collected on apartment sales and fees for maintenance – to meet its financial responsibilities.

That would leave those residents who choose not to sell their apartments on the hook for the increased costs of keeping the place going.

Pro-privatization residents say that the co-op would earn sufficient income from the fees it would collect when residents sell their apartments to outside buyers, known as “flip taxes.” They say that the offering plan for the privatization is solid financially, and that a private East Midtown would not cause evictions, with ways for even the neediest residents to keep their homes.

Poindexter, 71, is spearheading a group of pro-Mitchell-Lama co-operators. She isn’t convinced by the plan. “People don’t want to lose or jeopardize their homes,” says the retired Barnard College biology professor.

The final offering plan, or “Black Book,” has been filed with the state Attorney General’s office. A two-thirds vote in favor of the Black Book by East Midtown’s cooperators would be the last step toward going private. Currently, the complex is overseen by the city Department of Housing Preservation and Development (HPD).

“If it’s voted ‘yes,’ then things will be unchanged,” with the pressure for bringing Mitchell-Lama co-ops onto the open market continuing unabated, says Richard Heitler, the chief operating officer of Urban Homesteading Assistance Board (UHAB), a low-income housing cooperative advocacy group. If East Midtown’s plan is voted down, that “will have a dampening effect” on Mitchell-Lama co-op buyouts, says Heitler, who has advised anti-privatization residents at East Midtown.

Tom Waters, a housing policy analyst at Community Service Society, thinks the credit market crunch may also have a slowing effect, however. He is observing a slowdown in sales of Mitchell-Lama rental buildings, and the perceived weakness in the credit market could hold up sales of Mitchell-Lama co-op apartments, as well. “If I were a co-operator at East Midtown Plaza, I might be concerned it would be harder to sell now than it was a year ago,” Waters says.

And the financial burden on residents who don’t sell is another reason Waters, Heitler, and other affordable housing activists are worried by the exit of Mitchell-Lama co-ops. Besides East Midtown and its 746 apartments, Mitchell-Lama coops such as Manhattan’s Southbridge Towers, with more than 1,600 units, are in the process of leaving or considering leaving Mitchell-Lama. Already gone from Mitchell-Lama are co-ops such as Brooklyn’s Trump Village III, Trump Village IV and Contello 3, with about 3,000 apartments between them. There still are more than 80 Mitchell-Lama co-op complexes in New York City. But many of those, with the notable exception of 15,000-unit Co-op City in the Bronx, are small complexes with several hundred units, making the buyouts of thousands of units a substantial loss.

But for those who can afford it – those willing to relocate beyond the city, or planning to buy a new home here for what they clear on their co-op – selling has some powerful incentives. Pro-privatization residents at East Midtown say it’s time that they realized a profit from their shares in the co-op, which is prime Manhattan real estate, situated on the East Side just blocks from the landmark Flatiron Building.
Of personal finance…

Unloading an apartment in a private co-op is far more lucrative than doing so in a Mitchell-Lama. Under Mitchell-Lama, residents don’t sell their apartments – rather, their shares are returned to the co-op. Then they get their money back from the co-op itself, in the form of “accumulated equity.” That’s the amount they paid to buy the apartment, plus the amount they paid toward the principal and interest of the co-op’s mortgage. Those mortgage contributions are part of each month’s maintenance fees.

For Jeanne Poindexter, who has a two-bedroom apartment with a balcony, that accumulated equity is roughly $18,000 today, she estimates. When Poindexter, her husband and their two young daughters moved into the apartment in 1974, they paid $4,300.

That $18,000 is the average amount of equity per apartment, according to Poindexter, who cites numbers from East Midtown’s board. (But it includes just a fraction of the maintenance fees a co-operator pays over the years, because most of the maintenance goes toward operating costs.)

Post-Mitchell-Lama, the numbers would be far different. East Midtown, a complex with six buildings and 746 apartments, is valued at $483 million, according to the “Red Herring” – the initial offering plan that precedes the Black Book – which roughly translates into $650,000 per unit when selling on the New York City real estate market.

Using appraisals from December 2006, the Black Book says the market value of East Midtown Plaza apartments ranged from $240,000 to $300,000 for studios, up to $860,000 to $940,000 for three-bedrooms. If selling a two-bedroom brings in $720,000 to a co-operator with about $20,000 in equity, that’s a windfall profit of $700,000. About 15 percent of East Midtown residents have three-bedroom apartments – and stand to make upwards of $850,000 in initial profit.

The co-op also gets a slice of the pie – actually nearly half the pie. When a Mitchell-Lama cooperator sells his apartment, the co-op collects a “flip tax.” At East Midtown, the flip tax would be 45 percent of the sale price for the first sale post-Mitchell-Lama (it’s a 3 percent flip tax for subsequent sales). Supporters of East Midtown’s conversion say the yearly revenue from flip taxes will make up for the increased debt and keep down maintenance fees.

…And municipal math

In fact, says Jerry Fox, president of East Midtown Plaza’s board, the surplus from the flip taxes will pay for millions of dollars of repairs. There are $20 million to $26 million of repairs needed at East Midtown, according to Fox and the Black Book. The to-do list for East Midtown, according to Fox, includes replacing “massive amounts” of plumbing, tearing up and replacing the plaza (which is leaking into the parking garage below it), replacing all the windows in the complex (which includes high-rise buildings), and redoing “a lot of” electrical wiring.

East Midtown needs the money for other reasons, too: Privatizing will put a much bigger debt burden on the Manhattan complex. First, roughly $24 million still owed on its Mitchell-Lama mortgages would have to be prepaid – the central requirement for leaving Mitchell-Lama. East Midtown has two mortgages held by the city Housing Development Corporation (HDC). Currently under Mitchell-Lama, annual payments on the HDC mortgages come to about $1.3 million.

Prepaying the HDC mortgages removes the complex from Mitchell-Lama. And, as stated in its Black Book, East Midtown will take on two new mortgages totaling $53 million. Mortgage payments on those two mortgages for the first year of privatization will be $3.4 million. That’s two-and-a-half-times increase during that first year – an increase of $2,800 per co-operator that will have to be offset.

Still other new expenses – and other increased expenses – would come into play if East Midtown leaves Mitchell-Lama. It would have to forfeit the money in its reserve fund with the federal Department of Housing and Urban Development. Since East Midtown can’t draw down the reserve to less than $1,000 per apartment, at least $746,000 will be lost.

And the co-op’s real estate levies will skyrocket. Instead of paying about $650,000 per year in “shelter rent,” a Mitchell-Lama co-op real estate assessment, the co-op will begin to pay actual real estate taxes, which will be $4.1 million per year.

New and bigger mortgages, loss of subsidies, and increased taxes all have the potential of increasing monthly maintenance fees. Currently, according to Heitler from UHAB, two-bedroom apartments pay about $582 to $888 per month in maintenance. The Black Book has similar numbers – “assuming flip tax as projected,” it says. That means if a privatized East Midtown doesn’t sell as many apartments as it needs, and at the prices it needs, maintenance fees will go up.

It’s possible to avoid maintenance increases, but each alternative comes with a price tag. Selling is one option – if the cooperator can give up his East Midtown home. Or a resident could enter into a “special lease,” or “lease for life,” that guarantees life-long occupancy with restrictions on future rent increases – but he would lose his shares and his right to sell. Or, he could accept the East Midtown board’s own version of a government elder subsidy program, according to Fox – if the resident is old enough.

Prepared to repair

“Privatization is not affordable housing,” acknowledges Fox, 66, who works as a sales and marketing executive. In fact, Fox doesn’t think the complex is affordable housing at present – because too many New Yorkers earn too much money to live there. Noting the income requirements for moving into East Midtown, such as the $49,000 income cap for buyers of a studio, Fox says, “East Midtown Plaza’s not affordable housing.”

Opponents of the conversion say the complex is, in fact, affordable housing, a place where maintenance fees are below market rates and New Yorkers of various incomes can live together. And they worry that fees could rise to the point where current residents can’t afford their own homes.

Opponents maintain that staying in Mitchell-Lama is the better deal, and that conversion throws away opportunities for more subsidies.

There is government money to pay for East Midtown’s repairs – if East Midtown stays in Mitchell-Lama. Three city financing programs are available to Mitchell-Lama co-ops overseen by HPD, if they remain in Mitchell-Lama for an additional 15 years. However, the board of East Midtown Plaza “is pursuing the buyout option, so therefore they’ve not taken any of our preservation programs,” says HPD spokesman Neill Coleman.

The three programs, which also are offered to Mitchell-Lama rentals under HPD, allow Mitchell-Lama owners to save on loans. The Mitchell-Lama Mortgage Restructuring Program offers owners more-favorable terms for refinancing the mortgage on Mitchell-Lama properties. The Mitchell-Lama Repair Loan Program offers low-interest loans for building repairs. Both are administered by HDC, which acts as “the city’s affordable housing bank,” says Coleman. There is the 8-A Loan Program, which is administered by HPD and also offers low-interest loans for repairs.

According to figures provided by Coleman, these programs have been attractive to Mitchell-Lama co-ops: Since 2003, co-ops with a total of 14,903 apartments have been kept in Mitchell-Lama through those programs. By contrast, the programs have been used by just over 7,000 Mitchell-Lama rental units. In fact, a number of elected officials wrote a letter to East Midtown residents outlining available funding.

Jerry Fox, who has been East Midtown’s board president for years, says that he’s tired of what he describes as waiting on the government for repair money and approvals for East Midtown’s decisions, such as its first attempt to go private in 2004.

“This is my personal feeling – the city and all the agencies make you a beggar for your own money,” Fox says of the agencies overseeing the complex.

As for why East Midtown wouldn’t stay in Mitchell-Lama so that it can take the government loans, it’s because “people want to go private,” Fox says. They want to get out of the government program, he adds.

Community anticlimax

The decision on whether to pull out of government oversight – the vote on the Black Book – hasn’t happened yet, however.

Originally slated for April 9, the vote was suspended on April 4 by the state Attorney General’s office, because the co-op’s board distributed additional materials on the plan to East Midtown residents – even though all offering documents are supposed to be authorized by the AG’s office.

Documents distributed in March – a memo by board member Larry Weiner, a small black pamphlet that Fox called the “Little Black Book,” and his cover letter for that – were forwarded to the AG by the lawyer for the East Midtown Plaza Mitchell-Lama Organization, the anti-privatization group spearheaded by Jeanne Poindexter.

In a stern letter dated April 4, Assistant Attorney General Kenneth E. Demario said the documents flew in the face of city and state regulations and rulings. Demario called the materials “unauthorized” and said “[s]uch conduct by the sponsor is impermissible.” The “sponsor” is East Midtown’s board.But according to Fox, the board sent out the Little Black Book “because we thought it would be helpful.” Asked whether he agreed or disagreed with the AG calling the board’s actions “unauthorized” and “impermissible,” Fox says “it’s not a question of whether I agree with it or not.”

The vote is postponed until East Midtown’s board can write a statement “disclosing its distribution of unauthorized documents and correcting any material misrepresentations or omissions contained in those documents,” according to Demario’s letter.

So what now?

Peter Goodman, in his late 60s and a resident of East Midtown since 1974, was an early proponent of privatization. “I think that clearly a majority of the people [here at East Midtown] want to leave the Mitchell-Lama program,” says Goodman, a former high school history teacher. He says maintenance fee increases – East Midtown’s increased in the fall – are driving the privatization push. And maintenance will keep rising, even without privatization, he thinks.

But affordable housing activists say that leaving Mitchell-Lama is the more expensive option. Both sides argue over the original intent of the Mitchell-Lama program – was it permanent affordable housing, or a tax break with a sunset?

That question of whether to reap individual profit from government-subsidized housing is now the unanswered question for Mitchell-Lama co-ops. UHAB’s Heitler says that “people moved in there [to East Midtown] not because they expected to make a profit, but because they loved Manhattan and wanted a place where they could live their whole lives.”

One of those was Jerry Fox, the board president. A fifth-generation Manhattanite who says he can’t conceive of selling his apartment, Fox bought into East Midtown more than 30 years ago, for a purchase price of $4,700. Did he worry at that time whether he would be able to sell his place 20 years later? “Never gave it a second thought,” Fox replies. “But, my God, I was moving into a three-bedroom apartment,” he recounts, and his son could play safely in the plaza.

As for going private, says Fox, “for the first 25 years, nobody thought about it.”

– Rachel Nielsen

UHAB, cited above, is the landlord of City Limits. Its executive director is chairman of the board of City Limits’ parent nonprofit, City Futures, Inc.

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