Tighter Credit's Been A Boon For Mitchell-Lama

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Among the winners and losers in the city's now departed real estate boom, the Mitchell-Lama state affordable housing program in recent years came up as a loser. The boundless confidence and easy credit fueling property deals also encouraged owners of Mitchell-Lama buildings to finance an exit from the program when they could, in pursuit of tenants able to pay market-rate rents.

Now lower-income tenants and housing advocates are finally getting a breather, at least in relation to this signature affordable housing initiative of New York state. Since credit has dried up, the slower economy appears to have halted the financing and completion of Mitchell-Lama buyouts. In recent years, more than 3,500 apartments annually have left the program's protections. But so far in 2008 – with just a month and a half left until the new year begins – fewer than 300 have lost their Mitchell-Lama protections, a dramatic dive in the number of conversions.

To exit the program, a building owner must prepay his government-held mortgage and begin to pay far higher property taxes to New York City. That’s why exiting, or “buying out,” of Mitchell-Lama can require building owners to secure tens of millions of dollars in loans. But, just as financing for more exotic kinds of estate deals has slowed, housing advocates suggest, so has the market for Mitchell-Lama buildings.

“The credit crunch has made it harder to finance a buyout,” says Tom Waters, housing policy analyst at Community Service Society (CSS).

Buyouts usually spell trouble for Mitchell-Lama tenants – whose annual median income is about $22,500 – because most owners take advantage of the Mitchell-Lama “sunset” provision in order to raise rents to standard market rates. Securing landlord concessions, such as the rent agreements for buildings occupied after 1974, can require protracted and expensive legal battles waged by tenants. In addition to luxury-level rents, residents in co-ops that exit Mitchell-Lama can face skyrocketing monthly maintenance fees.

To be sure, a buyout doesn’t translate into higher rents for all residents in every Mitchell-Lama building. For example, tenants in Mitchell-Lama rentals that receive federal Section 8 assistance can get individual subsidies from the Department of Housing and Urban Development. Mitchell-Lama buildings occupied prior to 1974 go under rent stabilization laws, while tenants in post-1974 buildings can obtain an agreement governing how quickly rents can rise post-Mitchell-Lama.

Yet the decline in Mitchell-Lama buyouts is a salve to affordable housing activists who have been trying to stanch the bleeding of the five-decade-old program. According to figures from Waters at CSS, Mitchell-Lama rental losses have topped 1,500 apartments a year since 1997, except for a milder loss of only 300 apartments in 2000.

And the losses since 2003 have been sobering, particularly considering that according to state guidelines, the apartments are intended for low or middle-income residents. From 2003 to 2004, the Mitchell-Lama rental losses more than doubled, to about 3,600. That annual outflow continued until this year. In 2005, about 5,400 rental apartments left the program; in 2006, about 3,700 rental apartments; and in 2007 around 3,600 rentals exited.

In all, from the start of 2004 through the end of 2007, more than 16,000 apartments left the rent protections of Mitchell-Lama, according to figures from CSS.

But the mortgage crisis may have begun to slow Mitchell-Lama building sales as early as the second half of 2007, according to a report issued by CSS this September, “Closing the Door 2008.” Six rental buildings had bought out by mid-2007, with a total of more than 3,000 apartments. “Buy-outs, in other words, were proceeding at an even higher rate than in previous years,” the report says. Only around 400 units in two buildings bought out in the second half of the year, however. Per CSS, “this pattern appears to be the effect of the credit crisis that began in August 2007 as securities backed by single-family mortgages began to unravel, making it much more difficult to arrange financing for any large transaction.”

Despite the drastic decline in buyouts, some are going forward, possibly removing hundreds of units from the Mitchell-Lama stock in the months to come. At Knickerbocker Plaza, a Mitchell-Lama rental on the Upper East Side, the owner gave tenants the required one-year notice of its intent to exit Mitchell-Lama last summer. The buyout was set for October and then re-scheduled for Dec. 1, according to Rita Popper, president of the tenants association at Knickerbocker Plaza. Popper wonders if the owner has the financing to go ahead with the deal. “I would imagine, if I were the owner, I would rather have [the buyout] happen sooner than later,” says Popper.

Knickerbocker’s owner, DeMatteis Organizations, is proceeding with the buyout, according to DeMatteis spokesman Gerald McKelvey. He says DeMatteis has a lender, and DeMatteis “expect[s] to close on the loan to fund the buyout in early or mid-December.” Knickerbocker Plaza has about 600 apartments.

And many other Mitchell-Lama tenants are fighting – sometimes with landlords, sometimes with co-op neighbors – over the affordability of their buildings. Popper said her tenants association spent six months negotiating an agreement between DeMatteis and the tenants, protecting them from sudden rent increases. Columbus Park Towers, an Upper West Side co-op with 162 units, voted in favor of leaving Mitchell-Lama last week. And a number of other co-ops and rentals, with hundreds of apartments and families between them, have owners and co-op boards considering going private.

There are still more than 100,000 apartments in the program – down from 140,000 in 1978. Another big chunk could fall away if the nearly 6,000 apartments at Starrett City, the unique affordable community near Jamaica Bay in Brooklyn, exit the Mitchell-Lama program. It has filed a notice to buy out. The silver lining is that the apartments would not be leaving the stock of affordable housing; due to a deal brokered by the government, the apartments will remain within reach of working New Yorkers.

– Rachel Nielsen

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