City Pushes to Regulate Low-Income Coops Amid Some Shareholders’ Opposition

In 2010, new parents Evi and Vern were looking for an affordable home in their neighborhood of Central Harlem when they discovered an unbeatable opportunity: a five-bedroom apartment selling for the stunning price of about $100,000. It was in a foreclosed rental apartment building with a hole in the roof and a bunch of vacancies, and was soon to be transferred to the city’s Housing Development Fund Corporation (HDFC) program, under which the building would become a limited-equity cooperative.

Evi is a photographer and Vern a City College employee. The couple just met the income limits for new buyers of about a $100,000 annual salary. They agreed to the resale price caps that came with the city program, which allowed the value of their home to increase by only five percent a year.

With home prices increasingly out of reach for low- and middle-income families, the city’s nearly 1,300 HDFC buildings are prized as one of New York’s last remaining opportunities for affordable homeownership. Since its creation in the late 1970s, the HDFC program has allowed existing tenants of abandoned and foreclosed buildings to buy their apartments for a minimal price (in the program’s first years it was $250 but later rose to $2,500), while providing many new buyers like Evi and Vern with enviable below-market prices.

Yet HDFCs operate under a hodgepodge of rules, under varying levels of oversight, and have varying degrees of financial health, with at least 27 percent in a stage of physical or financial trouble, according to DNAinfo. When it comes to affordability restrictions, about 50 newer HDFCs, like Evi and Vern’s, have resale price caps, but most never did; some have income limits for new buyers of about $100,000, while many others are open to new families making up to $135,000. As a result, in recent years some original HDFC residents have sold their apartments for millions of dollars to asset-rich middle-income buyers. Affordable housing advocates have called for new rules to ensure the program remains a resource for low-income families.

Last year, the de Blasio administration’s Department of Housing Preservation and Development (HPD) proposed a new regulatory agreement to address these concerns, as well as others about financial management, but the draft regulation has triggered a substantial backlash.

Along with provisions such as requiring every building to pay for a monitor, a manager, and stricter provisions around subletting, the new regulation would require HDFCs to adopt price caps specified by the city. The proposal would grant HDFCs a larger property tax exemption than they currently get, but they’d have to adopt the caps to receive any break at all.

Some shareholders adamantly oppose the price caps and argue they will reduce shareholders’ economic mobility and reduce the financial health of HDFC buildings, as many use flip taxes to ensure a portion of the profit from sales goes back to support the property. They also argue that it’s just unfair: from their perspective, the city has never given the same supports to HDFCs as other affordable housing programs, and now wants to slap price caps on shareholders’ resales, even though many HDFCs still sell at low prices.*

“[The city makes] fuzzy statements about what the ‘intent’ of the program was. We know what the terms of the deal were, and we know what our intent was: to stabilize our housing and do the best we could for our families and communities, and get a shot at the American Dream,” says John McBride of the HDFC Coalition in an e-mail to City Limits. “The city relied on our desire to work hard and succeed when they needed us to take these abandoned buildings off their hands, and now they want to take from us what is rightfully ours, and we won’t let that happen. ”

McBride adds that in the 1980 and 1990s, under the city’s 60/40 Security Agreements, HDFCs were required to give 40 percent of the profit of any sale back to the city. HDFCs weren’t required to abide by sales caps at that time, he points out—suggesting the city did not ask for a cap when it stood to make money from the deals.

Shareholders may be justified in feeling past administrations did not do enough to help them and even gave them a different idea of the program’s purpose, and they also may have valid concerns about how they’ll continue paying for repairs in the future.

Yet ultimately the Blasio administration—and City Council, which would need to vote on the new rules—has to decide whether its worth going up against these owners’ concerns to preserve a vulnerable affordable housing resource for future decades. The details of the new regulation, including how the city incentivizes buildings to adopt the new regulations rather than simply forgo the property tax exemption, will be key to its success.

Questions of fairness, mobility, building finances

A few decades ago, when city land and foreclosed buildings were in abundance, the city dedicated much of its property to affordable homeownership opportunities that included income caps but no resale price restrictions. At the time, many people saw wealth building as one of the primary benefits of homeownership and believed limiting equity would unjustly rob low-income homeowners of the potential to grow assets. Few people imagined just how high home prices would skyrocket in the decades to come.

Over the past few years, a task force composed of non-profit affordable housing advocates and a few shareholders began suggesting new regulations to improve the management of HDFCs and secure their future affordability. Drawing on some but not all of the task force’s recommendations, HPD drafted its own regulation last year. Under the new proposal, HDFC units could only be resold to families making below $97,920, and with no more than about $142,800 in savings—stricter limits than found in many older HDFCs. In addition, the price of the apartment would be limited to the maximum sale prices listed in the proposed regulatory agreement (See page 26)—for instance, $412,022 for a two-bedroom apartment in 2017, with the price growing annually to keep up with inflation.

HPD says their proposed caps are calculated according to a measurement of what would be affordable to a family of three making about 110 percent Area Median Income, or $89,760, though some argue HPD’s calculations overestimate what would be affordable to such a family. A flip tax would also be applied to each sale, requiring the selling shareholder to give back 30 percent of the sale revenue to the building. (HPD also allows exemptions for individual shareholders who bought their apartments recently at market-rates; basically, the city is willing to consider those units lost and allow such owners to sell at prices above the caps.*)

HDFCs that don’t sign the new regulatory agreement will lose their current property tax exemption, though an HPD factsheet says that if HDFCs file a Real Property Income Expense (RPIE) with the Department of Finance, that might help to lower their taxes.

Richard James, a 73-year-old retired schoolteacher who lives in an HDFC in Washington Heights, is deeply opposed to the cap. Back in the 70s, his family lived in the same building as renters and endured under horrendous conditions, like weeks without hot water and heat, broken elevators and boarded up windows. When the city took over the building from their delinquent landlord and resold it at a low price to the tenants, the city’s documents claimed that the building had been handed over in good condition. But James says over the years, shareholders have spent millions getting the dilapidated building into shape. While he didn’t know the exact amount, he says he had paid out “tens of thousands of dollars” toward mortgage and renovation costs.

James argues that since the city didn’t do much for the building beyond offering low-interest loans, it’s fair the city continue offering the building a property tax abatement without imposing a price cap.* An apartment the same size as James’ recently sold for over $2 million dollars, but under the proposed regulatory agreement, he’d be able to sell for only $539,880. Furthermore, James says his building still has major renovation needs, and is concerned that since his building applies a flip tax to each new sale, price caps will take away a source of revenue for his building, jacking up maintenance costs for shareholders.

“Where’s that money going to come from?” James asks. “For the city to tell us how to manage our own building doesn’t make any sense.”

The HDFC Coalition’s McBride agrees. He notes that HDFCs have trouble obtaining bank loans, and thus need the help they can get from sales revenue. He also argues that in today’s housing market, the price caps will make it challenging for shareholders to move out. And if the building decides not to agree to the sales prices, HDFC shareholders would be hit with increased real-estate taxes. This, he says, would “[threaten] the viability of the whole building and could push our people out,” which he says is “clearly not how you preserve affordability.”

And those are not McBride’s only concerns with the regulatory agreement. He says the provision excluding the newest buyers from caps is tantamount to creating two classes of shareholders. He is alarmed by a provision that would allow HPD to terminate and reappoint the board if an HDFC breaches the agreement. And he say that the requirement that all buildings hire monitors may be good business for non-profit monitoring organizations, but will result in a loss of autonomy for HDFCs.

Advocates say caps are justified

But many housing advocates support the need for a new set of regulations.

Andy Reicher, director of the Urban Homesteading Assistance Board (UHAB), which is a member of the original task force and provides monitoring for many HDFCs, says while it’s true the new resale prices will not allow residents to purchase units of equivalent size in New York City’s private market, price caps still allow families to make a large return on their initial investment. (The return would be higher for the building’s original tenants, but much less for purchasers who bought after the building’s conversion.**)

And he says that though HDFC families may not make the same kind of whopping return as market-rate homeowners, they still reap many benefits from being shareholders. As rents have risen in the surrounding neighborhood, shareholders have become some of the least cost-burdened New Yorkers and are able to invest those savings in sending their children to college, opening their own businesses, and other purposes, he adds.

“It’s understandable that people want to get everything they can get out of it,” Reicher says. “But there’s someone else who wants to retire with an affordable place to live.” An HDFC owner might find, Reicher adds, that “a lot of his colleagues who are retiring behind him will have no such opportunity.”

Samantha Kattan, UHAB’s assistant director of organizing and policy, recognizes the amount of labor and resources invested by shareholders in the past and the need for HPD to amp up its support to HDFCs going forward. But she says it’s not wise for buildings to rely on the random event of an apartment sale for revenue. Instead, HDFCs can take advantage of HPD’s new Green Preservation Loan program, among other available benefits.

In addition, although she thinks that the city’s monitoring requirement could be revised to be less onerous, she thinks its an important part of the regulation because buildings with monitors would have an easier time getting bank loans. (And that monitoring requirement could create more competition for UHAB, not necessarily help UHAB get more business as a monitor, she says.)

Affordable housing advocates also reject the argument that imposing price restrictions is unfair and unexpected, given that HDFCs are incorporated under the state’s Private Housing Finance law, which defines HDFCs as an affordable housing resource for low-income families, and most HDFCs have received tax abatements for years due to their special status.

(Granted, the state does not define “low-income,” leaving it up to local housing agencies to define that term, and in the past, HPD has said the HDFC program can arguing serve families making up to $134,640. That’s left foes and friends of a price cap debating who the program should serve.)

UHAB and other advocates do seek revisions to the proposed rules, including an even lower price cap. UHAB points out that the federal definition of “low income” includes households of three making less than 80 percent Area Median Income. In the New York City metropolitan area, 80 percent AMI is $65,250, though median incomes are actually much lower in many of the neighborhoods where HDFCs are located. UHAB would like to see prices affordable to families making between $48, 960 and $65,250—around $100,000 to $250,000 per apartment, which they say is within the price range of many HDFC units on the market, even in buildings without price caps.

In addition, advocates think the city needs to provide greater rewards to HDFCs to incentivize shareholders to adopt the new regulatory agreement, including a 100 percent property tax exemption not only for low-valued coops, as currently proposed, but for the higher-value coops in gentrified neighborhoods that have the most reason to leave the program.

Furthermore, advocates say the city could consider offering different percentages of property tax abatement according to the depth of the resale price cap agreed to.

“This was the worst housing in New York City and it was given to the lowest-income people who were living there and they’ve taken good care of it and have provided the city with an amazing resource and they need to be rewarded…but they need to be brought into the city’s effort to preserve for the next generation housing affordable to people like them,” Reicher says.

Pulling up the ladder

It is likely that HPD’s proposed agreement will not be approved in its current form. This week, seven City Council members sent a letter to HPD Commissioner Maria Torres-Springer asking for HPD to “halt the process to move forward with the Regulatory agreement to ensure real meaningful input from current HDFC stakeholders.” The council members, including Margaret Chin, Corey Johnson, Rosie Mendez, Daniel Garodnick, Ben Kallos, Mark Levine and Ydanis Rodriguez, expressed concern that the regulatory agreement had been crafted without significant input from HDFC stakeholders, that the regulation was “one-size-fits-all,” that additional restrictions could hurt stakeholders’ leveraging ability, among other concerns.

Asked to respond to the letter, HPD emphasized that the regulation is still only a proposal, but stood by its intentions.

“Unless we take steps to protect our stock of HDFC coops, we risk losing one of the most valuable sources of affordable homeownership in the city,” says Elizabeth Rohlfing, a spokesperson for HPD. “The goal of the agency’s proposal is to get struggling HDFCs on solid footing, while ensuring the long-term affordability of all HDFCs that are so critical to the stability and diversity of our neighborhoods.”

Critics of the proposed regulatory agreement are likely to see the City Council’s letter as a step toward victory. Those who support the proposal say more community input and revision is a good idea, but they dispute the councilmembers’ claims that more regulation could hurt shareholders’ leveraging ability. They also hope that the creation of a new regulatory agreement won’t be postponed indefinitely. If more units are sold for whopping prices as the city delays action, it will be less and less easy for City Council to justify extending any sort of property tax to HDFCs beyond 2029.

And it’s not just non-profit advocates who want the city to succeed. Central Harlem shareholders Evi and Vern, who were so pleased to discover their $100,000 apartment in 2010, want generations of moderate-income families like themselves to have the same opportunity. Vern participated in the non-profit task force that suggested new regulation.*** Considering that the regulatory agreement he and Evi signed in 2010 has lower price caps than the city’s proposal, they think the city could be stricter.

Vern does hope that in addition to lowering the price caps, the city will provide training to HDFCs to improve governance, ensure easy access to competent managers, create a reasonable enforcement system, and do more to help shareholders pay for rising maintenance and repair costs—especially for the original tenants.

“The original people who have been here, a lot of them…suffer the most because their income doesn’t keep up with the increases we have to do each year,” Evi says.

Sitting in their now renovated apartment, which with its splendid view and light might make a fortune on the private market, they compare the sales prices allowed. If they chose to sell in 20 years, their regulatory agreement would permit them to resell their $100,000 apartment for about $350,000; under the city’s proposal they could have sold for $1.1 million (though in the city’s proposal, a greater share of the profit would go back to the building).

According to HPD, if the new regulatory agreement were passed, it would not supersede the 2010 regulatory agreement in Evi and Vern’s building. Still, the idea that shareholders in other buildings will be able to sell for such high prices is a cause for concern to Evi and Vern.

“The only people who are really going to be able to afford it are people who have parents who are wealthy, or retirees, you know who have savings, or someone who won a lottery,” Vern says, adding, “for me, this is like pulling up the ladder up behind us.”

*Correction: Originally implied that HDFCs currently sell at market rates, and that HDFC Coalition members believe they should be able to sell their apartments at market rates. In fact, existing income restrictions have a dampening effect on HDFC sales prices, and the Coalition supports the program’s current income restrictions.
**Correction: Originally implied that all HDFC shareholders would still be able to make a good return on their investment under the new price caps. The return would vary greatly, however, depending on whether the shareholder was an original tenant or bought after the building’s conversion.
***Clarification: Updated to clarify that Vern was one of the few shareholders on the task force.

* * * *
City Limits coverage of housing policy is supported by the New York Community Trust and the Charles H. Revson Foundation.