A Breed Apart

HDFC cooperatives have always been different – and a
special place for low-income owners. As times change, will they?

When Andrew Reicher arrived in New York in the 1970s, the Bronx was burning and President Gerald Ford had recently told the teetering city to drop dead. “New York then was abandonment – vacant buildings, burning buildings,” recalls Reicher, who left architecture school in California to join up with a fledgling group called the Urban Homesteading Assistance Board (UHAB), which helps turn abandoned and derelict buildings into low-income co-ops. “[New York] landlords back then weren’t providing services or paying taxes. The city had a major crisis on its hands.”

What a difference 30 years makes.

Today, Reicher is executive director of UHAB and he’s confronted with very different problems from the ones that greeted him in the 1970s. After helping turn more than 1,000 abandoned and derelict buildings into healthy, functioning co-ops over the past three decades, Reicher and his staff are now watching, dismayed, as more and more shareholders in those co-ops sell out for prices that would have been unimaginable even a few years ago. The result, of course, is that the city’s stock of affordable housing continues to shrink as the value of real estate continues to soar.

“Now,” says Reicher, “the tide washing across these neighborhoods is gentrification. The Lower East Side is one of the most valuable neighborhoods on earth. Even the Bronx has real market value. You’re seeing displacement not from abandonment but from gentrification.”

A House to Let

Reicher, 57, is speaking from personal experience. For the past 30 years, he has lived in a co-op on the Lower East Side that was brought back from the brink of ruin by a core of determined residents. They turned the building into what is known as a Housing Development Fund Corporation (HDFC) co-op. The HDFC buys distressed buildings from the city for a nominal fee, then offers the shareholders breaks on the transfer tax, mortgage-recording tax, city and state income taxes, and property tax. Also known as “Article 11” co-ops (because of the section of the Private Housing Finance Act that brought them into being), the very health of these co-ops is, ironically, the greatest threat to their continued existence as “affordable” housing.

Unlike Mitchell-Lama co-ops, which are regulated and administered under strict city and state statutes, low-income HDFC co-ops are solely a city concern. If there are any formal limits on the income of shareholders or the prices they can fetch when selling out, those limits will be spelled out in the certificate of incorporation, the bylaws, or the proprietary lease. Predictably, the limits vary from building to building. In some cases, they do not exist at all or are not enforced by the city. Which, to low-income housing advocates, is a recipe for disaster.

“I think it’s a significant problem,” says Ann Henderson, UHAB’s associate director for co-op preservation. “Once someone hears that his neighbor sold his apartment for $300,000, he’s not going to sell for $250,000. What happens is that the people who want to sell for a lot of money say, ‘You can’t stop me.’ Those forces are strong. And once the barn door is open, you can’t close it. Before long, we’re going to have a crisis of no affordable housing in this city. In fact, I’d say we already have one.”

Great Expectations

When Andrew Reicher arrived in New York in 1978, the city was riddled with substandard apartment buildings owned by landlords who were not only failing to make basic repairs but also failing to pay their taxes. The city’s response was to get into the landlord business on a major scale. By reducing the grace period on unpaid real estate taxes from ten years to one, the city was able to foreclose on a staggering number of substandard buildings. “All of a sudden,” Reicher recalls, “the city became a landlord of 100,000 apartments.”

In years past, the conventional approach of most urban planners was to bulldoze such marginal buildings rather than try to save them. UHAB had a better idea. “We championed the self-help approach,” Reicher says. “Why not let the residents take over management of these buildings? We helped turn the tide of bulldozing slums.”

The main tool was education. UHAB set up a training program to teach residents how to hold co-op board meetings and elections, how to make or contract for repairs, buy insurance, draw up a budget, run a building. The goal was to get the buildings into the Tenant Interim Lease program, under which the city provides financial assistance for repairs until the co-op is up and running. The renewable 11-month leases traditionally run from three to ten years.

At UHAB’s first training session, representatives from 20 low-income buildings showed up to learn the nuts-and-bolts of how to become a successful co-op. By the end of the first year, 200 buildings were involved and a small revolution was under way.

As a result of those educational efforts, more than 25,000 apartments in buildings that were once decaying now belong to healthy co-ops. An additional 238 buildings are currently operating under a Tenant Interim Lease and will eventually join the rolls of functioning co-ops.

But during the reign of Mayor Rudolph Giuliani, the city got out of the landlord business. After taking over derelict buildings, the city now completes a “third-party transfer” to either a nonprofit like UHAB or to a for-profit developer. Through a “tenant petition” process, residents of these buildings are able to choose whether to remain renters or become owners.

“We strongly believe residents should have the opportunity to make a choice on how their building is run,” Reicher says. “We’re just pleased if they become proactive and make a choice. There’s a limit to what we can do.”

Though market forces and city politics have changed radically in the past 30 years, Reicher doesn’t believe the supply of delinquent buildings will ever dry up completely.

“There are always buildings where landlords haven’t paid taxes, met the mortgage, or kept the buildings in good repair,” he says. “There doesn’t seem to be any end of them. These buildings may be failures, but we see them as opportunities for buildings to become affordable HDFC co-ops.”

The question now is whether market forces and human nature will allow that to happen.

Hard Times

Ellen Covas knows a thing or two about market forces and human nature. She moved to Williamsburg, Brooklyn, in 1982, long before the neighborhood achieved its current status as hipster hotbed. The city had recently foreclosed on her building – part of the wave of late-’70s foreclosures described by Reicher.

Even so, Covas’s apartment rarely had heat or hot water, sewage routinely backed up in the basement, and drug dealers worked openly on the street out front. But the residents were working together to save their homes, and Covas decided to stick it out. Two years after she had moved in, the building completed its transition from slum to self-sufficient Article 11 co-op.

Today, it’s a healthy property that walks the delicate line between remaining true to its low-income roots while allowing its shareholders to reap the rewards of their sweat equity, discomfort, and risk.

“It’s not meant for rich people,” says Covas, who notes there’s an elaborate formula in the co-op’s bylaws for determining the acceptable income level of prospective shareholders. “But we leave it up to the board to decide their definition of ‘low-income.’”

Since 1999, the co-op’s 15th birthday, there has been no limit on resale prices. Despite the mind-bending prices Williamsburg apartments are now fetching, Covas, who writes budgets for the city’s Department of Sanitation, says she feels little temptation to follow human nature and succumb to market forces.

“Where would I go if I sold out?” she asks. “Where could I afford to move? Besides, I have a certain amount of pride that my building helped stabilize the neighborhood – it’s one less burned-down building – so all the artists could come in years later.”

The seven-unit co-op – with its stubbornly “low-income” ethos and freedom to sell at any price – may sound like it has a split personality. But it, like other HDFC co-ops, is simply feeling its way in the absence of clear guidelines on maximum tenant incomes and maximum resale prices.

A few miles away, in the Bedford-Stuyvesant section of Brooklyn, Emma Oliver is president of a 41-unit HDFC co-op board that stipulates both maximum shareholder income and maximum resale price.

“We have income limits we have to abide by,” says Oliver, 74, a retired nurse who is now on disability. “We also set a limit on what shareholders can sell for – $3,000 per room to an inside buyer and $6,000 to an outside buyer. We try not to make it too high because we have a lot of senior citizens, people on disability, and people who don’t make much money.”

A native of South Carolina who came to New York in 1955, Oliver loudly sings the praises of HDFC. “I feel it preserved something for me,” she says. “Had it not been for this program, I would not have been able to purchase my own home. And this is a home, a place where most everyone knows everyone else. Most of my neighbors have lived here 30, 40 years. The HDFC gave us a chance to live in an affordable place that’s comfortable.”

Bleak House

But some HDFC co-ops turn out to be their own worst enemies. At the 36-unit Fort Washington Avenue HDFC co-op in the Washington Heights section of upper Manhattan, years of inept self-management nearly drove the co-op to financial ruin. “We tried managing ourselves with a family of shareholders but we were on the verge of losing the building,” says Renee Davenport, who moved into the building in 1994, joined the board in 2004, and is now its president. “We had $2 million in unpaid back taxes, $1 million in unpaid water bills. We were in a bad, bad situation.”

In 2003, shortly before Davenport joined the co-op board, UHAB came to the rescue. Working with a new piece of state legislation that made tax forgiveness possible for co-ops, UHAB got the city to forgive $1.26 million in taxes due prior to January 2001, and it got the water department to forgive $570,000 in interest on unpaid water bills. In exchange for these concessions, the co-op entered into a regulatory agreement with the city for the next 30 years to make sure the co-op would stick to the terms of the deal.

The co-op’s shareholders are a working-class mix of office workers, mechanics, bakers, and retirees. While there is a limit on the income of new shareholders ($85,000 for a family of four), there is no limit on resale prices. A 30 percent flip tax has been paying down the loan that covered the unpaid water bill.

The deal with the city requires the co-op to add $7,200 a year to its reserve fund. “We’ve been doing that for the past two years,” says Davenport, 43, who works as an administrative assistant at Columbia University. “The goal is to get on our feet and never be in the position we were in before. We want to become a viable enterprise.”

The co-op also took out a low-interest $903,000 “8-A” loan from the city to tackle major capital improvements to the boiler, masonry, roof, elevator, and handicapped ramps. And the co-op is now capably managed by Veritas Property Management. “We’ve been managing the manager,” Davenport says with a laugh. “We’re a very close-knit board now, and we communicate with UHAB and our lawyer to make sure we’re doing things according to the law.”

She can’t praise UHAB enough. “They’ve been unbelievable,” she says. “You can trust them to walk you through what needs to be done. Having someone you can trust on your side, that makes a big difference.”

“I call it tough love,” says UHAB’s Henderson. “We’ve only done about 30 of these workouts involving tax relief so far. These are buildings that are threatened with foreclosure. It’s been a pleasure to work with this very active board. They became the board that made this happen.”

Our Mutual Friend

Larry McGaughey, a New York real estate lawyer for the past 40 years, believes it’s impossible to turn back the clock. The HDFC co-ops that have sold for large sums are gone forever from the city’s stock of low-income housing. The emphasis now, he says, should be on developing guidelines that will protect the dwindling supply of co-ops for low-income New Yorkers.

“The certificate of incorporation for all HDFC co-ops says it’s to operate ‘low-income’ housing, but exactly what that means is open to interpretation,” McGaughey says. “The city’s policy decision was that they didn’t have the resources to regulate [Article 11 co-ops] the way the city and state regulate Mitchell-Lamas. Basically, the city’s Department of Housing Preservation and Development [HPD] has no enforcement mechanism over HDFCs. Each individual co-op is on its own.”

In certain areas of the city, McGaughey says, market pressures on HDFC co-ops have become especially acute. He cites the Lower East Side, central Harlem, and the co-called “brownstone neighborhoods” of Brooklyn as areas where HDFC residents are finding the temptation to sell increasingly irresistible.

“I think most buildings are hard-pressed to prevent that from happening,” he says of such high-dollar sales in once-marginal neighborhoods. “Are you going to put a cap on resale prices? Are people entitled to a windfall? It’s up to the people to decide for themselves. Usually, it takes a super-majority to do that – two-thirds of the shareholders. That’s a tough sell.”

If there is a solution, McGaughey and many others believe it lies with the city government. But the city has so far shown little inclination to step in. “HPD is basically sitting on its hands,” McGaughey says, “while the market is pushing really hard. Money talks, and it’s hard to fight that.”

But UHAB is fighting. “We’re pushing the city council to bring some sanity to this situation,” says Reicher. “The city needs to set not only an income standard for admission to HDFC co-ops but a maximum resale price as well. I don’t believe they should be sold for large amounts of money. That’s the struggle we’re going through now.”

He also remembers the bad old days when the Bronx was burning, and he doesn’t expect the struggle to get any easier. “Greed,” he says, “is an overpowering force.”