The Off-Balance World of HDFC Co-ops

A trio of bills introduced to New York City Council in March seeks to centralize information about co-ops that were born under the auspices of the Housing Development Fund Corporation (HDFC). The bills’ sponsors say they want to preserve housing for low-income New Yorkers, and help keep the city a vibrant mix of rich and poor, artists and bankers, Moroccans and Midwesterners – maybe not in those words, but that’s the gist of it.

Yet many HDFC co-ops are struggling, some facing foreclosure, while others, through a loophole, ironically are cashing in and essentially leaving the system. The new bills would require the Department of Housing Preservation and Development (HPD) to pinpoint HDFC co-ops with tax arrears and maintenance-code violations, and examine any regulatory agreements with the city, as well as tracking average sale prices. But are these measures sufficient?

“It’s a good start. Kind of a small step,” says Brooklyn Law School professor Debra Bechtel, an authority on low-income housing and a member of a task force fighting to preserve HDFC co-ops, which were created under New York State’s 1966 Housing Development Fund. As part of that program, the city took over neglected buildings and sold apartments for as little as $200 each to low-income New Yorkers. The thinking was that the newly minted homeowners would self-manage and improve buildings they now had a stake in, preserving housing stock and solidifying blighted neighborhoods through their homesteading.

But some of the city’s estimated 1,271 HDFC co-ops, comprising 25,850 units, themselves are blighted with dysfunctional or corrupt boards. One extreme case, the Hamilton Heights co-op at 501 West 143rd Street, has made news with its recalcitrant board, 405 open violations, $3.2 million in unpaid back taxes (and other city debts), and a managing agent, Yvette Hanon of D.K. Hanon & Associates, who was held in contempt of court in January 2015 for not providing shareholders with mandated income and expense reports, among other documents.

“HDFCs are a critical element of New York City’s affordable housing stock, yet this program has been allowed to languish and falter under lack of oversight that has put [such] co-ops in financial distress,” says Tyrone Stevens, spokesman for City Councilman Mark Levine, who was among the sponsors of the March legislation.

The Price Is Wrong

At the other end of the spectrum, some HDFC co-ops, through a loophole, are selling for market-rate prices. The Wall Street Journal reviewed 540 HDFC co-op sales in Manhattan since 2005, and in November reported that 220 – nearly 41 percent – went for more than $500,000 each. One, a three-bedroom apartment at the Grinnell, 800 Riverside Drive at West 157th Street, sold for $2.025 million in 2014. But a December 2015 report by the city’s Independent Budget Office studied 990 HDFC co-op apartment sales from 2011 through 2015 and reported that only 16.4 percent sold for more than $500,000. The median price, in 2015 dollars, was $270,200, ranging from a highly affordable $82,500 to an out-of-line $2 million.

How does this happen with co-ops that are reserved – by legislation – for low-income buyers? Because the income of the buyer may indeed be under the allowable ceiling, but the buyer’s well-heeled parents or other benefactors can give the buyer cash, thereby driving up prices beyond what a genuinely low-income person could afford. The same holds true with someone who’s inherited money, or who has had a house-sale windfall, or who is otherwise income-low but asset-rich. “A schoolteacher making $60,000 a year can have his wealthy parents buy an HDFC,” says Gregory Baggett, executive director of the advocacy group New York Council for Housing.

Development Fund Companies.

“There aren’t that many buildings with high-priced sales so far,” counters Bechtel, the law professor, who says HPD is working on new regulations and “is planning to add an asset test.”
Part of the issue is that while HPD says it expects co-op boards to “set and enforce sales prices that are affordable to people within your HDFC’s target income range,” there are no regulations actually requiring that for any except a tiny sliver of HDFC co-ops – those that voluntarily added price caps to their bylaws, federally funded HDFC co-ops, and nonprofit HDFC co-ops organized under the Membership Corporation Law. Will moneyed buyers inevitably buy out eager-to-sell homesteaders’ apartments? What about low-income shareholders who want to stay, even as more well-to-do residents move in and desire expensive amenities, raising maintenance? Can HDFC co-ops survive today’s market pressures?

Price Caps

Such questions are impossible to answer without objective baseline information. And that’s a point the three new bills address, since there is no systematic record of what HDFC co-ops variously agreed to do amid ever-changing regulations and conditions over the decades.

“HDFCs have suffered from an utter lack of data or transparency,” says Stevens, councilman Levine’s spokesman. “There is no readily available and actionable data compiled that can tell us average sale prices within a given area, no data on average resale prices and maintenance-code violations, nothing that compiles the amount of tax arrears buildings may owe the city, and no publicly available data of each regulatory agreement the city enters into with each co-op. This lack of data hampers oversight and fundamentally derails this program.”

Much of this documentation does exist, though it’s scattered across an alphabet soup of city departments – the Department of Buildings (DOB), the Department of Finance, and City Planning, as well as disparate agencies ranging from housing court to the New York State Division of Housing and Community Renewal and especially, the Urban Homesteading Assistance Board, an HPD arm created in 1973 to oversee HDFC co-ops. But, as Stevens notes, the city does not compile this information into a central database.
Baggett is dubious that legislation is needed to do so, since his own organization, with far fewer resources, has collected data on what he counts as 33,000 HDFC co-op apartments in the city (plus 56,000 nonprofit rental apartments, another part of the HDFC program).

Complicating matters is the fact that only about 20 percent of HDFC co-ops are even bound by a regulatory agreement, says HPD. As for the rest, the City Council’s 14-member Affordable Housing Preservation Task Force, formed in May 2015, is clear. The other 80 percent “currently benefit from tax exemptions without being subjected to any requirement that would keep them available for low- and moderate-income residents in future years. The city must develop a strategy to incentivize or require HDFCs to sign a regulatory agreement in exchange for this tax exemption.”

That tax exemption, which expires in 2029, is a cap on the taxable value of HDFC co-ops, significantly lowering their property taxes. A November 20 letter from the task force to HPD Commissioner Vicki Been recommends a new regulatory agreement that would contain “an additional tax exemption to help offset increased operating costs and ensure financial stability.” The letter, which makes no mention of forgiving tax arrears, also recommends the mandated use of management companies, rather than allowing self-management, and establishing affordability guidelines on income limits and resale values. In other words, if HDFCs want tax breaks, they’ll have to accept additional scrutiny. “A lot of City Council members are supportive of this carrot-and-stick idea,” says Bechtel.

Baggett is not. “We don’t need to be beaten with sticks and then force-fed carrots [that] we have no desire to consume,” he says. He believes the task force of city-owned properties, led by the Urban Homesteading Assistance Board, “wants to set price caps while also initiating income increases. So higher-income earners are going to benefit and can buy at cheaper prices.” Neither the bills nor the task force’s letter makes mention of how high or low the proposed limits on income and sales prices would be. In 2013, however, the New York City Bar Association’s Task Force on city-owned property – now called the Task Force on HDFCs – recommended a price cap of $30,000 per room, with a yearly increase of either three percent or a percentage tied to some consumer price index.

Wary of Changes

As for income, the upper limits as of 2014 ranged from 120 percent of an area’s average median income (AMI) for families with fewer than three dependents, to 165 percent AMI for families with three or more dependents. Translated into dollars, this means $70,560 maximum income for a single person to $182,820 for a household of eight with more than three dependents, according to HPD. The report also discussed disqualifying “applicants with trust funds or significant support from parents. For example, purchasers could be required to meet an asset test as well as an income test.”

Bechtel, a longtime member of that task force, is wary of any changes that would displace “the people who have been the backbone of our city. We can’t just say, ‘Let them move to New Jersey or Long Island.’ I think it’s also going to be harder to fill a range of jobs if we have only rich people in the city and the working class living outside [of it]. We need a variety of people with a variety of skills.”

“HDFCs are at a crossroads and they need to make some very serious decisions about what they want to do in the future,” Baggett says. “Will the city be honest? [They will have to] say to people in HDFCs, ‘It’s time for you people to go. Another constituency needs these properties. Each of you gets to walk away with a substantial return on your investment and we wish you all the best.’”

Levine and numerous other council members reject that scenario and vow to keep affordable housing for low-income New Yorkers a reality. The legislative package, Stevens believes, “could change the game and begin reforms that set us on a path toward preserving it into the future. To do that, we first need appropriate oversight and robust transparency so this program doesn’t continue to spiral downward.”