High Stakes Face-Off

The battle lines have been drawn. On one side, New York City’s Department of Housing Preservation and Development (HPD), and on the other, shareholders at the city’s Housing Development Fund Corporation (HDFC) co-ops. To help Mayor Bill de Blasio meet his goal of preserving affordable housing, HPD is proposing a sweeping overhaul of the rules that govern HDFC co-ops, former rental buildings that were abandoned by landlords, taken over by the city, and then sold for nominal sums to low- and middle-income shareholders.

Under the new plan – which, among other things, would require third-party monitoring of all co-op operations – the city would seize control of the nearly 1,231 privately owned HDFCs, which residents have labored for years to transform from derelicts into livable apartments.

Not surprisingly, the proposals are being met with fierce resistance. “Clearly, the city is attempting a land grab,” says John McBride, a co-op owner and member of the HDFC Coalition, an advocacy group. “These changes would penalize buildings that have worked hard to turn their properties around and followed the city’s rules for decades. It’s unjust, shareholders are furious, and they’re contacting their council members.”  In other words, welcome to the war.

Affordable Housing

Since its creation in the early 1980s, the HDFC program has allowed existing tenants of abandoned and foreclosed properties in neighborhoods like Harlem, Washington Heights, and the Lower East Side to buy their units at prices far below market value (initially, it was $250, but later it rose to $2,500). The city also provided a significant real estate tax abatement through its Division of Alternative Management Corporation program (DAMP) to keep maintenance affordable.

HDFCs, however, have operated under a confusing hodgepodge of rules. About 50 of the newer co-ops have resale price caps, but the majority of older ones do not. Income limits for new buyers also varied, from about $100,000 to $135,000; but with no restrictions on the purchasers’ assets, units at buildings that have been successfully rehabilitated have been selling at increasingly high prices, in some cases for $1 million or more.

At the same time, many HDFCs have had limited or nonexistent oversight by the city; left to fend for themselves, the co-ops now have widely different degrees of financial health. Indeed, according to HPD, 28 percent of them suffer from mismanagement and are in “serious municipal arrears,” unable to pay property taxes and water bills or keep their buildings in good repair. A 113-unit, three-building HDFC co-op on Anderson Avenue in the Bronx is fairly typical of such properties. “The building was falling deeper and deeper into debt with the city on its taxes and water bills,” notes board president Muhammed Suleman, who works in finance and has lived in the property for nearly nine years. “We had fallen behind on the local law work we had to do and on our obligations to the city. We weren’t cash-rich and we were very low on funds because the residents were falling behind in paying the maintenance.” (The seven-member board and its manager, HSC Management, are currently working out a payment plan with the city.)

Such scenarios led HPD to come up with a battery of stringent new rules and regulations. “Unless we take steps to protect our stock of HDFC co-ops, we risk losing one of the most valuable sources of affordable homeownership in the city,” says HPD spokesperson Elizabeth Rohlfing. “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.”

A Proposed Plan

To do that, the proposed plan includes phasing out the DAMP tax discount earlier than its scheduled 2029 expiration date and offering a larger abatement – but only to HDFCs that sign on to a 40-year agreement with the city. Opting in would require co-ops to cede their autonomy to a nonprofit, third-party monitor chosen by the city, for which the HDFCs themselves would have to pay. The monitor would wield authority over board elections, and approve sales, subletting, and commercial leases in the buildings, as well as the withdrawal of reserve funds, whether for capital improvements or operating shortfalls. The plan would also mandate that buildings raise maintenance charges by at least two percent a year. And for the first time, there would be strict caps on the sale prices of all apartments; according to the new regulations, the ceiling this year would be $347,636 for a one-bedroom and $412,022 for a two-bedroom apartment. As some shareholders see it, the city’s actions are politically motivated: De Blasio has pledged to create or preserve 200,000 units of affordable housing over the next decade, and the proposed plan would add 30,000 units this year alone, just as he’s gearing up for his re-election campaign. And while HPD is citing distressed HDFCs and unaffordable resales as the reason for the new regulations, HDFC Coalition members say the proposed changes will effectively punish the vast majority of functioning co-ops because of the perceived sins of the outliers.

“Some of the buildings that may now be in trouble were handed off in very poor physical condition to the residents by the city, and the people didn’t have much money and weren’t trained well, so what did the city expect?” says McBride. “As for the ‘high price’ sales, these are less than one percent of HDFC sales, and they occur at buildings that were built as luxury residences and are very large and expensive to maintain.”

Healthy HDFCs

One such co-op is the Grinnell House, a stately 83-unit, nine-story Manhattan prewar property at 800 Riverside Drive, where a nine-room apartment sold for $2.025 million in 2014, and another unit for $1.6 million last year. Richard James, a board member who has lived there since 1972 – 10 years before it became an HDFC – strenuously opposes the sales cap, since the co-op has had to rely on flip taxes and borrowing, including a $1 million 8A restoration loan from the city, to restore and maintain the property, the costs of which are enormous because of its size.

“We’ve put at least $5 million back into the building over the last 30 years,” he says. “It was literally falling apart, with windows blowing out, water leaks in practically every apartment, and elevators that broke down so often companies refused to service them.” The need for more money is never-ending, he adds. “We recently had to repair the courtyard and replace the roof – projects that were supposed to cost $1 million but ended up costing over twice that.”

Equally distressing to the Grinnell board are other rules changes that call for a two-tiered system of shareholders, in which up to a third of those who bought their units at higher prices (as defined by HPD) would be exempt from the price cap restrictions if they sell. “That would essentially pit those people who came in more recently against the homesteaders who have been here a long time and put in the hard work to turn our building around,” says James. “It would create an animus in our co-op that’s never existed before.”

At the 989 Amsterdam Avenue co-op in Morningside Heights, board president Dan Friedman is also up in arms. The nine-unit prewar building was an abandoned, blighted property when it became an HDFC in 1981, but with sound management and sweat equity, shareholders have made it into a well run, family-friendly building and amassed some $100,000 in reserves.  “We’ve accomplished exactly what the city wanted us to do,” he says. “But adding a whole extra level of management to approve every single decision, from elections to capital projects, would be totally intrusive for non-distressed co-ops like ours. And requiring us to pay a monitor could be prohibitive and only adds insult to injury.”

Any ceiling on sales, Friedman adds, would severely penalize shareholders by diminishing the value of their units. “We are not opportunists making money from flipping our property. This is a modest, middle-class building – we’re teachers, social workers, and healthcare professionals. My wife and I have spent 15 years investing in our home for ourselves and our two children – some of our neighbors have spent far longer – and to see a huge portion of equity wiped away seems harsh and unfair.”

Misguided Mission?

While both Friedman and James acknowledge the need for affordable housing, they believe the HPD’s one-size-fits-all approach is misguided at best, and that the agency should instead focus on failing buildings and leave healthy ones alone.

“They’re lumping us all together,” says James. While he believes his fellow shareholders would vote against signing the regulatory agreement, James, a retired lawyer, is hoping it won’t come to that. “Everything about this proposal, from taking away DAMP to the price caps and having outside monitors, is basically a breach of contract from our agreements with the city, and I think it’s inviting a lawsuit.”

Emanuela Lupu agrees. An attorney at Smith, Buss & Jacobs, she has been working pro bono with the HDFC Coalition and notes: “HPD is seeking to impose restrictions and regulations that obviate the bylaws of HDFCs and strip away their ability to self-govern. If [the restrictions are] passed by the City Council, HDFCs are likely to join together in a class action against the city of New York.”

For its part, HPD appears to be considering other options. “We do not believe any provision is punitive,” says Juliet Pierre-Antoine, the department’s press secretary. But she does note that, before it submits the new regulatory agreement for approval, HPD will meet with shareholders and city officials in the coming months at public forums. After that, she expects the agency will make “some revisions and clarifications” to its proposals.

“Given the intense blowback that HPD has received, it would make sense for them to reconsider,” says McBride of the HDFC Coalition, who adds that the recent appointment of a new HPD commissioner, Maria Torres-Springer, at least opens the door to that possibility. “We’re hopeful that the city will take a fresh look at this and realize that they need to work with HDFC shareholders, instead of against us.”