HDFC Income Restrictions

How can an apartment that’s selling for $500,000 or $1 million have income restrictions?

This is an issue that many HDFCs [Housing Development Fund Corporation] face. They are special-purpose co-ops that were created under the New York State Private Housing Finance Law, with the purpose of providing homeownership opportunities for low-to-moderate income New Yorkers. Some are new construction, but most were created from buildings that had been abandoned or neglected by their landlords. Tenants banded together and invested sweat-equity to try to stabilize the buildings and, along with it, their neighborhoods. The city foreclosed on landlords who had been neglecting their buildings and failing to pay taxes. The units were transferred to not-for-profits or to tenant organizers and sold to them for anywhere from $250 to $2,500. The buildings were brought back onto the city tax rolls. The buildings were stabilized. The tenants became homeowners.

Why are prices no longer affordable in many of these buildings?

Many HDFCs are in neighborhoods in upper Manhattan, Harlem, Brooklyn, and the Bronx that were less desirable in the 1970s, 1980s, and 1990s but have since been stabilized and gentrified. And along with that comes higher resale opportunities.

This seems like a real clash of cultures.

It is. You've got the old guard, the original shareholders who bought in at a lower price but also spent a lot of time and sweat equity fixing up their apartments and, in some instances, preserving the buildings. Then you have newer buyers who purchased their apartments for much higher or even market prices and view their purchase as an investment.

How could a board keep their co-op affordable?

The first thing I would recommend is that they take a look at their governing documents – their proprietary lease, bylaws, certificate of incorporation, and certainly their resale policy. If there's a regulatory agreement in place, which is often the case, they need to look at that as well.

What would be in a resale policy?

Many HDFCs don’t have a formal policy in place. If the HDFC’s goal is to create a structure around the resale prices, the HDFC could establish a maximum resale price, which could be based upon several factors, including the area’s median income and the co-op’s monthly maintenance. The policy would also take into consideration the established income ceilings for qualified buyers.

Aren’t there ways to get around that income cap? For example, what if someone has a trust fund and doesn’t work?

Some HDFCs have considered putting in a financing requirement as well as a minimum three-year employment requirement to address those kinds of issues. The city has also implemented a new regulatory agreement under which HDFCs seeking to extend their existing tax benefits or obtain other city assistance must agree to controls on costs and resale operations, as well as monitoring and oversight.

Do HDFCs pay property taxes?

One of the ways the city helped HDFCs maintain their affordability was to provide a tax exemption, so there's only a minimum payment due that's far below the market tax rate. There are also low-interest loans available to HDFCs as well as subsidies for elderly or disabled people who are HDFC homeowners. The tax-exemption benefit is a big incentive for co-ops to continue operating as an HDFC and sign these regulatory agreements.

Just how much of a concern is there in the HDFC community to maintain affordability?

I would say it's certainly an important issue. For these co-ops, it’s important that the boards meet with shareholders to make them aware of their intentions and long-term visions, and of the measures they’re considering to keep their buildings affordable. Communication and taking the temperature of the community is key, because some things, like changing a resale cap, could change the culture of the building. In those cases, we always recommend a shareholder vote.

Let’s say I’m a trust-fund baby who bought an apartment for $500,000 two years ago and now the board implements a different strategy that could hurt my investment. That doesn’t seem fair.

The board should look at the issue and see how to address it. Boards have the right to implement virtually any policy as long as it's not in violation of the fair-housing laws and is not discriminatory. And some policies require a shareholder vote to amend the governing documents. At the same time, co-op boards – and this is especially true at HDFCs – want to be take into consideration the values and goals of the entire shareholder community.