New Law Raises Bar for Opting Out of Mitchell-Lama Program

Gov. Kathy Hochul has signed a law that raises the bar for Mitchell-Lama co-ops to opt out of the affordable-housing program and convert their apartments to market rate. The governor’s move has sparked sharp divisions. Supporters of affordable housing are delighted; shareholders and sponsors in Mitchell-Lama co-ops who yearn to transform their apartments to market rate are equally dismayed.

The new law requires that 80% of residents — up from 67% — must choose to opt out of the program. It also requires Mitchell-Lama co-op boards to hold six shareholder meetings a year, and if a vote to opt out fails, it places a five-year moratorium on a new vote.

“Some people believe this is a mechanism to prevent all buyouts because the requirements are so high,” says Scott Mollen, a partner at the law firm Herrick Feinstein who has extensive experience with past opt-outs. “This law makes it very difficult — not impossible, but very difficult to opt out. Now, 20.1% of the shareholders know they can block the whole process. This law empowers the minority to control the majority — even a big majority. The positive side is that this will lead to greater communication between boards and shareholders because of the mandated six meetings a year.”

The new legislation was sponsored in the state Legislature by two New York City Democrats, Assembly member Linda Rosenthal and Sen. Brain Kavanagh. “Without this reform,” Rosenthal says, “which was shaped by Mitchell-Lama shareholders from across the city and state, we would continue to bleed desperately needed units of affordable Mitchell-Lama housing to the private market.”

Under the law that created the Mitchell-Lama program, developers were required to keep the buildings, either cooperatives or rentals, affordable for a specified number of years in return for tax abatements and other considerations. That number was amended and now stands at 20 years. After that time, they could opt to charge market-rate rents or sell the apartments and create a condominium. Traditionally, shareholders were able to buy their apartments at about 30% of their market value, and were then free to flip them or continue living in them. The co-op lost tax abatements and other perks, but shareholders usually experienced a financial windfall.

Mollen was involved in the conversion of the massive, 1,258-unit Ruppert Yorkville Towers from a Mitchell-Lama to a market-rate condominium in 2003. He notes that the complex deal included protections for eldlerly and disabled residents, and rent protections for shareholders who chose not to purchase their apartments.

The Mitchell-Lama program was created on both the city and state levels in 1955 as affordable cooperative and rental housing for low- and moderate-income New Yorkers. Residents must verify their household income annually, and if that income exceeds the allowable limit, they must pay a surcharge in addition to their monthly maintenance or rent. There’s also a limit on the profit shareholders can make when they sell their apartment. 

“The original Mitchell-Lama agreements never contemplated that the buildings would have permanent status as Mitchell-Lamas,” Mollen says. “The opportunity for sponsors and shareholders to convert to market rate was part of the original concept.”

Asked to speculate about Hochul’s motivation for signing a law that is widely seen as unwelcome by the real estate industry, Mollen says, “I think the governor wants to send a message that maintaining affordable housing is extremely important.”