Carol Ott: Welcome to Legal Talk, a conversation about governance issues that New York's co-op and condo board directors are tackling today. I'm Carol Ott with Habitat, the New York City magazine for co-op and condo board directors. And my guest today is Dean Roberts, a member at Norris McLaughlin. Many would say that securing a Mitchell-Lama apartment in the very expensive city of New York is like winning the lottery.
It's affordable, and if certain rules are met, it can be passed down from family member to family member. Dean, let's start with getting a Mitchell-Lama apartment. I don't think I've seen one for sale on any real estate site. So how do people get one in the first place?
Dean Roberts: Not any legal site. The normal process and it's been modified.
Technology has evolved. It used to be that the co-ops kept individual lists and if you go back far enough there even had family list. Where there were two sets of lists. There was a list of family members and a list of applicants, but now the family list had been banned. You have to go through housing, HPDs, housing direct onsite webpage to register for the co-ops and there are Michel Lamas that have open waiting lists because they are less desirable. They're larger or whatever. Most of the lists are closed and are only opened occasionally to a lottery where people apply, their name is selected and they're put on the waiting list that sometimes can run up, a decade and a half.
Carol Ott: So let's say I was one of the fortunate ones to actually secure an apartment in a Michel Lama co-op, and I raised my family in it, and I would like my children to inherit the apartment when I leave it. How can I accomplish this?
Dean Roberts: This is, the common term for this is succession rights for an apartment in a Michel Lama and both DHCR and HPD, the state and the city who regulate the co-ops, have very similar procedures, and the basic premise of succession is families should not be displaced because a shareholder has passed. So if you are a family member, either in the biological sense of that word or in the more nuanced term non-traditional family member, you may apply to remain, to take over ownership and occupancy of an apartment If you appear on two years worth of income and you co resided with the shareholder prior to their departure, and that can be either by death or simply vacating.
Carol Ott: Now it, let me, let me step back. Let's say that when you say you're on this application, what if my children, what if it's my children who are. They really are children. They're in high school and--
Dean Roberts: Oh, if I said application, I may have misspoke. What I meant was the income affidavits that a anyone in a Mitchell-Lama is required annually to file what is called the income affidavit and that list who the shareholder is, who the occupants of the apartment are, and for adults, their relevant, their income. That sets issues for surcharge and other things. But that annual form confirms who the actual occupants of the apartment are.
Carol Ott: I see. So my children would be on that form.
Dean Roberts: Correct. But if they're under 18, they can't succeed.
Carol Ott: What does that mean exactly?
Dean Roberts: You have to be an adult to become a shareholder. So I've had instances where someone less than 18 years of age was remaining in the apartment but wasn't qualified for succession. And we used a guardian to do a work around there. But in theory, someone succeeding needs to be over the age of 18, which is the legal age to contract.
Carol Ott: So from the board's perspective, are there succession rules it should have in place and what are they and why?
Dean Roberts: Oh, great question in that I will start off by saying there's an immense imbalance in this dynamic. The HPD and DHR have rules regarding succession, and as part of the board's fiduciary duty, it is incumbent on them to ensure that the succession process works successfully.
That doesn't mean the board should be directly involved in this succession process. It should rather make sure that its managing agent knows the procedures and policies and that the co-op follows the governmental guidelines. But the nuance here is there's not a great deal of benefit or negative effects if a succession claim goes through or not for the co-op. Because if the succession claim goes through the shareholder will be paying the same maintenance as anyone else if it comes off the person from the waiting list. There's really not an economic development interest for the co-op. Conversely, for the person seeking applicant, as you noted earlier, getting a Mitchell-Lama apartment is an incredible windfall. It's a great thing to have. It's one of the last true treasures in New York.
So people are highly incentivized to create succession claims and to litigate succession claims, and that's where the imbalance comes into play because oftentimes, if a co-op denies a succession claim, it will end up in litigation.
Carol Ott: And why would a co-op deny a succession claim?
Dean Roberts: The person may not be in occupancy for two years or may not be a family member.
Oftentimes, you have the issue of a caregiver, a home care attendant living in the apartment making a succession claim, or frankly, grandma and grandpa moved to Florida two years ago, but the son's been living in the, the grandson's been living in the apartment and now they're gonna try to play this succession card.
Carol Ott: And is there any place in the succession process where a board can become legally liable for something gone amiss?
Dean Roberts: Yes, but they're rare and not so much with the process, but more with misuse of the process because again, because of the economic incentives here, people are willing to do things to create false succession claims.
And there have been instances in New York where managing agents have created, a little side business of creating false, I shouldn't say management companies, but managers or individuals will create false succession claims in order to, in essence sell the apartment. You come in, you give me $50,000, and I will create a false succession claim for you.
Carol Ott: So in a Michel Lama, unlike a market rate co-op, the board cannot, the board has, sounds-- has no say on who moves in.
Dean Roberts: By definition, the Mitchell-Lamas have very limited, or no, in most cases to deny someone absent extraordinary circumstances. Either they're financially not qualified, or there are material issues which I've can think of, like literally less than a handful where a co-op has been successful in denying somebody coming off the HPD regulated waiting list.
So generally no. Succession claims, there is a right for the co-op to reject, but again, it's not on nuisance or bad behavior. I have a succession claim pending right now where they owe literally. $50,000 in back maintenance and they're a hoarder. But those two factors do not come into play on the succession claim because it's only are they a family member and did they co-occupy for two years.
Carol Ott: And I just, just my last question on succession. So in, in a, in the private market co-ops, often when an apartment turns over, there's a flip tax or there's some kind of a fee that helps feed the reserves of the co-op. If I'm understanding correctly, in a Mitchell-Lama, that's not the case.
Dean Roberts: No, there's no flip tax in a Mitchell-Lama because there's in essence no profit to reap a harvest of. The co-op can deduct certain fees and in certain circumstances where there's what's called double equity, where the equity value of the apartment has been increased for incoming shareholders. That can, in theory be applied, but those are the vast majority. And really the correct answer is no.
A succession transfer is not going to change the economic structure or benefit. Bring a benefit to the
Carol Ott: co-op.
And for individual shareholders in a Michel Lama, I guess there's not an economic incentive to put their apartment in some sort of a trust.
Dean Roberts: There, there are tons of economic incentives to put an apartment in trust, but they are not allowed because in a Mitchell-Lama it's required to be an individual's primary residence and neither HCR or HPD have allowed trust because in essence, they're not individuals who are New York State taxpayers who would qualify. A trust is a separate legal entity, and it would be an avenue in essence to hide the change of ownership because you could change the beneficiary, you could change the trustee. And as a general rule, I doubt they will ever approve trust for a Mitchell-Lama.
Carol Ott: Is that outta step by any chance with the world as it is today?
Dean Roberts: I'm going to say no because Mitchell-Lamas are not free market housing. They are subsidized housing. Shareholders in a Michel Lama reap the benefit of lower maintenance because they don't pay full real estate taxes. That conversely comes with certain burdens of an income affidavit and surcharge and being subject to rules and regulations and not being able to resell your apartment for a profit.
But those benefits grout greatly outweigh whatever benefits you would reap from a trust.
Carol Ott: So for boards, for your takeaway for boards who are governing these, and they tend to be very large complexes. They don't get to control or to, controls may be the wrong word. They don't get to approve who comes in, they don't get to earn any money on when apartment turns over but many of these buildings still have to follow lots of the New York City rules and regulations, which cost money.
Dean Roberts: Yes.
Carol Ott: So what is the takeaway for a board and how to navigate, which seems a little bit like a disconnect?
Dean Roberts: Larger structural system about how the Mitchell-Lamas evolved into their permanent status when they were originally created to be temporary programs.
In their original inception, Mitchell-Lamas would be subject to a loan and under regulation for 20 years. Then they would roll back into a private market co-op, and to be replaced by new Mitchell-Lamas. In the mid seventies That system fell apart through changes in government funding and a whole set of other things.
But the Mitchell-Lamas then became permanent, and these rules and regulations evolved along the way. They were never designed for this. So there is a structural disconnect where a lot of things have to be dealt with on the backend of the transactions rather than the front end. And this is one of them: a lack of control on who comes in and out of your co-op, 'cause you have to accept who comes in off the waiting list and then if they are a problem, you have to litigate it. And conversely, there are a lot of administrative costs that, the co-ops have to bear, for lack of a better way to phrase it, as unfunded mandates. In the area of succession, I think the prudent thing for boards to do is to have a discussion with their managing agent as to what that co-op's policies are and how the management handles them so that there are clear guidelines, because the thing you don't want to do is have inconsistent policy or inconsistent application of the policy to succession.
There is one footnote that I think boards really need to start considering here, and that is under both HCR and HPD rules and regulations, you can apply the occupancy standards to succession. And what that means is, most co-ops traditionally on succession, there's a funny pattern is that a family moves in, or actually a young couple moves in.
They start having children. They have a group of children. They end up in a three bedroom. The children move out, the husband passes away. You end up with an elderly woman living in an apartment. Then the one child who comes back home because he can't get his life together, moves in with her. She passes, and you end up with a shareholder who will be in a three bedroom apartment as a single individual. So the thing we stress is that they apply the occupancy standards to transfers so you don't get this out of balance. Because I have had situations where a grandson inherited a three bedroom or a two bedroom apartment, and that's where the big disconnect in succession is you get misallocation of apartment resources.
Carol Ott: And a board can influence that through its policies.
Dean Roberts: A board, here's the key component of that, is the board can vote or pass a resolution to have the occupancy standards apply on succession. The HPD rules allow for this, however, it has to be uniformly applied.
Somebody who's favored can't stay in the three bedroom absent very big hardship explanations, like an ADA request or something like that. It has to be uniform. It can't just be everybody but the board members, it applies to.
Carol Ott: Okay, Dean Roberts, thank you so much for joining us today.
Dean Roberts: Carol, always a pleasure. Thank you.