Should We Stay Affordable – or Go to Market Rate?

Since 1955, the state’s Mitchell-Lama housing program has subsidized the development of some 135,000 affordable housing units in the city, including about 69,000 co-ops. But in recent years, according to a report from the Community Service Society of New York, about half of the Mitchell-Lama rentals have converted to market rate, along with 7 percent of the co-ops. In a city with a shrinking supply of affordable housing, the trend is troubling.

Today’s soaring real estate values have made the prospect of privatizing particularly tempting, since under Mitchell-Lama, shareholders don’t gain any appreciation on their equity when they sell. Co-ops facing major repair or improvement costs may also favor privatization as a way of raising the necessary funds. Once out of Mitchell-Lama, they may institute a flip tax on sales and use the funds to boost their reserves.

Currently, 20 city-sponsored Mitchell-Lama co-ops are eligible to privatize into a market-rate cooperative or condominium, according to Erica F. Buckley, an attorney at Stroock & Stroock & Lavan, and a former chief of the state Attorney General’s bureau that oversees the privatization process.

“During my time at the AG’s office, when I was involved with several Mitchell-Lamas that privatized, we would get numerous letters from shareholders demanding the ability to tap into their equity, that this was something they were entitled to,” Buckley says.

On the other hand, there are advantages to staying in the program. Mitchell-Lamas don’t pay real property taxes, and they have access to loans and grants that are unavailable to market-rate co-ops, notes Karol Robinson, a lawyer with Norris McLaughlin & Marcus. And while some Mitchell-Lama boards complain about the constraints of regulatory oversight, that oversight can be a blessing.

“For example, if there’s a construction project going on, then the government agencies get involved and oversee the bidding process with the goal of ensuring that it’s fair and that the board selects a qualified bidder,” Robinson says.

The privatization process is also both lengthy and costly, often running into the hundreds of thousands of dollars. In a closely watched case, Cadman Towers, an affordable 421-unit co-op in Brooklyn Heights, spent seven years exploring privatization – only to fall short of the two-thirds majority required to make the switch.

Co-ops considering whether to embark on the process ought to be aware of a third option. As an alternative to privatization, the city’s department of Housing Preservation and Development (HPD) created a Conversion Program in 2013 to allow co-ops to convert to Housing Development Fund Corporations (HDFCs), as a way of preserving affordability while giving shareholders some equity relief. The program extends affordability for 30 years, but boosts the qualifying income for shareholders from 125 to 130 percent of the area median income. Unit prices would be set accordingly by HPD – the estimated range for two-bedrooms would be roughly $146,000 to $334,000 – and would allow for some modest equity appreciation, says Buckley, who helped develop the program.

Boards would be required to institute a flip tax to boost reserves. They would no longer have to fill vacancies based on a waiting list. And shareholders would have the ability to will their units to heirs, pending board approval, an option not currently available in Mitchell-Lamas.

“The word needs to be spread a little bit more,” Buckley says, adding that several co-ops are exploring the Conversion Program but so far none has taken the plunge. “We’ve got to get the right co-op to take advantage of it and be a model.”