Mitchell-Lama Buyouts - Times Article

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This article appears in the Real Estate section of the January 26, 2003 online edition of The New York Times:

When Landlords Decide to Leave Mitchell-Lama

By Nadine Brozan

When residents of Mitchell-Lama apartments, accustomed to paying well below market rate rents, learn that their landlords are planning to take their buildings out of the program through a buyout procedure, panic and resentment often ensue, sometimes followed by years of exhaustive litigation.

Even after agreements releasing buildings from the program's constraints are reached, legal maneuvering and bitter feelings can persist for years. While there have been exceptions, the path out of Mitchell-Lama regulation is rarely smooth.

"With a buyout comes the possibility that apartments will go to market rate, putting them out of the reach of the folks who live there," said C. Virginia Fields, the Manhattan borough president, who established a task force in 1999 meant to "slow the process down or completely stop it."

Tenants, she said, "thought Mitchell-Lama would forever allow them to live in affordable housing, and the fact that buyouts have occurred makes them wonder what potentially could be next."

Ruth Lerner, who was the manager of Waterside Plaza, which juts into the East River at 26th to 29th Street, during the years it was emerging from Mitchell-Lama, 1999 to 2001, adds a more immediate concern. "If you hadn't had a rent increase in 12 years, and now you get one every year, how would you feel?" she asked.

The Private Housing Finance Law, which governs Mitchell-Lama developments, permits developers to withdraw from the program after 20 years by prepaying their mortgages and taking other financial steps. With the last project completed in 1978, the 20-year escape hatch has now completely opened.

Established in 1955 by the New York State Legislature, the Mitchell-Lama program was created to spur production of middle-income housing by offering developers of rentals or co-ops low interest mortgages and generous tax abatements. In exchange, they had to place caps on their rents and could not impose increases unless profits fell below 6 percent. Additional benefits were given to those who built on urban renewal land.

Without giving developers the option of taking their buildings out of the program after a set time, it was believed, builders would not have been motivated to put up moderate income housing. "When Mitchell-Lama was started, it had a 35-year buyout but no takers, so it was decreased to 25 and then 20," said Lee Chong, director of land use, housing and development for Ms. Fields's office and head of its Mitchell-Lama Task Force.

All told, about 105,000 units of housing in 269 developments, most of them in New York City or nearby suburbs, were built under the Mitchell-Lama banner.

To date, 18 owners of Mitchell-Lama buildings supervised by the city's Department of Housing Preservation and Development and 22 under the state's Division of Housing and Community Renewal have bought out.

"There are about 60,000 units in the city-sponsored program, about 5,000 of which have gone out since 1989," said Julie Walpert, assistant commissioner of H.P.D., who is in charge of its Mitchell-Lama program. "That is not many buyouts."

Ms. Chong sees it differently. "From 1998 to today, in Manhattan alone we have lost 2,724 units and 5,962 are at risk because owners have made application to dissolve their Mitchell-Lama program," she said. "If we don't replace the housing lost to buyouts, we will see an exodus of moderate and middle income people leaving the city, the backbone of the city, blue collar workers."

To qualify for Mitchell-Lama apartments, tenants could not have a household income more than seven times the annual rent for families of one to three and eight times the rent for families of four or more. Tenants earning more must pay a surcharge.

Tenant advocates foresee in the movement by owners to leave the Mitchell-Lama program a wave of buyouts that will push rents out of the range of people with modest incomes. "The supply of Mitchell-Lama has been incredibly important in terms of the overall market," said Michael McKee, associate director of the New York State Tenants and Neighbors Coalition, "but it never came close to ending the housing shortage. I think it is unconscionable that the government provided tremendous subsidies to produce affordable housing that is not permanently affordable."

But, as Robert S. Nelson, who has brought 11 buildings with 3,000 units in the Bronx out of Mitchell-Lama, sees it, owners are only asking what is due them. "Any time you purchase an apartment building and put substantial equity in it, you are taking a risk," he said. "You expect those risks to be commensurate with a certain reward. And when you sign a contract, it is important that both parties keep up their end of the bargain."

Josephine Cinquemani, president of the tenants association at Hazel Towers, a 300-unit building in the Pelham Bay section of the Bronx owned by Mr. Nelson, said she was happy to see Mitchell-Lama go because she felt there were too many rules. "There are always people who are unhappy, but we were pushing for it years ago," she said. The landlord has invested in capital improvements, including new windows. "Now we have one of the nicest buildings in the neighborhood and people want to get in." The rent on Ms. Cinquemani's three-bedroom apartment was $1,009 when the Mitchell-Lama ceiling was lifted in 1999. Now it is $1,100.

Owners of rental projects in Manhattan and Brooklyn have seven pending applications with the city and five with the state to leave the program. Only two co-ops, Anthony J. Contello in Brooklyn and LaFontaine in the Bronx, have bought out, but others like the giant Co-op City in the Bronx are considering doing so.

Whether buildings that leave the Mitchell-Lama program continue under another set of rent restrictions or can go to market-rate rents depends on when they were built. Buildings completed before Jan. 1, 1974, that leave Mitchell-Lama move automatically into the rent stabilization system, with annual increases set by the city's Rent Guidelines Board. (Those increases are currently 2 percent for a one-year renewal lease and 4 percent for a two-year renewal.)

Apartments finished after that date do not have to move into the rent stabilization program after leaving Mitchell-Lama. So far, most of the buildings coming out of the program were built before the cutoff date and therefore are now covered by the rent stabilization program's controls.

Buying the buildings out of the Mitchell-Lama program can require a significant investment by owners, making the low interest rates of recent years a key element in their decisions.

"Until about four years ago, it was too expensive to buy out because the developers had to pay the outstanding mortgage plus renovation costs to collect market rent, and whatever income tax liability was incurred," said Stuart M. Saft, chairman of the Council of New York Cooperatives and Condominiums and a lawyer who sometimes represents tenants. "All that necessitated borrowing substantial amounts of money."

The move from one set of rent limits to another has not promoted harmony between tenants and landlords or, for that matter, among competing groups of tenants.

Lawyers for both landlords and tenants are closely watching the continuing legal skirmishes at Westgate Apartments, a cluster of three buildings with 427 apartments on West 96th and 97th Streets between Columbus and Amsterdam Avenues, where both sides expect to eventually see a crucial ruling. The case focuses on the ability of a landlord whose buildings has left Mitchell-Lama and moved to rent stabilization to reset the basis on which those rents are computed.

Four months after the transition into rent stabilization in 1998, the tenants appealed to the state Division of Housing and Community Renewal for reduction of their new rents based on what they claimed to be a decrease in services.

At the same time, the owners, KSLM-Columbus Apartments applied for an increase in the permissible rents citing a clause in the law granting relief for "unique and peculiar" circumstances when rents are demonstrably lower than they are in comparable apartments. The state rejected the applications, and the tenants and owners both filed lawsuits.

"When they announced in 1998 that they were going to buy out, their position was that they could get major rent increases and no one could stop them," said Jean Dorsey, the president of the Westgate Tenants Association, who has her own technology and strategy consulting firm. "When we got a letter saying our rents would go up 300 percent, we formed a legal committee."

"We were the urban homesteaders living here when this place was funky rather than fabulous," she continued. "We are multiracial, multiethnic and multieconomic, and if we want buildings where mailmen and teachers can live, we ought to be replicating this, not destroying it."

In subsequent years, residents and management squared off over everything from the renewal of leases to the operation of the parking garage.

But it is the challenge of "unique and peculiar circumstances" that is being watched most carefully outside the Westgate community. "The other issues are important, but they are the battles and this is the war," said William Gribben, the lawyer representing the tenants' association. "The increases being sought range from triple to seven times the current rents."

Average rents in Westgate are $450 for studio apartments; $593 for one-bedrooms; $518 for two-bedrooms, which are lower than one-bedrooms because they have turned over at a slower rate; and $640 for three-bedrooms.

A report on rentals between January and June last year, the most recent data available, issued by the Halstead/Feathered Nest brokerage firm listed rents in rent-stabilized apartments on the Upper West Side that, like the Westgate, do not have doormen, as $1,503 for studios, $2,075 for one-bedrooms, $2,698 for two-bedrooms.

Nicholas Kamillatos, a lawyer who represents KSLM-Columbus Apartments, would not divulge what rents were being sought, but did say: "The disparity between the initial rent stabilization rents and the prevailing rents in comparable apartments is compelling. They should be adjusted."

KSLM-Columbus Apartments has filed notice of its intention to take the matter to the Appellate Divison, seeking to reverse the Supreme Court decision to uphold the Division of Housing and Community Renewal's denial of the owner's application for rent increases.

Despite the clarity with which the law spells out the right of owners to withdraw from Mitchell-Lama, some tenants' associations and their lawyers have found loopholes, primarily in the form of covenants written into land disposition agreements stipulating that properties remain affordable for longer periods of time.

That was the case in the settlement reached between Yorkville Towers Associates and residents of Ruppert Yorkville Towers, two brick buildings with four towers stretching from 90th to 92d Streets between Second and Third Avenue. The development is about to become a hybrid condominium-rental complex.

The project, developed by the DeMatteis Organization, went up in 1974 and 1975 and thus is not subject to the requirement that it enter the rent stabilization program after leaving Mitchell-Lama.

"But there was a difference of opinion about their right to a buyout," said Mr. Saft, who represents the tenants there. "We found in a land disposition agreement a clause stating that it would remain available as low and moderate income housing for 40 years."

"We litigated for about two years and held up the buyout for a total of four years," he said. "We estimated that during that period tenants saved about $80 million in increases. Then we started talking about a settlement."

As a result, tenants were given the option of purchasing their apartments at a 20 percent discount from what appraisers deemed outsiders would pay plus a 10 percent fix-up allowance. To reserve their apartments — or the right to sell them to outsiders — tenants had to put down $1,000, which was nonrefundable.

As of Wednesday, 863 purchase agreements had been signed, said Robert J. Klehammer, vice president of R. Y. Management, the sales and management agents for the property. But it is too early to tell how many of those represent people who will remain in the buildings and how many will flip, or resell, them at market prices.

The preclosings, at which buyers execute all documents with the condo and the lenders, are scheduled to begin tomorrow, with the closings to start on Feb. 20. Until then, residents can withdraw without forfeiting their right to rent.

According to Karen Duncan, a vice president of the Corcoran Group, tenants who are buying studios are paying an average of about $144,550 compared with an average of about $206,000 for outsiders. The average inside price on one-bedrooms is $265,000, compared with $379,000 for outsiders. Two-bedrooms are going for about $408,000 and $583,000, respectively, and three-bedrooms for $462,000 and $660,000.

Renters whose incomes are less than the area median income — $43,960 for an individual, $62,800 for a family of four — are eligible for one of two subsidy programs, one for people earning less than 80 percent of the area median income and the other for those with incomes between 80 and 100 percent of median.

Those whose incomes exceed the median will pay one-third of their income or their current rent or an adjusted rent predicated on what it would have been had increases been permitted (there has been no raise in rents since 1982), whichever is the greatest.

"In no event will anyone pay more than a 50 percent increase for the first renewal lease," said Mr. Klehammer, a former assistant commissioner of the city agency that oversees the Mitchell-Lama program.

Conrad Eberstein, an original tenant in Ruppert Towers and vice president of the Ruppert-Yorkville Tenants Association, has mixed feelings about the settlement. "People on limited incomes are protected and clearly people with tons of money are protected, but it's the people in the middle I worry about," he said. "They are too rich to get a subsidy and not wealthy enough to buy easily."

Ascertaining the completion date for the buildings at Waterside Plaza, the complex that protrudes into the East River from 26th to 29th Street, became the deciding factor for the establishment of rents after its removal from Mitchell-Lama by its developer, Richard Ravitch, a former chairman of the Metropolitan Transportation Authority.

A community unto itself with four towers and 20 town houses surrounding a two acre plaza, the complex was partly completed before 1974, and partly after. "We made the argument that because we were really one horizontal mutiple dwelling we were one entity and weren't completed until the last building was finished," Ms. Lerner said.

"There were a lot of delaying tactics used, but finally the D.H.C.R. suggested we split our differences down the middle and forget the concept of horizontal multiple dwelling," she said. After more than two and a half years of wrangling, the rent increases were set at 9 percent a year for two years and 7.5 percent every year thereafter. The first increase went into effect on Nov. 1, 2001.

Even though they had a rider in their leases stating that they would come under rent stablization after Mitchell-Lama, residents agreed to forego the protection of stabilization. "If we had lost in our appeal to the state, then the entire complex could have gone to market rate," said B. J. Handal, the current president of the Waterside Tenants Association and its former treasurer. "The tenants essentially made a decision to take what was not a great deal but better than being forced out."

Norma Davis has lived in North Waterside, a building with 370 federally subsidized units for low income tenants for 29 years. Under the terms of the settlement, those who qualify were granted what are known as enhanced vouchers through the federal Section 8 program.

"That means that they will pay 30 percent of their gross income, and the government will make up the difference between that and the market rate," said Ms. Davis, whose own income as a laboratory technician in a physician's offfice, has made her ineligible for the subsidy.

She voluntarily moved from a three-bedroom apartment where she had raised two children to a one-bedroom, "because I was above the voucher level and realized that after the settlement my rent would soar," she explained. Her next increase, coming due shortly, will raise her rent to $900 a month. "In five years when I retire, my rent will probably double and I will probably be out," she said.

Mr. Ravitch called the settlement "a good solution to an impossibly difficult problem," Had he been left to his own devices to reconfigure the rents, he said, "I would never have gone to market rate. At this point in my life and career, I'm not about to throw anyone out. I spent two years working out various scenarios so no one would have to move out. But the tenants insisted on going to the mat."

In the end, he said, "Tenants benefited by not having draconian rent increases, and we got the benefit of the bargain we made with the government 30 years ago."

Whatever apprehensions the tenants of two 23-story buildings with 440 units each in the Brighton Beach section of Brooklyn known as Trump Village Section 1 and Section 2 had before they were taken out of Mitchell-Lama by Fred Trump in 1992, they have been assuaged by the passage of time.

"People were very upset and afraid of increases, but no one moved out," said Susan Shavitz, vice president of the Section 2 tenants association, who is a teacher. Along with her mother, Lillian Grayer, she was an original tenant.

Under Mitchell-Lama, the two women paid $650 a month, which included a surcharge because their household income exceeded guidelines, for their two bedroom apartment. Now they are paying $990.

"On the whole, management has been very responsive and responsible," Ms. Shavitz said. But, she added, "I do wish it had remained in Mitchell-Lama or that management had sold us our apartment. It hurts to pay more and more rent."

To Ms. Lerner, who at various times, has worked for city's Mitchell-Lama program, tenants and a major developer, the debate cuts deeper than any individual or building.

"More important than any lingering tension is the bigger issue of what happens to middle-income housing," she said. "We have the mayor talking about doing affordable housing and keeping middle-income people in the city with high cost new construction. Why not a concerted effort by the city and state to keep the remaining Mitchell-Lamas in the program. The cost of preserving middle-income housing is only a fraction of building new, at $300,000 a unit."

Acknowledging the right of landlords to buy out, she asked, "Is there no inducement in the world that would keep them in the program for another 10 or 20 years?"