In Rising Market, Vital Mitchell-Lama Program at Crossroads

Opened in 1976, the four-building Lakeview apartment complex at Fifth Avenue and 107th Street once illustrated the promise and ambition of New York state’s Mitchell-Lama housing program, which offered low-interest loans, cheap land and tax breaks—plus a guaranteed 6 percent return—in exchange for lower- and middle-class affordability. From 1955 to 1978, Mitchell-Lama produced nearly 70,000 rental units in 174 properties around the city, often anchoring neighborhoods while the city lost population.

In recent years, however, Lakeview has also illustrated the strains and fissures facing Mitchell-Lama, which has been hailed, for example, by Manhattan Borough President Gale Brewer as “the best housing program ever conceived, middle-income.” It also houses low- and moderate-income tenants.

Through what tenants call "landlord neglect," the 446-unit Lakeview has fallen into disrepair. Tenant association president Jo Ann Lawson points to defective elevators, missing light fixtures, mold, walls going years unpainted and—perhaps most glaring—scaffolding that has lingered more than nine years to protect residents from falling bricks. “I am ashamed of where I live,” she told legislators at a hearing last year.

The solution to those problems may come at the expense of the complex's long-term affordability. Lakeviews’s parkside location in East Harlem is growing ever more attractive, as the cost of market-rate apartments and land shoots up. The incoming owner of Lakeview—Portland, Me.-based Low Income Housing Corporation (LIHC)—plans to implement more than $20 million in repairs, and to catch up on a mortgage that went unpaid for 18 months. To do so, however, it may move Lakeview out of Mitchell-Lama, as is permissible, and jack up rents. Mitchell-Lama projects must only maintain program restrictions for 20 years and owners who pay off the mortgage can leave the program.

Most existing tenants likely won’t face punishing costs, since other regulatory programs should serve as a stopgap, providing rent support while ensuring the landlord has the money to invest. But even solutions that help existing tenants leave advocates and elected officials wondering about the fate of a program enacted with expiration dates. After all, though city regulators say they have loan funds for repairs, they can’t compel owners to stay in Mitchell-Lama when privatization may be more lucrative.

Scant funding from Albany

Early Mitchell-Lama buildings faced a 50-year affordability commitment, but that was reduced to 35 years two years into the program, and to 20 years two years later, as noted by the NYU Furman Center. Pre-1974 rental buildings that leave the program must go into rent stabilization, but many newer buildings face no such restriction. The Mitchell-Lama Residents Coalition (MLRC) has long advocated that rent-stabilization be applied to all newer buildings, but that remains an uphill battle in the state Legislature. 

By the end of 2012, as the Community Service Society (CSS) reported in its 2013 “Closing the Door” report, some 47 percent of Mitchell-Lama rental units had left the program since 1990. Though the rate of loss slowed significantly after 2007, when the financial crisis began, “the losses could be revived by a change in the investment climate,” wrote Tom Waters and Victor Bach of CSS. The challenge is especially acute in Manhattan, where the real estate market is hottest and departures have been concentrated.

Assemblyman Robert Rodriguez, who represents East Harlem, calls the situation facing Mitchell-Lama a crisis, pointing to buildings fallen into disrepair or vulnerable to leaving the program. Like other legislators and advocates, he’d like to see a much greater public commitment to Mitchell-Lama.

Last December, in a Daily News op-ed, Rodriguez called for the state to dedicate $1.5 billion from a $5 billion banking settlement fund for housing preservation and new construction geared toward the Mitchell-Lama program, aimed at a range of incomes, including low-income households. Bronx Sen. Jeff Klein and his Independent Democratic Conference recently called for $750 million to fund new Mitchell-Lama construction, for a middle-class constituency.

The New York State Association for Affordable Housing, a coalition of builders and others working in the affordable field, in November proposed that $1 billion of the settlement—which derives in part from misrepresentation of mortgages—be used to develop and preserve affordable housing, including Mitchell-Lama.

That hasn’t happened. The gubernatorial budget directs just $440 million of settlement funds to housing, including $50 million for new low- and moderate-income construction, and $50 million for Mitchell-Lama repairs. “It’s a missed opportunity,” Rodriguez says. Another coalition, the Fair Share for Housing Coalition, launched March 10 to argue for more of the bank settlement to be spent on housing.

Any effort to restart Mitchell-Lama would have to grapple with the ways the world has changed since the 1970s. For one thing, the city no longer has a large supply of cheap land to offer. For another, subsidized borrowing in no longer a great lure, because all borrowing is so much cheaper. Last October, former housing official Charles Urstadt told the Observer that mortgage rates are now so low, close to tax-exempt rates, that they couldn’t spur a similar program.

Making the math work

Rodriguez is keenly interested in Lakeview. “We’re in negotiations with the developer [of Lakeview] right now, to figure out the level of investment for capital improvements that are necessitating the exit,” says Rodriguez.

“We’re really hoping our wonderful mayor steps up and tries to keep this place affordable,” Lawson said. “We are prime real estate.”

The process takes a while, and the landlord did seek a meeting with the tenants. “He was very receptive to our conversation,” Lawson says of LIHC founder Charlie Gendron. “We have countered [that] we will do everything we can do to give you what you’re looking for and stay in the program.” The city Department of Housing Preservation and Development (HPD) says it has reached out to the owner. A public hearing and state approval are necessary to exit the program.

If Lakeview leaves Mitchell-Lama, one potential outcome is a program in which rents rise on paper—one-bedrooms vaulting from some $850 a month to at least $2,000—though tenants would be responsible for a fraction. Perhaps three-quarters of the tenants (those earning up to 95 percent of Area Median Income, or about $79,700 for a four-person household) would pay 30 percent of their income. That’s thanks to special housing vouchers from the federal Department of Housing and Urban Development (HUD). About half of all Mitchell-Lama buildings in New York City have HUD mortgages, which make them eligible for such “sticky vouchers.”

Better-off tenants ineligible for vouchers might see rents capped for a defined period under a negotiated Landlord Assistance Program, or LAP, though such programs are unregulated. But the owner is also considering other potential resolutions, depending on government funds.

“For years, the building has lacked funds for regular maintenance, which has led to severe water infiltration, elevators that frequently break down, and a rat infestation,” a LIHC spokeswoman tells City Limits in a statement. “Under this proposal, low to moderate-income tenants and seniors—which are a vast majority of the building tenants—will remain eligible for rental assistance and there will be a limit on how much they pay.” (LIHC points out that it has extended the project-based Section 8 contract with a nearby building, Villa Hermosa, for 15 years, longer than the typical term.)

Lawson describes both “a great deal of excitement” about improvements, as well as “a great deal of fear” among tenants. While most existing tenants would qualify for vouchers, anyone not formally on the lease would be out of luck. Those whose family members have left would have to downsize to a smaller apartment, with no money to pay for moving. And, Lawson points out, tenants have already faced unexpected costs, such as prepping their apartments—it cost her $2,400—to respond to a “bad bedbug epidemic.”

Flaws and consequences

The increasing attractiveness of Mitchell-Lama buildings comes on top of what many tenants consider official neglect—a feeling that was backed up partly by a 2007 state Inspector General’s report slamming the Division of Housing and Community Renewal’s oversight of Mitchell-Lama.

“Rather than safeguarding the integrity of the program, DHCR, through its own shortcomings, has allowed housing companies to flout rules regarding apartment allocation, financial reporting, and contracting,” the IG stated. That meant, among other things, “deterioration of facilities” and “waste of taxpayer money.” DHCR pledged to take remedial action.

Some one-third of the city's Mitchell-Lama developments have major capital repair needs, with $80 million in construction costs, HPD Assistant Commissioner Julie Walpert said at the February 2014 Assembly hearing. To some degree those are the result of flaws in the program that benefited tenants in the past—and could punish them severely now.

Because of the way the program was constructed, Mitchell-Lama tenants, on average, pay about 20 percent of their income towards rent, while those over the income limit per building pay less than nine percent, according to Walpert’s testimony.

The huge repair needs at these buildings, combined with a common lack of capital reserves thanks to low rent rolls in the past, now means rent increases can be huge, sometimes even 50 percent.

Walpert pointed to the example of Tracey Towers in the Bronx, which required more than $20 million in capital work, but had not had a rent increase in nearly a decade. (The Daily News quoted the owner as saying rents were $163 per room.) After HDC refinanced the mortgage, the complex stayed in Mitchell-Lama, and HPD implemented a rent increase—proposed at 65 percent, but reduced to 61.5 percent after a lawsuit was settled—over four years.

“Had Tracey Towers been required to take modest annual rent increases, they could have budgeted more easily and not been faced with such a large increase,” Walpert testified. Tenant leaders, however, pointed to a history of bad faith by building owners and managers who didn’t make promised repairs that would have justified ongoing rent increases. 

To mitigate the impact of large rent increases, especially after years of static rents, HPD could require annual rent increases for city Mitchell-Lama developments that follow either the consumer price index or the increase set by the Rent Guidelines Board, Walpert suggested at the hearing.

Forks in the road

HPD’s proposal to lift rents and add a surcharge to higher-income tenants hasn’t made legislative progress. As the gap between building expenses and revenues remains, owners of Mitchell-Lama buildings face a fork in the road: stay in the program thanks to refinancing (since 2000, HPD and the city's Housing Development Corporation (HDC) have preserved more than 35,000 units of Mitchell-Lama housing) or exit, directly or indirectly, toward the market, depending on available funding and regulatory regimes.

Buildings that don't stay in the Mitchell-Lama program can transition to Housing Development Fund Companies (HDFC) under the state’s Article XI tax incentive, which extends protections for mixed-income tenants for up to 40 years. The process requires HPD review and approval by the City Council.

Still other Mitchell-Lama buildings—those with HUD loans—may go the voucher route. But that ultimately portends the loss of protected units, and also makes the units vulnerable to precarious federal housing budgets. While most residents were eligible to remain with Section 8 vouchers when the Urban American Putnam Portfolio—five former Mitchell-Lama projects in upper Manhattan and Roosevelt Island with nearly 4,000 units—left the program in 2005, Crain’s New York Business reported in January 2014 that only about half of the unit-holders had vouchers.

The reason is unclear, but Katie Goldstein, executive director of Tenants and Neighbors, suggested it was “either poor conditions or they decided to move.” (A spokesperson for Urban American and Brookfield says the 5 percent annual turnover is comparable to similar buildings and that they’ve invested in repairs.)

“Vouchers on their own are problematic,” says Kerri White, organizing director of the Urban Homesteading Assistance Board, because vacated apartments can go to market. She’s argued that buyers of the Putnam Portfolio—like buyers at some other complexes with regulated rents but gaudy price tags—have paid so much they must push units to market rates. “They can essentially triple the rent.”

City leverage? 

The city’s leverage over Mitchell-Lama owners has been subject to debate. White said advocates met with the office of Comptroller Scott Stringer, who inherited an investment in part of the Putnam portfolio, to ask for the city to use its pension funds to ensure affordability. But the comptroller has a fiduciary responsibility to enhance pension-fund investments. “While they understand what was problematic about this portfolio, they have an obligation to the investment,” she reports.

A Stringer spokesman told City Limits, “The Putnam investment was made at the height of the real estate market in 2005-2007 and created a unique situation unlikely to be found in the rest of the portfolio.  However, to ensure that the pension funds are never put in that type of situation again, our real estate partnerships include a clause that allows for a reputational risk opt-out.”

In 2007, warning about “predatory equity,” Tenants and Neighbors asked that city investment funds not invest in firms making private equity or other highly leveraged investments in subsidized housing; Indeed, the opt-out policy in the comptroller’s office dates back to 2008, advocates say.

But advocates haven’t achieved another request, that “regulatory agencies that supervise Mitchell-Lama developments” find ways to scrutinize sales so “neither tenants nor the assets are being placed at risk.” HPD notes it cannot legally interfere with an owner’s right to exit Mitchell-Lama, nor impose requirements to stop a buyout, but says rules require significant transparency during the one-year buyout process. 

White agrees that the city often “does come to the table” regarding Mitchell-Lama preservation, though there are times “they can definitely push harder.”

A citywide challenge

For tenants with Mitchell-Lama leases and decent conditions—not a given—the program is a holy grail, an unusual opportunity in an increasingly unaffordable city. Last year, retired rocker and bar operator Handsome Dick Manitoba told New York magazine he’d waited nine years for a “great two-bedroom apartment with a terrace… Mitchell Lama. Hit the apartment lotto!”

Fewer get that chance. A February 2004 report from then-Comptroller Thompson warned of “New York City’s Looming Crisis in Mitchell-Lama and Limited Dividend Housing.” It noted that “a combination of historically low-interest rates, an upward swing of real-estate prices, and initial mortgages nearing their maturation date” made it likely that such subsidized buildings would leave the programs.

That is exactly what happened, as noted by the Community Service Society. After slowing for the recession, the trend is poised for another upswing. Over the next nine years, NYU’s the Furman Center reported in January, more than 58,000 units of subsidized affordable rental housing—including but not limited to Mitchell-Lama units—will be eligible to opt out of all affordability restrictions.

So the “city must prepare for the return of the market conditions that caused the last wave of Mitchell-Lama losses by creating and funding incentives for owners to maintain their commitment to affordability,” as well as help with repairs in buildings remaining in the program, Waters and Bach wrote in the CSS report.

As buildings leave the program, that portends changes like those MLRC officer Ed Rosner says he's seen at his complex, Independent Plaza North in TriBeCa, with the regular turnover of market-rate units making it “almost like a college dorm.” Such transient renters have “none of the awareness or consciousness of long-term tenants.”

As legislative and rule changes get proposed, the current position of Mitchell-Lama rental buildings provokes painful hindsight. Programs like Mitchell-Lama were created in tougher times, and with expiration dates rather than permanent affordability. That leaves advocates scrambling. “We’d prefer to save the housing,” says Katy Bondonaro of the Mitchell-Lama Residents Coalition, “but if not, we’d prefer to save the people who built these communities.”

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For Co-ops, a “Windfall”?

According to a 2011 Furman Center report, 97 Mitchell-Lama co-ops, with 69,700 units, were built in New York City. Relatively few co-ops have left Mitchell-Lama, but some exits have prompted huge debates, such as at the 1651-unit Southbridge Towers in Lower Manhattan. Cooperators at Southbridge, paid about an average of $17,500 for their co-ops, with an average monthly maintenance fee of $620, the Times reported last year. When the units go to market, the Southbridge offering plan—according to the Times—predicts that a shareholder could sell a one-bedroom apartment for $550,000 and reap $325,000 after a significant flip tax.

Should those who have benefited from affordability get an unfair “windfall profit,” as Cooperators United for Mitchell-Lama (CUML) dubs it? Or do they deserve an award for taking a risk by moving to a community decades ago and helping it serve as a magnet for growth?

Defenders note that the program began with a time horizon, and also note that co-op sales generate new tax revenue because all co-op sales are taxed. Many would like to pass on an asset to their children. They got a boost last December, when a state court ruled that those buildings leaving the program were not subject to the city’s Real Property Transfer Tax; a lawyer for those considering privatizing told the Daily News that residents would be “dancing in the street.”

Critics, however, believe Mitchell-Lama cooperators are cashing in on an affordable housing investment made by someone else—namely, taxpayers. Max Weselcouch, director of the Moelis Institute for Affordable Housing Policy at the NYU Furman Center, contrasts the Mitchell-Lama rentals, where the owners took on some risk with the expectation of an eventual market-rate future, with the co-ops, whose shareholders took on less risk.

“They have the potential for a huge profit in buying out,” she observes. “It’s unclear whose interest that is in. The city and state invested in these properties when they were built. Now they won’t be available for future generations.”

As with Mitchell-Lama rentals, hindsight suggests an awkward fit with today’s city. “I think if someone were to design a limited equity program today,” Weselcouch suggested, “there probably wouldn’t be an option for shareholders to opt out.”

HPD has begun a co-op buyout plan in which buildings can be converted under state law to income-restricted buildings, which would provide the cooperators with some limited growth in their equity. Once outside Mitchell-Lama, however, the building’s waiting list—the next generation for entry—would be eliminated, since the units could be sold on the open market. And while buyers would face income limits and restrictions on sales prices, Cooperators United for Mitchell-Lama has warned this will put the buildings out of reach of many previously eligible to buy in.