SUSTAINING AFFORDABLE HOUSING IN A COMPETITIVE REAL ESTATE MARKET: A Case Study of Mitchell­Lama Rental Units Prepared by Wendy D. Anderson Joanna Raymundo Lindsay Ruprecht Heather Sheridan COMMUNITY DEVELOPMENT FINANCE LAB April 7, 2008 Sponsored By Prepared for TABLE OF THE URBAN HOMESTEADING ASSISTANCE BOARD Table of Contents Acknowledgements……………………………………………………………………………………………….…..…………..3 Executive Summary…………………………………..………………………...……………………….………….…………….4 Project Mandate…………………………………….……………………………………………………...…………….…………5 Overview of the Mitchell­Lama Affordable Housing Program……………...……….………………….…….5 Methodology……………………………………..…………………………..….…………………………………………………12 The Key Players………………………………………………………………...………………………………………….……..12 Economics of the Deals………………………………………………………...…………...……………………………...…14 Investment by New York City Pension Funds………………………………….……………………………………16 The Importance of Section 8……………………………………………..…...………..………………………………..…18 New York City Housing Policies……………………………………………………………………………………………19 Local successes…………………………………………………………………..………………………………………………..20 Other City Models…………………………………………………………….…………………………………………….……21 Recommendations…………………………………………………….………………….………………………………..……22 Appendices Appendix A: List of Mitchell­Lama Rentals Expiring Out of the Program…………………..….25 Appendix B: Loss of Mitchell­Lama Units by Borough……………………………….……………….….26 Appendix C: Lenders Involved in Buyouts or Pending Buyouts…………………………………..…28 Appendix D: HDC Preservation of Mitchell­Lama Properties: Mortgage Restructuring and Repair Loan Programs……………………………………………………………………………….…………..29 Appendix E: Development and Management Companies Participating in the HDC Preservation of Mitchell­Lama Properties: Mortgage Restructuring/Repair Loan Programs………………………………………………………………………………………………………………………30 Appendix F: Average Rent Stabilized Unit Rent…………………………………………………….……….36 Appendix G: Ten­Year Rent Increases…………………………………………………………………………...38 Appendix H: Buyout Transactions…………………………………………………………………………………39 2 Appendix I: Financial Models………………………………………………………………………………………...42 Appendix J: Tenant Association Contacts and Meeting Dates…………………………….…….……59 Appendix K: Resident Survey………………………………………………………………………..……….………60 References……...………………………………………………………………………………………………………………...…61 Acknowledgements We would like to extend a special thank you to our faculty advisor Blaise Rastello who made great contributions to our direction as he guided us through the process and some of the technical details involved in the project. We also appreciate the insight of Dr. Lisa Servon, Associate Director of the Community Development Research Center at Milano The New School for Management and Urban Policy and Associate Professor of the Community Development Finance Lab. We would also like to thank HSBC for funding this project. Contributions like theirs allow Milano students to gain significant experience while working towards making a difference in the community. 3 Executive Summary The limited Profit Housing Companies Act was created in 1955 to create affordable housing for middle‐income residents. Mitchell‐Lama housing came as a result of this legislation. After twenty years from the original occupancy date, owners of the developments were allowed to buyout and leave the Mitchell‐Lama program. Policy‐makers did not plan for the soaring real estate market that New York City has experienced over the last decade; and this has enticed owners of limited‐profit housing projects prepay their mortgages in order to gain early departure from the affordable housing program restrictions. New York is running out of land on which to build and the numbers of affordable housing units available in the city are dwindling. This is an extremely important issue not only for affordable housing advocates but tenants, community leaders and other stakeholders who have a vested interest in preserving the affordability of expiring Mitchell‐Lama units. Our research focused strictly on Mitchell‐Lama rental units. We looked at three properties that are pending a buyout from the Mitchell‐Lama Program and four properties that have finalized the buyout process. Utilizing policy reports, case studies, legislation, financial reports and the Automated City Register Information System (ACRIS) and interviews with tenants, developers, banking specialists and political officials, we created financial models projecting the rent changes that can be expected for the seven properties with industry‐ standard investment practices. The models generally demonstrate extreme rent increases, which carry high probability of tenant displacement and therefore permanent loss of the units' affordability. We also identify key lenders and developers in these buyout deals. Our recommendations to the Urban Homesteading Assistance Board (UHAB) are the continuation of advocacy efforts persuading the Department of Housing Preservation and Development (HPD) and the Housing Development Corporation (HDC) to vet these deals and meeting with the Comptroller’s Office on an on‐going basis to ensure that public pension funds are not being used in these deals. Other short‐term strategies include meeting with lenders that underwrite the deals involving the sale of affordable housing units and educating them about their role, participation and responsibility as lenders, emphasizing that these activities could be detrimental to their credibility as responsible lenders. Reticent lenders’ practices, which add to the instability in the affordable housing market, should be exposed through a focused media campaign. In the long‐term UHAB should develop and implement the policies and mechanics on purchase options on city financing programs to ensure permanent affordability through collaboration with other non‐profit advocacy organizations such as the Association for Neighborhood Housing and Development (ANHD) and for‐profit developers who can implement finance strategies to preserve affordable housing. Most importantly UHAB must create a broad coalition of developers, bankers and other advocacy organizations to present policy solutions to the city as a united front. 4 Project Mandate Our team was charged with answering the following: Due to the rising population growth and increasingly competitive real estate market in New York City, what can be done to preserve sustainable affordable rental housing units for low and middle‐income residents? Overview of the Mitchell­Lama Affordable Housing Program The limited Profit Housing Companies Act was created in 1955 for the purpose of building affordable housing for middle‐income residents. The housing that was built as a result of this legislation was called Mitchell‐Lama units, derived from the names of former Manhattan State Senator MacNeil Mitchell and former Brooklyn Assemblyman Alfred Lama who sponsored the legislation. The Mitchell‐Lama program facilitated the construction of nearly 142,000 units of affordable housing in New York City. Owners were required by law to keep rents affordable in exchange for low‐interest mortgage loans and real property tax exemptions. 1 Table 1 shows the number of Mitchell‐Lama Rental and Co‐op Units created in each borough. Manhattan had the most rentals, 25,219 and the Bronx had the most co‐ops with 22,732. There were 74,182 rentals created in New York City and 67,815 co‐ops for a total of 141,997 Mitchell‐Lama Units. Table 1: Total Number of Mitchell­Lama Units Created in Each Borough Borough Rentals Co­ops Total Bronx 21,755 22,732 44,487 Brooklyn 18,044 16,391 34,435 Manhattan 25,219 15,876 41,095 Queens 8,176 12,8 16 20,992 Staten Island 988 0 988 NYC Total 74,182 67,815 141,997 Sources: Division of Housing and Community Renewal (DHCR) and NYC Comptroller’s Office The Mitchell‐Lama program did not ensure permanent affordable housing. After twenty years from the original occupancy date, owners of the developments were allowed to buy out and leave the program. The process of leaving the supervision of the Mitchell‐Lama program begins when a development owner serves the New York State Division of Housing and Community Renewal (DHCR) or the New York City Department of Housing 1 Affordable No More, 2006 5 Preservation and Development (HPD) and the tenants of the building, with a formal notice of intent to leave the program. One year after filing this document, the owner may leave the program if all other terms and obligations of the contract that established the original development, have been met. Many buildings began timing out of the program in the early 1990’s. At this time DHCR issued regulations stipulating that certain areas are subject to the Rent Stabilization Law (RSL) of 1969 or the Emergency Tenant Protection Act (ETPA) of 1974, and Mitchell‐Lama buildings in those areas would be protected under Rent Stabilization guidelines after being bought out. The policy report, “Affordable No More: An Update” released by the New York City Comptroller’s Office in 2006 states the circumstances under which Mitchell‐Lamas are subject to RSL and ETPA. As stated in this report, Mitchell‐Lama developments occupied on or after January 1, 1974, are not subject to rent stabilization. Also, all units that were built prior to 1969 but were not occupied continuously between July 1, 1971 and December 31, 1973, and those that were built between March 10, 1969 and January 1, 1974 are governed by the ETPA. A section in the ETPA states that owners can submit a request to DHCR, within 60 days of leaving the program, to increase rent in a building due to “unique and peculiar circumstances,”