Friday, June 1, 2012

Unprecedented Plan For Roosevelt Island's Island House Building To Exit Mitchell Lama Program With Affordable Home Ownership For Residents, Will It Work? Island House Residents Hold Question And Answer Session To Explain Plan

Image of Roosevelt Island's Island House Entrance

An update on Roosevelt Island's Island House efforts to exit the NY State Mitchell Lama program under a privatization and affordability plan agreed to by the Owner (David Hirschhorn), Residents and NY State.

On May 27, the Island House Tenants Association (IHTA) held a meeting at the Good Shepherd Community Center
with tenants to discuss the privatization/affordability plan and answer questions from residents. In addition to the IHTA Board, Roosevelt Island Assembly Member Micah Kellner, NY State Homes and Community Renewal (DHCR) Assistant Commissioner Richmond McCurnin and IHTA attorney Stuart Saft were in attendance to answer questions.

After an introduction by IHTA Chair Graham Cannon, Assembly Member Kellner gave a brief review explaining to the Island House residents that the Mitchell Lama program was coming to an end and the question is how it will end so that the residents of Island House can remain in their homes either under an affordable plan for home ownership or remaining as renters.

Mr. Kellner then introduced DHCR Assistant Commissioner McCurnin who stated that not a single Mitchell Lama building exiting the program has been saved from going market rate through a home ownership conversion such as the one proposed and agreed to for Island House. If the Island House privatization and affordability plan succeeds, it will be unprecedented said Mr. McCurnin. Also, Mr. McCurnin emphasized that the plan is a result of a great deal of compromise and that everybody is not going to like every single provision but that if this privatization/affordability plan is not accepted, the alternative is market rate housing. Many current Island House tenants would not be able to afford remaining in their homes if a market rate housing plan was instituted.

Here's a video excerpt from the beginning of the meeting (full video of meeting is below).

The IHTA prepared this summary of the plan:

Please find attached the Island House Plan for Preservation of Affordable Housing and Withdrawal from the Mitchell-Lama Program.

This is the final version of the Plan,* negotiated and agreed by the owner, DHCR, RIOC, the Empire State Development Corporation, and the Governor's office, that we voted for in September 2009 and by which we "signaled the owner, DHCR and RIOC to move ahead with a ground lease extension and preparation of the offering plan".

We are very pleased with the outcome. As many others have noted, at a point where the owner has the absolute right to withdraw our building from Mitchell-Lama and charge market rents, this is a plan that protects tenant purchasers and continuing renters at affordable levels that will allow us the security of remaining in our homes for many decades to come.

The purpose of the Affordability Plan is to provide a structure for the withdrawal of Island House from the Mitchell-Lama Program on terms that will preserve Island House as an affordable housing project for both existing tenants and future occupants.

The key elements of the plan are as follows:
  • RIOC will extend the Island House ground lease until 2068 — we anticipate by July 31 2012 — for the sole purpose of implementing the Affordability Plan.
  • Following that vote by RIOC to extend the ground lease, Island House will withdraw from Mitchell-Lama Program and immediately enter the Affordable Rental Program (similar to New York rent stabilization) outlined and required by the Plan. All tenants will initially continue as renters to be covered by the affordable rental program while the portion of the plan allowing tenants to purchase their apartments is submitted to the New York Attorney General as an Offering Plan by the owner (the "Sponsor").
  • Once the ground lease has been extended by RIOC, the Sponsor will submit the Offering Plan (the "Red Herring") to the New York Attorney General. The Attorney General will first review the plan then require additional answers and disclosures from the Sponsor before accepting the plan for filing. The Sponsor will then send the final Offering Plan to the tenants and each tenant will have an exclusive period to determine whether or not to purchase his/her apartment.
  • Under the Offering Plan, Island House tenants will be able to purchase their apartments at a discount of approximately 65% off the market price. The price of each apartment will be based upon the number of shares in the cooperative apartment corporation allocated to such unit.
  • Under the agreement, the aggregate value of all apartments in the coop ($90,252,162) was determined by using an average price of $198 per sq. ft. times the aggregate saleable residential area of 455,819 sq. ft. (exclusive of terraces and balconies). Based upon this aggregate valuation (exclusive of terraces and balconies), the per share price is $164. Shares are assigned to each cooperative apartment based upon a standard formula for Adjusted Apartment Area and relative value, taking into account location, view and height.
  • For those Island House residents who do not wish to purchase their apartments, they may remain as tenants for the next 30 years under a rental program mirroring rent stabilization with increases based on the same increases provided to New York rent stabilized tenants (plus a surcharge of no more then 5% for those at higher income levels as outlined in the plan).
  • The Division of Housing and Community Renewal (DHCR) will continue to supervise the property to insure that the terms of the Affordability Plan are adhered to.
  • Owner contributes $9,600,000 to building improvements and reserves.
  • Owner pays $4,500,000 in transfer fees to RIOC
  • Ground Lease and Tax Equivalency Payments for affordable units remain low during the 30 year affordability period and thereafter phase into a market level tax payment. (Along with flip tax revenue, this will greatly enhance affordability by keeping monthly costs. in addition to mortgage, as low as possible.)
  • After a tenant has made his or her initial purchase of the apartment under the Offering Plan, in order to balance both the investment risk taken by the tenant and provide for affordability for future generations, tenants will be able to resell their apartments at an initial resale price per share of $328 (twice the initial per share offering price to tenants), plus costs of any improvements. This price will be allowed to increase by 7.5% per annum. After the initial sale by the Sponsor to the current tenant, tenants may only sell their apartments to people with incomes under the formula described in the Affordability Plan.....
Among the questions asked by the Island House residents during the meeting was:
  • will a single person living in a multi bedroom apartment be able to buy their apartment,

  • if you decide not to buy what happens to the price of your rent,

what is the amount of flip tax on future apartment sales and will there be a windfall in profits for sellers,

and why is the Island House plan so unique?

Here's the entire Island House Affordability and Privatization Plan

and full video of May 27, 2012 IHTA meeting.

You Tube Video of Island House Affordability/Privatization Meeting (Part 1)

You Tube Video of Island House Affordability/Privatization Meeting (Part 2)

Following the meeting I asked Assembly Member Kellner if there were any outstanding issues remaining with the Roosevelt Island Operating Corp (RIOC) extending the ground lease on Island House with the current building owner. Mr. Kellner replied that there were no outstanding issues to his knowledge. I sent an email the next day asking RIOC President Leslie Torres:
After the Island House Meeting last night on their privatization/affordability plans, I asked Assembly Member Micah Kellner if there were any outstanding issues remaining regarding the ground lease extension being sought by the building's owner from RIOC.

Mr. Kellner replied that to his knowledge there were no outstanding issues remaining for the ground lease extension.

From RIOC's perspective, is it true that there are no issues remaining to be agreed upon for the Island House Ground Lease extension?

Thank you.
Have not received a response back from RIOC.

RIOC's discretion in granting the ground lease extension for the building is a key component in the affordability plan negotiations. Without the ground lease extension, the building owners would find it very difficult to finance exiting Mitchell Lama. It's going to be very interesting to see how this all plays out and how it impacts privatization/affordability of the other remaining Roosevelt Island Mitchell Lama buildings - Rivercross Coop and Westview rental.


Abeyant Flux said...

I don't suppose any information was discussed regarding how future renters/buyers of apartments subject to Affordable Resale/Rental restrictions will be determined?  Presumably demand will exceed supply of these apartments, such that a waitlist will continue to be necessary.  Will the current management company manage the waitlist in the same fashion it does now?

Nikola Đurković said...

If a tenant buys apartment, is he/she allowed then to rent it and, if yes, how much can he/she rent it for?

Frank Farance said...

Here's the answer we've already given the tenants: the post-conversion housing corporation (a co-op) will determine the policy.  One needs to strike a balance of: people needing to take temporary work assignments (e.g., a two-year project elsewhere); versus having a transient tenancy that reduces property values (e.g., unlimited subletting).  A balance needs to be struck, my crystal ball does not yet predict what that balance will be. :-)

Frank Farance said...

For the first question, according to the plan, DHCR is administering the process (a Good Thing).

For the second question on waiting lists, I don't know answer, I will try to find out.

YetAnotherRIer said...

"After a tenant has made his or her initial purchase of the apartment [ ... ] tenants will be able to resell their apartments at an initial resale price per share of $328 (twice the initial per share offering price to tenants), plus costs of any improvements."

So, the lucky people who are able to purchase their apartments could walk away with twice as much money as they put in if they decided to sell. That's a 100% gain... Island House tenants must be ecstatic. Why was the resell price set so high or the buy out price so low?

Frank Farance said...

First, there is not that kind of return, nor will there ever be.  The transfer fee (flip tax) starts out at 50%, gradually tapering out to 30% about a decade later.  So 50% goes right towards flip tax, which goes back into the building to support the maintenance reserve (a weak feature of older Mitchell-Lama buildings, which causes them to exit the M-L program).  In short, one has to FIRST put up significant monies to get to the point of having some return.

Second, the purchase price was set to be affordable for the tenancy in the building.  According to Mr. McCurnin (DHCR), most of the Island House tenancy is in the 100-150% AMI bracket.  According to Federal agency HUD (Housing and Urban Development), the 2012 AMI (area median income) for New York County (Manhattan) is $65,000, i.e., most of Island House is in the $65,000 to $97,500 income range.

A significantly higher purchase price would make it out of range for much of the tenancy.  Even with these rates, it will be a struggle for a good number of tenants because this can add 30-50% increase in housing costs.

Third, for the next 30 years, one has to find a buyer that meets the same affordable housing income requirements, which puts pressure on the top-end of the range.

Fourth, these kinds of prices and resale limitations are in use elsewhere in the City for affordable housing.  For example, the two story row houses (34 Avenue in LIC, between 13 and 14 Streets) have limitations and their owners must hold onto their houses for 21 years before being able to sell freely at market rate.  For Island House, it will be 30 years before being able to sell freely at market rate.  These kinds of approaches create stable tenancies, which is good for neighborhoods.

YetAnotherRIer said...

1. Right. You will still make a profit of $82/sqft. In a 700sqft apartment that comes to (at least for most of us living here on RI) a decent $56k. Not too shabby.

2. You are right.

3. I really don't think that this will ever be a problem here in NYC.

4. That may be so. It still feels unfair. There shouldn't be a possibility to make any profit whatsoever for the first 10 years or so. Some lengthy time that removes short-term thinking out of the equation.

Frank Farance said...

You've missed an important point: the transaction you cite also produced approximately $100K to be added to the building's maintenance reserve (a Good Thing, better than Mitchell-Lama), and monies have been given to RIOC and the Island (good for the Island's finances).

However, I'm not sure how you got your numbers.  With 50% going to flip tax and (say) 30% going towards income taxes (because it is is treated as ordinary income for the first two years), that would be 35% * $198 = $69, then times 700 sq-ft = $48K.  That means:

- You need to put up about $140K to make that kind of money; AND
- You need to find a buyer, too, who is willing to pay that price ($280K); AND
- Your buyer is willing to take on the same affordable plan for their investment; AND
- You buyer is able to meet the AMI income requirements.

It would take all that - a fair amount of resources and risk - to make that kind of return.

Paul Maas, the Jones Lang Laselle real estate consultant made a similar argument as yours, but the people buying these apartments aren't real estate investors, they are people of middle income who are living here.

On the other hand, one needs to make the investment attractive for the first set of buyers.  For example, if the penalties are too severe, few will purchase because: Why take all that risk if suddenly a tenant's job moves to a different city?  They entitled to some return on their investment, otherwise they won't make that investment now, which is why the flip taxes start high and taper off over time (similar to other building conversions).

DHCR's Rich McCurnin pointed out: there is nothing perfect in this plan, it was a series of comprises that were necessary to make this whole thing work.

YetAnotherRIer said...

"You've missed an important point: the transaction you cite also produced approximately $100K to be added to the building's maintenance reserve"

Good point. But why not take this money out of the price that residents will pay to become first owners? Why wait until they sell?

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