Roosevelt Island Westview Building Ground Lease Extension On RIOC Board Meeting Agenda Tonight - Here Are The Details On Mitchell Lama Exit And Resident Affordability Plan

On July 18, the Roosevelt Island Operating Corp (RIOC) Real Estate Development Advisory Committee met in Executive Sessioin (closed to the public) to discuss the Westview building

ground lease negotiations. As reported that evening:

Following the Executive Session, I spotted RIOC President Susan Rosenthal on Main Street. I asked what happened at the meeting. Ms Rosenthal replied:

Board meeting has been scheduled for Monday...

Translation, a Westview agreement has been reached and will be voted on at Board meeting on Monday.

More details on the Agreement coming soon.

Here are the details.

 It looks like the Westview Affordability Plan, Privatization and Ground Lease Extension will be approved at this evening's RIOC Board meeting. Among the items on RIOC Board Agenda for meeting tonight is:

III. New Business
1. Authorizations Related to Amendment to Westview Ground Lease (Board Action Required)

Below is RIOC CFO Kimberly Quinones July 20 Memo in support of the Westview Ground Lease Amendment to the RIOC Board of Directors:

EXECUTIVE SUMMARY

At its July 23, 2018 meeting, the Board of Directors of RIOC will be asked to consider approval of an amendment (the “Amendment”) to the 1973 ground lease (“Ground Lease”) with NorthTown Phase III Houses, Inc., the owner of Westview (the “Owner”). Approval of the Amendment would enable the Owner to pursue an affordable home ownership conversion plan for Westview (“Affordability Plan”). The Affordability Plan provides for current tenants to be able to purchase their apartments at below market value with non-purchasers receiving guaranteed rent protections. In approving the Affordability Plan, RIOC will need to extend the Ground Lease with increases for Tax Equivalency and Ground Rent payments as provided in the Amendment. Prior to approving the Amendment, the Board will be asked to approve certain environmental findings. Proposed Board resolutions adopting the environmental findings and approving the Amendment are attached.

PROPOSED AMENDMENT

The Proposed Amendment would modify and extend the existing Ground Lease between RIOC and the Owner governing a Mitchell-Lama building with 361 residential rental units (“Westview”). Although the Ground Lease is not scheduled to terminate until 2028, certain changes in circumstances merit the proposed Amendment. The Owner seeks to exit the Mitchell Lama program, as is its right under the State’s Private Housing Finance Law, and pursue a cooperative and condominium conversion (the “Conversion”). The Owner also seeks to refinance the mortgage on Westview. In order to accomplish these goals, the Owner needs to extend the term of the lease. RIOC seeks to preserve affordable housing, consistent with its mission and statutory purpose.

RIOC has worked with the Owner and the Empire State Development Corp. of N.Y. (ESD) the New York State Division of Housing and Community Renewal (HCR) to develop a plan that balances the parties’ goals. In exchange for an extension of the Ground Lease at a below market ground rent, the Owner has agreed to maintain Westview as an affordable housing complex for a period of 30 years pursuant to the Affordability Plan. In exchange for affordability protections, the expiration date of the Ground Lease will be extended from January 31, 2028 through December 22, 2068, and the ground rent payable to RIOC will be less than a full market ground rent unencumbered by the Affordability Plan for a lease term through 2068. In addition, the Amendment will allow RIOC to remain in occupancy of its current office space for a period of up to five (5) years, with no rent being payable by RIOC for the first three years. Finally, the Amendment will permit the Owner to refinance its existing mortgage at advantageous rates so it can make necessary capital improvements to Westview.

AFFORDABILITY PLAN HIGHLIGHTS

The Affordability Plan provides that for the next 30 years at least 55% of the 361 residential units, (199 units) will either be affordable restricted price cooperative apartments or affordable rental units. Affordable cooperative apartments will give existing tenants the opportunity to purchase at a substantial discount while restricting resale prices and instituting income limitations upon subsequent purchasers. Tenants who do not purchase apartments will be provided with rent increases tied to the “Rent Guidelines Board” increased by 6.16% plus a 0% to 5% add-on depending on the tenant’s income. Tenants who do not purchase their units will be provided subsidized rent for as long as they remain up to the next 30 years.

Please note that the cooperative Conversion will require the approval of the NYS Attorney General’s Office. In the event of non-approval, the building will convert to an “Affordable Rental” whereby at least 55% of the residential units will be provided subsidized rents as described above for the next 30 years.

As detailed in the attached Affordability Plan, the Sponsor is required to make an up-front capital contribution to the building’s Capital Reserve Fund.

GROUND RENT HIGHLIGHTS

Under the Amendment, the effective starting annual ground rent would be $325,000 (an increase as Westview does not currently pay ground rent), and would increase by 10% every 5 years during the 30 year affordable period, and thereafter at 4% per year. The ground rent amount is supported by an appraisal of the leasehold encumbered by the Affordability Plan. The ground rent was structured in order to keep cooperative maintenance charges to a minimum. Ground rent will be comprised of three components: Base Ground Rent (paid by the Lessee); Transfer Resale Fees (paid by the shareholders upon re-sale); and Capital Event Fee (referred to as Sponsor Transfer fees in the Amendment) (paid by the sponsor on initial sales). The NPV of the projected estimated revenues comes to approximately 30% of appraisal. The appraisal was performed by Jerome Haims, a highly respected appraiser with many years’ experience with public/private New York real estate. In addition, a Valuation Letter was also obtained from Newmark Knight Frank.

TAX EQUIVALENT PAYMENTS (TEP) HIGHLIGHTS

The Amendment provides for a ten (10) year phase-in of Tax Equivalent payments to market rates for units being sold or rented at market, provided that for the first thirty years, the Tax Equivalent Payments for market rate apartments will be based on 80% of the market based tax equivalent payment. Thereafter, the Equivalent Payments for market apartments will increase to 100% of market based TEP. On July, 2018, the Empire State Development Corp. of N.Y. (ESD) approved the TEP provisions in the Affordability Plan and gave its consent to the ground lease extension.

ENVIRONMENTAL REVIEW

Counsel has advised that the Proposed Amendment is a Type II action under the State Environmental Quality Review Act (“SEQRA”), and therefore does not require environmental review. However, as a conservative measure and for the avoidance of doubt, RIOC staff has worked with outside environmental counsel to prepare the attached Short Environmental Assessment Form and addendums (“SEAF”) to assess any potential environmental impacts that may result from the Proposed Amendment. Based on the SEAF, I recommend that RIOC conclude that the Amendment and implementation of the Affordability Plan will not have a significant adverse impact on the environment. Copies of the SEAF and a proposed negative declaration for Board approval are attached.

RECOMMENDATION
I believe that, in keeping with RIOC’s corporate mission of promoting Affordable Housing on the Island if economically feasible, the proposed ground lease extension accomplishes this and I recommend its approval....

Also, NY State Department of Homes & Community Renewal (DHCR) memo to RIOC in support of the Westview Affordability Plan.

Executive Summary

The decision to be made is whether the State (ESD, RIOC, and HCR) should take the necessary steps to approve an affordable home ownership conversion plan for Westview on Roosevelt Island. The Plan provides for current tenants to be able to purchase their apartments at below market value with non purchasers receiving guaranteed rent protections. In approving the Plan, the State will need to extend the Ground Lease as follows: an increase in effective annual ground to $325,000 escalating by 10% every 5 years through 2048 and then 4% annually through 2068.

The reasons to support the Plan are as follows:

• Preservation of Mitchell-Lama(s) (M/L) as a housing resource is a priority policy initiative;
• Non-purchasing tenants will have annual rent increases limited to a formula based on % of AMI tied to NYC Rent Guidelines Board rates
• Non-purchasing tenants will face an initial 6.16% increase (the first at Westview since 2009), down from an initially proposed 14.8% increase
• Residents are being offered to purchase apartments at approx. 30% of market value with limitations being imposed on re- sales; rent protections tied to RGB guidleines are guaranteed for non-purchasers;
• Income restrictions for new purchasers based upon the statutory M/L formula;
• Sponsor contributions and flip tax proceeds fund a substantial capital reserve fund;
• Substantial flip taxes on affordable units help keep project affordable;
• The Plan is overwhelmingly supported by the Westview tenants, with 92% of those voting in favor of the Plan (73% of the apartments voted);
• The Plan is supported by local elected officials, including AMB Seawright and MBP Gale Brewer;
• All of the above vs. the owner exercising the option to buyout of the M/L program and transition Westview to a market rate rental or coop likely forcing a significant number of families to relocate
• Sponsor will deposit into a special fund $3.6 million for Tenant Association expenses and other building related items as may be jointly approved by the Board of Directors of the Corporation and the Sponsor.

Background

Westview is a 361 unit Mitchell-Lama rental housing development on Roosevelt Island. In 1969, the City of New York leased Roosevelt Island to the Urban Development Corporation (UDC) for a period of 99 years. A master development plan, later amended, for the creation of a mixed income community was implemented. UDC (now known as ESD) thereupon entered into subleases with the four housing companies developed under the M/L program, Westview being one of them. The Westview sublease (hereafter referred to as the “Ground Lease”) expires in 2028.

Mitchell-Lama Law/Voluntary Dissolution

Westview is organized pursuant to Article II of the Private Housing Finance Law (PHFL); Section 35 of the PHFL allows a M/L housing company to voluntarily dissolve (buyout), without the consent of the Commissioner, upon prepayment of its mortgage after twenty years from the date of initial occupancy. Westview is currently eligible to voluntarily dissolve. Of the 282 State M/L(s) originally constructed, 133 have bought-ought of the program.

Starting with the Spitzer Administration, a policy initiative was developed to aggressively pursue the preservation of M/L companies as an affordable resource, and these efforts have been greatly expanded upon during the Cuomo Administration. In the case of Westview, we engaged the owner, David Hirschhorn, to discuss the possibility of a conversion to a Business Corporation Law (BCL) cooperative (but with long-term affordability restrictions) modeled on the cooperative regime implemented as part of the 2012 buyout of Westview’s sister property, Island House, from the M/L program. Mr. Hirschhorn has agreed to such an approach, and the current Plan under consideration is the product of our negotions with him and his subsequent agreement to proceed on such basis.

The Affordability Plan

The major provisions of the agreed upon Affordability Plan are as follows:

• The term of the Affordability Plan is 30 years.
• Insider prices on average of $246 per sq. ft. (market price of $816 per sq. ft.)
• Initial resale price by purchaser – $492 per sq. ft. (increasing annually by 7.5%) The first $6 million of flip tax proceeds will be deposited into the Apartment Corporation’s Reserve Fund account. Therafter, the next flip tax proceeds will be distributed a) 50% to the Sponsor, up to the difference between the Reserve Fund contribution, and the Local Law 70 Reserve Fund contribution, and b) the remaining 50% shall be deposited into the Apartment Corporation’s Reserve Fund account. All flip tax proceeds thereafter shall be deposited into the Apartment Corporation’s Reserve Fund account.
• A flip tax equal to 60% of the gross profit for the first two years, declining by 5% per year to 30%, then declining by 2% per year to 22% through year 30 will be assessed on insider first time sales
• Future purchasers must meet income qualifications for admission based upon the M/L statutory formula of: “[Max. Income for Admission = 7X or 8X (depending on family size) the annual carrying charge + 6% of equity]”
• Non-purchasing tenants will receive annual rent increases equal to the then 1 year RGB increase plus a % based upon income as it relates to AMI; for households with an income at less than 200% of AMI, the annual increase cannot exceed 7.5%.
• Sponsor will fund a $6 million reserve fund for specified capital improvements. 
• Spsonsor is permitted to sell up to 45% of units at market.

RIOC

Regarding RIOC’s ground rent payments, an agreement has been reached on an annual ground rent payment beginning at $325,000. In total, there are three (3) revenue sources being used to generate payment under the ground lease: a) a direct ground rent payment of $325,000 escalating at 10% every 5 years through 2048 and then 4% annually through 2068; b) a 5% capital event fee on all sponsor sales (capped at $1,500,000); and c) a 1% transfer fee on all re-sales.

While the negotiated ground lease terms are less favorable than what RIOC had sought based on its appraisal of the land (and admittedly represent a lower percentage of notional value than was achieved as part of the conversion and exit from the M/L program of Westview’s sister property, Island House, in 2012), the negotiated Westview lease terms nonetheless represent in whole dollar amounts a reasonableimprovement over what was achieved at Island House ($236,000 per year) in 2012, and constitute a critical and necessary component of the grand bargain being struck with the owner that is enablingWestview to remain affordable for renters for 30 years and to offer affordable  first-time homeownership.

Discussion

Other than the 2012 conversion of Island House, there has never been a successful conversion of a State Mitchell-Lama rental to affordable home ownership (a NYC supervised M/L, West Village, has been successfully converted). The difficulty encountered is the need to satisfy the goals of both the owner and residents, while maintaining affordability. On the one hand, the owner is being asked to leave some money on the table (it has been pointed out that, in this case, the owner’s profit potential is somewhat limited by only 10 years remaining on the existing ground lease) by offering the sale of units at 30% of market. From the perspective of those tenants considering purchasing, they are being asked to make a fairly significant investment and not only must determine whether the additional monthly cost is affordable but whether the potential return justifies making the investment. Also a factor for the tenants to consider is the owner’s right to exit the Mitchell-Lama program and operate the property as a market rate rental which likely will cause a significant number of families to have to relocate.

In sum, we are attempting to achieve a balance as to the owner’s and tenants’ interests and, once having done so, incorporate additional restrictions so that affordability for future residents and non-purchasers is being achieved.

Summary and Recommendation

To summarize, an agreement has been reached among the involved parties to offer an affordable home ownership opportunity to Westview tenants while preserving long-term affordability for those who choose not to buy and instead continue to rent. Further, an agreement has been reached to extend the Ground Lease between RIOC and the property owner, a necessary action to implementing the conversion. The agreement was successfully negotiated with the knowledge that a failure to do so would result in Westview’s withdrawal from the M/L program and it becoming a market rate rental.

The structure of the conversion plan – insider pricing, flip taxes, resale prices, capitalized reserves, and regulated rents, etc. – negotiated between the owner and the Tenant Association representatives – was presented to the tenant body and received overwhelming support. Also, future ground rent payments through the end of the extended lease term have been settled upon between the owner and RIOC, which effectively reach market levels during the post-affordability term. We view the agreement in its entirety as successfully achieving the State’s goal of preserving Mitchell Lama housing as an affordable housing resource and recommend you support the Plan.

Here's the full Agenda, including Board Materials, for tonight's RIOC Board Meeting:

JULY 23, 2018 SPECIAL MEETING OFTHE ROOSEVELT ISLAND OPERATING CORPORATION BOARD OF DIRECTORS

THE CULTURAL CENTER THEATER, 548 MAIN STREET,
ROOSEVELT ISLAND, NEW YORK
5:30 P.M.1

I. Call to Order

II. Roll Call

III. New Business
1. Authorizations Related to Amendment to Westview Ground Lease (Board Action Required)

2. Authorization to Enter into Contract with Walter B. Melvin Architects, LLC for
Design Services for the Renwick Ruin Stabilization Project (Board Action
Required)

3. Authorization to Enter into Contract with Rosemar Contracting, Inc. for Roadway
Repair and On-call Services (Board Action Required)

4. President’s Report

5. Committee Reports

a. Audit Committee

b. Governance Committee

c. Operations Advisory Committee

d. Real Estate Development Advisory Committee

IV. Adjournment

1 The RIOC Board Meeting will commence following a public comment period. The public comment period is not part of the
meeting.

UPDATE 8:30 PM - The RIOC Board approved the Westview ground lease extension and Affordability Plan.

Here's the discussion.

Part 1 - RIOC CFO Kim Quinones describes the terms of the ground lease extension.

DHCR's Mark Colon describes the Afflordability Plan for residents buying units and those renting.



Part 2 - DHCR's Mark Colon describes the Sponsors Commitment to funding buildings infrastructure needs and capital investment plan.

Westview Task Force members informed the RIOC Board that they are in favor on the plan.



Part 3 - RIOC's lawyer informs the Board no adverse environmental impact from this agreement.

RIOC President Susan Rosenthal says the deal would not have been made without the Westview Retail portion of building returning to Westiview Building owner. Main Street Retail Master Leaseholder Hudson Related no longer controls the Westview retail space.