Starrett City deal underscores Mitchell-Lama value

It seemed like d j vu: another massive price tag on another huge housing complex, this time Starrett City in East New York.

The decision last month of Starrett City’s owners to put their 46-tower Brooklyn property up for sale made headlines not just for its projected enormity — it’s expected to go for close to $1 billion — but because Starrett City is an affordable housing complex. The 140-acre site has its own schools, shopping center, security force and power plant, and it is home to 12,000 residents. Published reports said the development is the largest federally subsidized residential complex in the country.

The announcement comes in the wake of October’s chart-topping $5.4 billion sale of Peter Cooper Village and Stuyvesant Town, where 70 percent of the 6,000 units are rent-stabilized.

Unlike Stuyvesant Town and Peter Cooper Village, however, Starrett City is a Mitchell-Lama property, and its price tag underscores the extent to which Mitchell-Lama buildings are now considered high-yield investments, even in less-than-desirable neighborhoods.

Created in 1955, Mitchell-Lama is a statewide program that granted tax abatements and subsidized mortgages to developers for the construction and maintenance of rental and co-op properties. The resulting tens of thousands of Mitchell-Lama units in New York City were priced below market rate and rented or purchased by low- to middle-income tenants or buyers.

Most Mitchell-Lama landlords were required to keep their properties in the program for 20- or 30-year terms. As many of those terms come to an end, more and more owners are choosing to opt out of the program by refinancing their mortgages or selling their properties to developers who then opt out.

“The market for Mitchell-Lama has been increasing recently,” said Heidi Burkhart, a director at real estate investment firm Eastern Consolidated who specializes in deals involving Mitchell-Lama properties. “It’s a good investment. Steve Ross [of the Related Companies] made his career by focusing on buying affordable housing.”

Kathleen Cudahy, a spokesperson for developer Laurence Gluck of Stellar Management, concurs that the properties are a good investment for landlords. Stellar Management is one of the city’s most active players in the Mitchell-Lama private-refinancing realm. The company has taken, or is in the process of taking, 16 properties out of Mitchell-Lama over the past few years.

“Many of the tenants in Mitchell-Lama buildings are eligible for benefits like Section 8,” said Cudahy. “So if you’re a landlord, the federal government will pay you every month. Who would you rather get paid by, an individual tenant or Uncle Sam?”

Cudahy says Mitchell-Lama buildings offer owners a steady stream of income with the possibility of making more money.

“As tenants leave, an owner can up the rent to market rate,” she said. “The landlord then has the potential to make more, especially in Manhattan, where market-rate values are much higher than what tenants are paying. In the outer boroughs, taking the buildings out of Mitchell-Lama isn’t necessarily as attractive.”

According to the city’s Department of Housing Preservation and Development, 36 HPD-managed Mitchell-Lama properties have gone out of the program in the past five years. The city currently supervises 105 Mitchell-Lama developments.

A May 2006 report by the nonprofit Community Service Society noted that 22,688 rental units have gone out of Mitchell-Lama between 1990 and 2005, over a third of the program’s rental stock. At the same time, the Bloomberg administration has been trying to stem the loss of the city’s affordable housing units through various programs (see below).

Tenant associations have been vocal in their protests against landlords who have moved to end their buildings’ association with Mitchell-Lama, typically with little success. Owners of Mitchell-Lama buildings built after 1973 can raise rents to market rate upon exiting Mitchell-Lama, while units in buildings built before 1974 that leave the program become rent-stabilized and tenants are eligible for Section 8 benefits known as enhanced sticky vouchers.

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The rent-stabilization mandate is not necessarily in tenants’ best financial interests, said Hector Valentin, head of the tenants’ association at Park Lane, a 350-unit Mitchell-Lama building in the Bronx at 1965 Lafayette Avenue.

Valentin said landlords for newly rent-stabilized Mitchell-Lama buildings are able to hike rents by citing “unique and peculiar circumstances.”

“They can define a building as dilapidated and say they need to make renovations in order to increase rents,” said Valentin. “And enhanced sticky vouchers are good for people who already get some sort of subsidy. But, for example, if your rent is $700 and the building goes out of Mitchell-Lama, they say you will either pay your old rent or 30 percent of your income, whichever is greater. So if your income is $40,000 a year, that’s going to go up to almost $1,000, a $300 increase.”

Park Lane’s owners announced they were taking the building out of Mitchell-Lama in the middle of 2005. The building’s tenants’ association unearthed Park Lane’s deed and mortgage from city records and fought the owner’s decision based on a covenant in the documents stipulating the building be kept in Mitchell-Lama for 50 years. HPD ruled the covenant binding and said the building needed to remain in Mitchell-Lama.

Valentin said the decision was good news for Park Lane’s tenants because many of them feared they wouldn’t be able to afford rent increases.

“If buildings like Park Lane go out of Mitchell-Lama, a lot of people get displaced. Many tenants have been here for 35 years and now many of them are over 65 years old,” said Valentin. “They were around here before there was anything in the neighborhood. Now the neighborhood is very energetic; we have a lot of businesses nearby, but when these people moved in there was nothing here.”

Nick Bryan, president of the Westview Neighborhood Association, the tenants’ group for Westview, an Upper West Side building at 765 Amsterdam Avenue that is being taken out of Mitchell-Lama this year, said the property’s elderly residents are the ones most worried about the change.

“Going into rent-stabilization is better than not going into rent-stabilization, but tenants are concerned about not being able to pay their rents, especially seniors,” said Bryan. “One concern is that rents have doubled over the last 15 years under rent-stabilization.”

“We have to see if there are any changes with a Democratic governor,” said Bryan. “People are making money off of Mitchell-Lama, and right now they have a real window to get people out.”

Initiatives to preserve Mitchell-Lama stock

The Bloomberg administration has made the preservation of affordable housing a priority with its New Housing Marketplace plan, which aims to build or preserve 165,000 units of affordable housing in the city.

The administration’s most far-reaching effort to date to preserve Mitchell-Lama units came through a 2004 initiative to refinance and restructure Mitchell-Lama mortgages and offer a repair loan program for capital improvements. The initiative applies to Mitchell-Lama properties that are financed and administered by the New York City Housing Development Corporation. In exchange for receiving HDC funding, building owners must agree to extend their participation in Mitchell-Lama for 15 years.

According to HDC’s president, Emily Youssouf, the incentives have been successful. Of the 27,000 Mitchell-Lama units in HDC’s portfolio, 14,580 have been preserved. Youssouf said the vast majority of the properties that participated were co-ops. Youssouf also said current initiatives to keep properties in Mitchell-Lama include offering co-op conversions to Mitchell-Lama rental properties and partnering with the state to preserve Mitchell-Lama buildings. In November, HDC announced it would issue $50 million in tax-exempt bonds to rehabilitate Ocean View, a state-managed Mitchell-Lama complex in Coney Island. The agreement marked the first time the state and HDC had partnered to preserve a Mitchell-Lama property.

Also of note is Local Law 79, which was adopted by the city in August 2005 and stipulates that tenants in Mitchell-Lama rental buildings built after 1973 have the right to buy their buildings. The Department of Housing Preservation and Development has not been enforcing the statute, which is currently the subject of a lawsuit undertaken by the Real Estate Board of New York.

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