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A Mitchell-Lama program raises money for capital projects.
AUTHORLeslie Jay, Tom Soter
Habitat examines how the reverse flip tax can help raise needed funds for cash-strapped Mitchell-Lama cooperatives.
You could call it a flip tax in reverse. But you could also describe the two-year-old assessment program as a potentially big moneymaker for cash-strapped Mitchell-Lama cooperatives. “It’s a great way for any Mitchell-Lama co-op to raise funds,” says Cora Austin, president of the 2,702-unit Lindsay Park Housing Corporation, in Williamsburg, Brooklyn. “It doesn’t put a burden on residents.”
Making cooperative living less burdensome and very affordable has always been a guiding principle behind Mitchell-Lama housing. Named for two senate sponsors of a federal law that created the government-run program in the 1950s, Mitchell-Lama complexes were erected with cheap mortgages from the state, while the units were priced under market so that lower-middle-class people could afford them. When a potential buyer’s income exceeds a certain amount, he or she is not eligible. When owners leave, they sell for equity – what they originally paid when they bought in – plus amortization and any assessments.
That said, Mitchell-Lama co-ops such as Lindsay Park are similar to unregulated cooperatives: they also face rising operating costs and a deteriorating housing stock. “We have humungous bills,” notes Austin, who oversees Lindsay Park’s 21-person board. They were confronted with a $1.5 million bill for water and sewage for the coming year that was due in July (although a switch to water meters delayed payment) and health-related bills for the property’s staffers that cost $219,000 annually. Meanwhile, apart from maintenance, which hasn’t been raised in more than three years, the only revenue for the 40-year-old development comes from fees assessed for use of its community rooms and for parking.
The financial and structural problems concerned Jay Silverberg, president of Zenith Properties and the managing agent for Lindsay Park. Given the complex’s status as a state-supported outpost where studios and one-, two-, and three-bedroom apartments sell at artificially low prices, its options for funding capital improvements were limited. Like other co-ops, Lindsay Park could raise its monthly maintenance, impose a capital assessment on everyone in the development, or take a loan (and thereby add to its debt service). But, by city standards, Lindsay Park’s shareholders are not affluent. And under the terms of the Mitchell-Lama program, they realize little profit when they sell their apartments. So they’re even less eager than their counterparts in private buildings to ante up.
Silverberg expressed his concerns to Gary Sloman, director of operations for the Department of Housing Preservation and Development’s (HPD) division of housing supervision. Sloman told him about the relatively new “first-time sale assessment” program that would allow the co-op to assess the residents painlessly. Based on a state Mitchell-Lama program, the city version involves having the owners agree to a one-time assessment on their units that equals the equity and amortization of their apartments. So if, for instance, the equity and amortization is $5,000, the owner agrees to a $5,000 assessment, which increases the equity in the apartment to $10,000. The happy catch is that he or she won’t pay that additional cost – the money comes from the buyer of the co-op. “It’s a one-time assessment that will affect every apartment when it turns over,” Silverberg notes. A kind of flip tax in reverse.
“It’s a great way to raise capital and keep units affordable,” observes Sloman. “The shareholder agrees to double the unit’s value – which is the initial investment and any capital assessments made over the years. The housing corporation issues a note, and the owner signs it, agreeing that on the sale of the unit [the buyer] will pay double the price of the apartment.”
Insiders trading up to larger apartments will be treated like newcomers and pay the doubled price, which becomes the new base equity figure. Funds accumulated through first sales are deposited in a reserve account designated for capital improvements (although in an emergency situation, Sloman says HPD would probably allow the funds to be used for other projects). Withdrawals have to be approved by HPD.
“You can see the power of it,” says David Baron, a principal and senior vice president at Metro Management Development, which has two Manhattan buildings considering the program. “It doesn’t cost the shareholders in residence any money. It only affects those buying in. It’s an excellent program.”
Lindsay Park approved its first-sale proposal by a majority vote in November 2005 (Sloman estimates that about 20 of the city’s 66 Mitchell-Lama complexes have given the go-ahead to first-time sale assessments). At the beginning of this summer, the co-op notified shareholders in writing about the plan. “We just did a cover letter explaining it very simply,” reports Austin. “The capital assessment letter must be signed by everyone within 30 days’ receipt.” Then the completed paperwork will be submitted to HPD for its review. Consequently, Austin thinks that the first sale under the new system won’t close before next year.
Silverberg sees great potential for raising needed funds. “This development has 2,702 apartments. Every year, we wind up taking 200 to 250 people from our outsider lists for our studio and one-bedroom apartments. So, if you figure that the average equity for someone buying a one-bedroom apartment is $5,000, and a studio is about $4,000, we could raise $900,000 to $1,000,000 a year.”