Stay or Go?

The Low-Down

The privatization of Mitchell-Lama cooperatives is a timely issue. Right now, there’s a lot of discussion about preserving affordable housing. At the same time, a number of Mitchell-Lamas are reaching the stage where they legally could seek to privatize and leave the regulated housing system.  Under the Mitchell-Lama program, in exchange for low-cost real estate, low-interest mortgages, and some tax abatements and exemptions, Mitchell-Lama developments committed to remain affordable for a certain period of time. Now that time period is expiring or has expired for a number of properties. The boards and shareholders are faced with the option of remaining Mitchell-Lama or privatizing.

The Weigh-In

The final decision on whether to privatize rests with the shareholders, so boards should consider their concerns. There are some Mitchell-Lamas where the shareholders are philosophically opposed to privatization. They believe that their property was given tax abatement and other beneficial mortgage rates so that it could remain stable and affordable, and it should continue to provide the same opportunity for future generations. On the other hand, there are some who feel, “Under the law we’re permitted to privatize. Let’s go with it.” Those boards and shareholders believe that operating as a free-market, unregulated development will provide better options and result in overall greater benefits to the shareholder community.

There is another concern: real estate taxes. Mitchell-Lamas have the benefit of a shelter rent tax, which is a formula that results in substantially lower tax liability to the co-op, while free-market co-ops are subject to standard city real estate taxes. One Mitchell-Lama that recently privatized went from $110,000 to $300,000 in taxes. Boards that privatize will have to establish sources of revenue, such as flip taxes, or the increased taxes will have to be paid by the shareholders.

Another consideration is the cooperative’s debt and capital repair needs. Some Mitchell-Lamas have paid off the original mortgages and are reasonably financially stable. Others have had to refinance and take on more debt in order to fund substantial capital repair needs. In order to privatize, Mitchell-Lamas have to pay off any existing government-financed or -supported debt by refinancing. Boards have to consider how the co-op will fund its capital repair needs and support existing or new debt service obligations.

The Outcome

There’s something called a surcharge that can be helpful to Mitchell-Lama co-ops. Existing shareholders who exceed the initial income eligibility guidelines are permitted to stay, but they have to pay a surcharge. That income typically goes to the co-op and helps offset maintenance increases, and can be used for capital improvements and operating costs. Non-Mitchell-Lamas don’t have the surcharge because they’re free market. On the other hand, a free-market co-op can implement a flip tax and may have more borrowing options, potentially at lower interest rates.

Another benefit in a private co-op is that it can be sold for whatever the market will bear, providing shareholders with a return on their equity. A Mitchell-Lama, however, has to sell through a waiting list at a pre-established fixed price.

As an initial step, a Mitchell-Lama board that is contemplating privatization is required to do a study that looks at the financial and structural aspects of the co-op, as well as the resale and cost projections of operating as a free-market cooperative. The study is presented to the shareholders and the review and approval process can take from two to seven years. Boards should consider the costs and time associated with privatization weighed against the potential benefits.

Boards should also explore a new abbreviated conversion program created by the city’s Department of Housing Preservation and Development, under which a Mitchell-Lama would be allowed to convert to a Housing Development Fund Corporation and be relieved of some regulatory restrictions.

The Take-Away

The board and its shareholders must consider all of these factors when deciding whether to remain a Mitchell-Lama, or privatize, or to pursue something in-between.