Bill Morris in Bricks & Bucks on January 16, 2019
Many residents of New York City’s affordable co-ops, including Mitchell-Lamas, find themselves caught in a crossfire. While some residents want to stay in the affordable programs and continue to enjoy their tax breaks, low maintenance and other benefits, many of their neighbors yearn to go to market rate so they can cash in on the ballooning value of their apartments.
The city’s robust real estate market has fueled the temptation to privatize. In recent years, according to the Community Service Society of New York, about 7 percent of the city’s 69,000 Mitchell-Lama co-op apartments have gone to market rate.
But exiting the program is an arduous and expensive process, and it usually requires approval of two-thirds of the shareholders. There’s another rub few of the people in the pro-privatization camp consider: most lenders treat the change in corporate structure as a default on the underlying mortgage, which requires the co-op to pay off the mortgage and the prepayment penalty. That sum can be significant. In the case of the 748-unit East Midtown Plaza co-op, which has debated exiting the Mitchell-Lama program for years, paying the prepayment penalty would be a deal breaker. Enter the professionals.
“The East Midtown Plaza co-op board wanted the right to go private and change the corporate structure – without paying the prepayment penalty,” says Patrick Niland, president of the mortgage brokerage First Funding of New York. “Making that happen was complicated, both legally and financially. It required some very sophisticated negotiation by myself and the board’s attorney, Perry Mintz, [a partner at Gallet, Dreyer & Berkey].”
The co-op’s borrowing history is worth mentioning. In 2014, the co-op refinanced its underlying mortgage for $35 million. The money allowed the board to tackle numerous capital projects, but four years later there was still work to do, and the board wanted to take out a second mortgage – without closing the door on the possibility of leaving the Mitchell-Lama program.
Niland went shopping. Some mortgage lenders insisted that a change in corporate structure would trigger a default and the ensuing requirement that the co-op pay the prepayment penalty. Since the de Blasio administration is eager to preserve as many affordable apartments as possible, the department of Housing Preservation and Development (HPD), which oversees the city’s affordable housing stock, offered a package of incentives designed to entice East Midtown Plaza’s shareholders to remain in the Mitchell-Lama program. Niland, meanwhile, negotiated a mortgage that would not require a prepayment penalty if shareholders vote to opt out. After the co-op’s accountant compared the HPD offer with the mortgage negotiated by Niland, the board decided last October to go with the latter and borrow $21 million on top of its underlying $35 million mortgage.
The crossfire at East Midtown Plaza is being played out across the city. “With what’s happened to real-estate values, particularly in Manhattan, many newer residents think it would be wonderful to go private,” Niland says. “People on fixed incomes don’t agree. They have a reasonably affordable apartment with reasonable maintenance, and they don’t want to change. There are factions among the shareholders. That’s exactly what’s happening at East Midtown Plaza.”
With its new loan secured, the co-op is now free to determine its fate. Will it stay in the affordable camp, or will it go market? “A vote is not on the front burner,” Niland says, “but it’s definitely very warm.”
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