Most New Yorkers would look upon the good fortune of the residents of Southbridge Towers with envy. They paid, on average, $17,500 for their Lower Manhattan apartments, many with stunning East River views. The average maintenance fee in the middle-income development in the financial district near South Street Seaport is $620 a month. And soon, their fortunes could soar even higher.
In late September, after a contentious eight-year debate, shareholders voted to leave Mitchell-Lama, the affordable housing program that has provided them with decades of low-cost housing. The decision paves the way for residents to sell their apartments at market rate and reap profits in the high six figures.
“People of modest means now have an asset worth hundreds of thousands of dollars,” said Wallace Dimson, 68, the president of the Southbridge Towers co-op board.
If the offering plan clears all hurdles, the 1,651-unit complex near the Brooklyn Bridge would be the largest Mitchell-Lama co-op in Manhattan to privatize at a time when the city is struggling to hold onto its dwindling stock of affordable housing. Mitchell-Lama, a program created in 1955, added thousands of units of affordable housing — both limited-equity co-ops and rentals — for middle-class New Yorkers during a period of urban renewal that lasted through the 1970s. Hailed as among the most successful such programs in the country, it frequently allowed residents to remain in their homes for decades, bringing stability and growth to neighborhoods that were once desolate.
“People of modest means now have an asset worth hundreds of thousands of dollars,” says Wallace Dimson, above, the president of the Southbridge Towers board.
Southbridge Towers, a nine-building complex bounded by Fulton, Gold, Frankfort and Pearl Streets, opened in 1971. Generous property tax exemptions and low-interest loans have helped Southbridge and other Mitchell-Lama projects keep housing costs well below market rate to this day. Prospective tenants frequently wait years for their names to be drawn in a lottery and must meet strict income guidelines, paying a monthly surcharge if their earnings subsequently pass the threshold. Co-op residents pay a lump sum when they move in. When they move out, they get back their initial investment, plus interest.
Although developments are allowed to eventually leave the program, few of the co-ops have. Of the city’s 97 Mitchell-Lama co-ops, encompassing more than 70,000 units, only seven have privatized. Southbridge would be the eighth, according to New York University Furman Center for Real Estate and Urban Policy.
The largest Mitchell-Lama co-op, Co-op City in the Bronx, with 15,372 units and about 50,000 residents, refinanced its debt in 2012, committing to another 35 years in the program. As for the city’s Mitchell-Lama rentals, about half of the 69,755 units have privatized, often delivering windfalls to the landlords and steep rent increases to tenants.
The state’s Homes and Community Renewal agency is reviewing the Southbridge vote for accuracy, but has no authority to override a shareholder decision or block privatization.
For supporters of Mitchell-Lama, the Southbridge vote delivers a painful blow.
“It’s a sad day for affordable housing in New York,” said John Fratta, 61, the only member of the 15-member Southbridge Towers co-op board to oppose the decision. “It’s really a tragedy.”
The city and state have made efforts to preserve Mitchell-Lama housing over the years. Mayor Bill de Blasio’s housing plan even suggests reaching out to former Mitchell-Lama developments to see if residents would consider returning to the fold. And Gov. Andrew M. Cuomo’s housing plan has refinanced loans for several Mitchell-Lamas.
The decision to stay or go is fraught, causing deep rifts among shareholders who have often lived together for decades. The debate pits those who would like to see their complexes remain affordable in perpetuity against those who would like to benefit from the rising housing market.
In a neighborhood like the financial district, where the average sales price is $1.1 million, according to CityRealty, the temptation to cash in is hard to resist. With so much money at stake, tensions flare. The Southbridge offering plan anticipates that a shareholder selling a one-bedroom apartment for $550,000 could walk away with $325,000 cash after paying substantial fees and taxes. The largest unit, a three-bedroom with a terrace, could sell for nearly $1 million.
“It’s really torn the community up,” said Charles Chawalko, 26, who moved to Southbridge as a child. “People think that you’re taking money out of their pockets if you want to support Mitchell-Lama.”
“If you saw what’s been going on here, the acrimony, this place will never be the same,” said Paul Hovitz, 68, a retired physical education teacher who has lived in Southbridge for 30 years with his wife, Denise, 61.
Privatizing assumes financial risk, particularly for the type of tenant the program was designed to serve — someone who can barely afford the current costs. No longer eligible for tax abatements, Southbridge would have to pay at least $8.1 million a year in real estate taxes, significantly more than the $1.64 million it now pays. The development could also be on the hook for a $27.77 million transfer tax if the New York State Court of Appeals rules in favor of the city in an ongoing case involving a former Mitchell-Lama development in Coney Island that privatized in 2007.
If privatization goes through, and “you want to sell, then there is this incredible opportunity to cash out and get a windfall,” said Max Weselcouch, the director of the Moelis Institute for Affordable Housing Policy at the Furman Center. “If you don’t want to sell, then you are locked into paying higher maintenance and taxes. Your living expenses rise.”
To cover the increased costs, original shareholders would pay the co-op a flip tax as high as 33 percent when they sell. Future shareholders would pay a 2.5 percent flip tax. But the Southbridge shareholders who voted in favor of the measure were clearly willing to take the risk.
“If you have an opportunity to have ownership of a piece of Manhattan real estate in one of the fastest growing areas, does that outweigh any of these negatives?” Mr. Dimson said. “I think most people will tell you yes.”
The Southbridge vote required support from two-thirds of the shareholders. If no irregularities are found in the voting process, shareholders then must choose one of three options. They can agree to participate, which means they become shareholders in a market-rate development; they can relinquish their shares to the co-op, get their equity back and leave; or they can relinquish their shares and stay on as rental tenants with annual rent increases of no more than 5 percent a year. As renters, they would lose their stature as shareholders, but they would not risk paying steep maintenance increases should costs rise.
Paul Hovitz, a 30-year resident of Southbridge and his wife, Denise Hovitz, with Ms. Hovitz’s mother, Lucy Dippolito, a 43-year resident.
In order for the plan to become final, two-thirds of the shareholders must agree to become market-rate shareholders. If this occurs, residents could begin selling their apartments by next summer.
The co-op anticipates that about 50 units will sell every year, bringing in enough revenue through the flip tax to cover any cost increases. “There is so much intrinsic value in the property that the increase in real estate taxes should be offset by the sale of apartments,” said Stuart M. Saft, the lawyer who helped Southbridge develop the offering plan.
The apartments at Southbridge Towers, a hulking brick complex of low-rise and high-rise towers, might be showing their age, but for buyers looking for a discount, they could provide a rare opportunity to buy a reasonably priced apartment in Manhattan. Many units have terraces and, with the option to combine existing apartments, a resident could create a large space.
There is little like the complex in the area. Of the 383 apartments that sold in the financial district in the first three quarters of the year, only 35 were co-ops, according to CityRealty. The average price for a co-op in the financial district is $859,000, substantially lower than the average price for a condo, $1.121 million.
“Bring it on,” said Jonathan J. Miller, the president of the appraisal firm Miller Samuel. “More reasonably priced units in Manhattan is what Manhattan desperately needs.”
Besides interior gardens, a playground and a community room, Southbridge Towers has several commercial tenants, including a Key Foods, parking, a bakery and a restaurant.
“The complex itself is pleasing and some of the views are remarkable,” said Neal Young, a salesman at Halstead Property. “There’s a modernity to it that I think is quite nice.”
To gauge how well Southbridge apartments might sell, brokers point to the Seward Park Cooperative, a midcentury Lower East Side development that was once part of the sprawling affordable housing complex known as Cooperative Village. Seward Park, built by the United Housing Federation, was privatized in 1995. Of the 54 units that sold in the first three quarters of the year, the average sales price was $664,000, according to CityRealty.
John Fratta, the only member of the co-op board to vote against privatization. “It’s a sad day for affordable housing in New York,” Mr. Fratta says. “It’s really a tragedy.”
“Anything in Seward Park is really selling in the first one to two weeks on the market,” said Jeremy Bolger, a salesman for Halstead Property.
Seward Park has endured its own growing pains in the years since privatization, with older or original residents often resisting costly improvements favored by newer shareholders, some of whom paid substantial sums for their apartments. Nevertheless, maintenance has held relatively steady over the years, helped by a substantial flip tax, according to Mr. Young, who has lived in Seward Park since 2001. For example, the maintenance for a one-bedroom listed for $600,000 on Streeteasy.com was $523 a month.
The area near the South Street Seaport was not always a desirable market. When Southbridge Towers opened in 1971, the neighborhood was pretty much without shops or restaurants. The Fulton Fish Market made its odoriferous presence known. Battery Park City did not exist. Schoolchildren had to walk many blocks to get to the nearest public school.
Southbridge residents — a mix of teachers, government workers and artists — spent decades improving their apartments and volunteering in the neighborhood at a time when few wanted to venture to the eastern end of Fulton Street. Yet while the area has blossomed around them, many residents believe they have not profited from the change.
“We and our friends built that community, we built the Little Leagues, we demanded the schools,” said David Feiner, 55, a resident. “What we helped create was a 24-hour community that now everybody wants to live in, and the city has made a fortune on that.”
Mr. Feiner, a cabinetmaker who moved to Southbridge Towers in 1981 with his wife, Susan, 53, supports privatization. “If the city wants more affordable housing, they should build it.”
Mr. Feiner renovated the couple’s three-bedroom apartment, installing Brazilian hardwood floors throughout, custom cabinets in the kitchen and whirlpool bathtubs in the two bathrooms. If the apartment stays in Mitchell-Lama, Mr. Feiner says he will never recoup his $60,000 investment. If it leaves the program, he could sublet his apartment and travel once he retires. Eventually, he could sell or leave it to his children, who are grown.
Critics of privatization argue that the residents have already enjoyed the financial rewards that come with living in affordable housing. By selling their apartments, they are denying other New Yorkers the very opportunity that enriched their own lives. It seems wrong, they say, for a handful of people who were lucky enough to win a housing lottery to pocket profits from a public investment.
“To say that you have sacrificed for downtown is ridiculous,” Mr. Hovitz said. “Do the math: You hit the lottery when you came in here.”
“I do think that there should be outrage,” said Christine Fowley, the president of the board of Cooperators United for Mitchell-Lama, an organization with members from Mitchell-Lama co-ops throughout the city. “People who’ve been long subsidized are able to walk away with a profit while pulling up the ladder. It’s just so wrong. It’s just not O.K.”
For the shareholders who support the plan, privatizing provides options they did not have before. They can take out home equity loans to pay for college for their children, purchase and combine existing units to create a larger home, or sell and move elsewhere in an expensive city.
“People say it’s closing the door and it’s true, but this helps generations to come for the people in Southbridge,” said Rachel Nash, 38, a lawyer who lives there with her husband and 7-year-old twins and supports privatization. “My children will have more financial security than they would have had otherwise. If it is helping me, it helps them even more so.”
Friday, November 14, 2014