For City-Supervised Mitchell-Lama Cooperatives Thinking About Privatization: Think Again

As of August 15, 2016, there are 20 City-Supervised Mitchell-Lama Cooperatives that are eligible to voluntarily dissolve and become either a market-rate cooperative or condominium. This Stroock Special Bulletin provides information regarding a meaningful alternative to privatization that may be helpful to shareholders of these 20 cooperatives. It's the Article II to Article XI Conversion Program - a program that is in line with the mission of the Mitchell-Lama law, and which also provides modest equity appreciation to existing shareholders and much-needed middle income housing for future generations to come.

Overview

The Mitchell-Lama program is widely viewed as one of the most successful contributors to affordable housing in New York City history. The fact remains, however, that the statute explicitly permits voluntary dissolution, which has been interpreted to mean that Mitchell-Lama cooperatives can privatize - to dissolve and reconstitute themselves as free-market cooperatives or condominiums. As the real estate market in New York City continues to thrive, more Mitchell-Lama cooperatives will face the question of whether to privatize or remain under State or City supervision.

Since the inception of the Mitchell-Lama program, at least five of the City-supervised Mitchell-Lama cooperatives have chosen the privatization route - dissolving and reconstituting as free market cooperatives or condominiums. Two more submitted offering plans that recently were accepted for filing by the New York State Attorney General's office ("NYAG"), and now the shareholders must vote on whether to voluntarily dissolve. According to a representative from the City's Department of Housing Preservation and Development ("HPD"), although at least 60 Mitchell-Lama cooperatives (with a total of approximately 30,000 apartments) remain in the City's portfolio, at least five of these are exploring privatization (in addition to the two whose offering plans have already been accepted for filing).

If the rate of Mitchell-Lama privatizations continues, then New York City could potentially lose more affordable housing at any moment. The number of Mitchell-Lama cooperatives that are at risk of loss - approximately 20 of the 60 Mitchell-Lama cooperatives that remain under City supervision - could severely undercut the efforts being made under the Mayor's Housing New York: A Five-Borough, Ten-Year Plan to add an additional 200,000 units of affordable housing units to the City's landscape - 120,000 units of which will come from efforts to keep existing units like Mitchell-Lama apartments affordable for future generations.

One alternative to privatization under Mitchell-Lama is conversion under New York City's Article II to Article XI Conversion Program (an "Article II to XI Conversion"). A key benefit of an Article II to XI Conversion is that the units continue to provide affordable housing for future generations, while also providing modest equity appreciation.1

The Mitchell-Lama Dilemma

Among the goals of the Mitchell-Lama program were to stabilize New York neighborhoods, to provide affordable housing for moderate-income individuals and families, and to create long-term cooperative housing for tenants.2 The dilemma arises because another goal of the Mitchell-Lama program is to provide an "exit strategy" for investors in Mitchell-Lama buildings to encourage private investment in affordable housing. So, built into Mitchell-Lama are two potentially contradictory mechanisms - one that encourages the creation of affordable housing, and the other that facilitates the conversion of that affordable housing to free-market cooperatives or condominiums.

Privatization of Mitchell-Lama cooperatives to market-rate cooperatives or condominiums, and the resultant loss of affordable housing, is particularly problematic in certain areas of the City that not only have Mitchell-Lama...