State Shouldn’t Make a Whole New Ball Game of Mitchell-Lama

Consistent with its mandate, the statute provided that stockholders in the new companies would be limited to a 6 percent

Consistent with its mandate, the statute provided that stockholders in the new companies would be limited to a 6 percent annual return on their invested equity in each housing development and that the rents (or, in the case of cooperative projects, the carrying charges) of each development would be regulated by what is now known as the Department of Housing and Community Renewal (DHCR). In the case of a development aided by a municipal loan, the regulation would be by a municipal “supervising agency.”

Initially, these limited-profit housing companies were prohibited from voluntarily dissolving (thereby freeing themselves of government regulation) for a period of 35 years, and then only with the consent of the state housing commissioner or the supervising agency. As you can imagine, with these restrictions, there were very few takers for the new program. This surprised the JLC, because they felt the low-interest rate loans and municipal tax breaks would be enough to stimulate private-sector interest.

Realizing that tangible changes had to be made to Mitchell-Lama if it was going to meet its objectives, in 1959 and again in 1960 the law was modified to allow for voluntary withdrawal from the program after 20 years (this was subsequently modified to 35 years in 1987). This became a permanent and essential element of the program that was needed to encourage the private sector to invest in these highly regulated companies.

Immediately, there was a flood of applications from prospective sponsors, and there was a spurt of affordable units created throughout the state. The program was, by any measure, an extremely successful initiative. In fact, it is thought to be one of the most successful programs of its type in the country.

Most of the city’s Mitchell-Lama housing units were constructed between 1965 and 1975. The program marks one of the few times affordable housing was built on a large scale in New York by private owners, the other times being the tenements of the 1880s and the outer-borough building boom of the 1920s. According to the comptroller’s office, statewide, 427 rental and cooperative Mitchell-Lama projects with 168,609 units were constructed. Of these, 139,004 units in 270 developments were built in New York City.

The creation of affordable units under Mitchell-Lama has dropped significantly since the early 1980s due to the escalation in construction and operating costs. These increased costs (even with tax-exempt financing, real estate tax exemptions and limited profits) pushed rents beyond the range of affordability for middle-income families. The final straw for the program may well have been the Tax Reform Act of 1986, which retroactively devalued the federal income tax benefits granted in 1969 by creating the passive loss rules.

Owners opting to buy out of the program have been a concern of affordable-housing advocates. By the end of 2008, 40,080 housing units in 99 New York City projects had left Mitchell-Lama, representing 29 percent of the units constructed in the city under the program. For an owner to buy out, they essentially have to prepay their mortgages and make sure all of their obligations have been satisfied. No two buyouts are alike because each buyout is affected by the deeds, covenants and other legal documents of that development.

What happens to the rents in a development post-buyout is determined by when it was first occupied. Rental developments don’t fall under rent-stabilization laws if they were occupied after Jan. 1, 1974. However, tenants and owners can voluntarily negotiate a Landlord Assistance Program agreement, which governs how quickly rents can rise. Also, if the buildings received federal funds for construction pursuant to “236” or “221(d)(3)” while under Mitchell-Lama, tenants who qualify may receive enhanced vouchers called “sticky vouchers” (so named because tenants can use them anywhere in the U.S.) from the federal government to cover rent increases.

State Shouldn’t Make a Whole New Ball Game of Mitchell-Lama