Island House Tenants Will Control Board & Future
But Questions Remain for Some
by Briana Warsing
Island House residents have until April 20 to make a choice. Under their building’s Offering Plan, they can buy their apartments, continue renting indefinitely without penalty, or be bought out by the owner of the building.
According to a recent count by Island House Tenants’ Association (IHTA) Treasurer Geof Kerr, over half of the building’s residents have decided to purchase, thereby putting control of the building into residents’ hands for the first time in its 40-year history.
Island House is unique, both on the Island and in the city, for being the first building to exit the Mitchell-Lama program and remain affordable. Roosevelt Landings, formerly known as Eastwood, left the program and became a market-rental building. Mitchell-Lama tenants were allowed to remain, but as they leave, their apartments are renovated and rented at market rate. Rivercross apartments are being sold at market-rate prices, with 45% flip taxes on sales keeping things affordable for owners who remain.
Island House, composed of 551, 555, and 575 Main Street, is a 400-apartment complex that dates back to 1975. Like all the other original Island construction, it was built pursuant to the Mitchell-Lama program, designed to promote affordable housing for middle-income residents.
According to one of the Offering Plan’s architects, IHTA President Graham Cannon, “The governing theory for all of us was to maintain affordability into the future. This is not a one-time threshold; the purpose is for [future] families to be able to buy into the building.” He added, “The next generation will still be buying at below market.”
Cannon was very firm that he would speak only about Island House, maintaining that “Each building is its own world,” but it could be argued that the goal of the Island House Tenants’ Association to keep the building affordable is in line with the original goal of Roosevelt Island and the General Development Plan (GDP).
According to the GDP, Roosevelt Island was intended to “make the maximum contribution to the [then] needs of the City,” which architect John Johansen called a “unique social and architectural experiment [that] represented great financial diversity as well as a mix of race, culture, and mores [by] accommodating low-income/highly-subsidized, middle-income/limited-subsidy, and high-income/conventionally-financed tenants.”
It took over a decade to get the current Island House plan devised and in place, but efforts toward privatization were under way over 20 years ago. Kerr recalls joining the IHTA in 2004 for the express purpose of working on the exit plan.
Cannon recalls his experience. “In the 1990’s, there was a clear sense that the Mitchell-Lama era would come to an end at some point, and the owner talked about privatization and a conversion. But there was never anything solid. That changed after 2000. At that time, the owners of the building were exploring selling the building, and one of the [potential] buyers was talking about the affordable price of $320 per square foot.”
Cannon said the IHTA opted to extend the ground lease, “which gave us [the tenants] more ability to engage in this.” Second, Cannon recalls, IHTA decided, We are not going to sit here and see what happens, let’s be active participants. The IHTA made their goal “structuring a plan that would satisfy us and the terms of the ground lease,” Cannon said.
According to Cannon, the first question IHTA tackled was, “If the building exits Mitchell-Lama, how do we make sure that staying on as a tenant doesn’t [incur] a ruinous rise in rent?” As a result, “The first thing we did, before anything else, was put in a rent structure.”
The rent structure Cannon refers to is memorialized in the Island House Affordability Plan: A Plan for Preservation of Affordable Housing and Withdrawal From the Mitchell-Lama Program (the Affordability Plan). It was created with the participation of the New York State Division of Housing and Community Renewal (DHCR), the New York Empire State Development Corporation (ESDC), the Roosevelt Island Operating Corporation (RIOC), the Island House Tenants’ Association (IHTA), and the owner of Island House.
Cannon says, “The number one priority was affordability, and we took it to the tenants in 2009. It was basically an outline [of the plan], before we put flesh on it, and we asked, is this where tenancy wants to go? That [positive vote] was the green light that the owners, the State agencies, and the Tenants’ Association took.” He added, “There was no exit strategy that didn’t involve the tenants signing off.”
The Affordability Plan provides the opportunity for existing tenants to purchase their apartments at below-market prices, and for non-purchasing tenants to remain in their apartments at below-market rents. Island House rent increases will model those mandated by the New York City Rent Guideline Board, with adjustments to reflect tenant income [a surcharge of up to 5% depending on income]. The Affordability Plan also sets limits on resale prices in a nod to second- and third-generation buyers whose income must also qualify.
Of the Affordability Plan, Cannon explains, “That’s in place for 31-32 years. It’s locked in. Even if the building never converted, everyone would be covered by that plan.”
But the building is converting. Cannon said, “We ended up aggressively negotiating a price: $180 per square foot, with significant owner contributions. The prices track a formulation and then they increment at 7.5% a year, compounding.”
The Offering Plan is made pursuant to the Affordability Plan. As such, it imposes many conditions and requirements that are not found in a typical cooperative or condominium. Island House is considered a Cond-Op, a hybrid of the two.
The Affordability Plan imposes provisions including maximum resale prices, maximum rental amounts, and transfer fees payable to RIOC, in addition to flip taxes (transfer fees) payable to the apartment corporation.
One percent of gross sale proceeds go to RIOC. There is a maximum resale price of $342.62 per share, which increases by 7.5% per year. No affordable unit will be sold other than to an income-qualified purchaser.
Cannon says, “The idea is that you can make a little money when you sell. There’s also a qualified-buyer structure so millionaires don’t come in and scoop up large apartments.” He says, “The way a conversion like this works is very highly regulated and very tightly controlled.”
The restrictions on subletting include limitations on the sub-rent that may be charged, and are subject to Board approval.
According to Cannon, “The maintenance will be affordable. Flip taxes are quite high. They start at 50% and go down to 30%.” (The flip tax decreases by 5% per year until it lands at 30%.)
The Offering Plan itself is over 1,000 pages. The Attorney General’s office oversees it. “Transparency is the bottom line,” explains Cannon. The Offering Plan attempts to answer any question that a purchaser would ever have about the building. Every bill, every document pertaining to the building is in there. It addresses the building’s age and health, special risks, and additional costs, and lists every apartment with floor plans and insider and outsider pricing.”
Cannon says, “We know the five- and ten-year costs and what will need to be upgraded. Window replacements will start over the summer. The first co-op board will need to keep a close eye on all of that. Island House is not a brand-new building; it was built with codes that were applicable in the 1970’s.”
A Typical Unit
There are 154 two-bedroom apartments in Island House, each with approximate square footage of 1,000. The average two-bedroom apartment without a terrace has 1,283 shares, and one-and-a-half baths, and will cost $220,000 to a tenant purchaser. That same apartment will cost $688,380 to a non-tenant purchaser. The monthly maintenance on this hypothetical apartment would be $1,165.
The purchaser of a co-op apartment buys shares of the corporation in which the apartment is located. Shareholders have the right to vote annually for the board of directors members, usually at one vote per share.
Under the plan, renters cannot vote. Additionally, renters will be unable to sublet their units, and there is no lease succession for rentals.
Not All Affordable
The owner of the building may rent or sell up to 35% of the shares (140 apartments) at market price. Shareholders of market-rate apartments are not required to pay the flip tax in connection with a sale or transfer of a market apartment.
Cannon says, “35% is the absolute cap on the owner’s ability to sell apartments at market. The others he can have as affordable rentals or sell under the affordability plan. That’s 140 apartments. Sixty-five percent of the building will always be affordable.” Currently, there are 34 empty apartments in the building that the owner has the right to fill at market-rate prices. Because the owner is currently under the cap, he’s made a buy-out offer in an effort to fill more apartments with market-rate tenants.
“The pool was one of the significant issues,” acknowledged Cannon, explaining, “The owner wasn’t prepared to sell the pool to be part of the co-op.” He added that, “We did agree with the owner that the only real option for the space is a pool or a gym – an amenity for the building. [The owner] is constrained in what he can do there. He said that the only customers would be people in Island House, or possibly Westview. Since he’s the one selling his apartments at market price, he is interested in the pool looking as good as it can.”
Cannon said, “ This is something the co-op board will work on. Ultimately, the majority of board seats will be voted and held by insiders in the building. The pool is not an antagonistic issue at this point. Smart people will have to sit down and ascertain options and what we will do.”
The exclusive period ends on April 20. Until then, there is not a sense of what final numbers will be. After April 20, it goes to the Attorney General for approval.
For the plan to be declared effective, the required buy-in level was 15%. At 50%, the owner-tenants will control the building. Both numbers have been surpassed. But both Kerr and Cannon are hesitant to celebrate. They both say people may change their minds, and that it’s all speculation until the exclusive period ends.
That being said, the first closing will probably happen in June.
The Cooperator, a publication, explained, “The purpose of the [Mitchell-Lama] program was to encourage the building of moderate-income housing, to keep more middle-class families within [New York S]tate’s cities, and to help stabilize city neighborhoods. Some say one of the real reasons for Mitchell-Lama in the first place was so that these buildings could stabilize borderline areas – clearing the way for the private real-estate market to step in.”
The program worked. A total of 269 buildings with 105,000 apartments were built under the program. Developments were eligible to buy out after 20 years or prepayment of their mortgages.
Many of the neighborhoods where Mitchell-Lama buildings were built – Independence Plaza in Tribeca or Independence House on the Upper West Side, for example – have become desirable neighborhoods.
Roosevelt Island is in that group. The success of the original four Mitchell-Lama buildings made further development possible.
Of the Island House plan, Cannon says, “This is what happens when a group of wonderful people come together over a number of years.” He characterizes the population of Island House as “a slice of everything that’s good in this city,” adding, “People deserve the right to some stability in their life. For the first time in years, people know they can live in the building for a long time.”
“This thing that people have talked about for years actually happened.”