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The conditions are complicated, so it would be best to review them with a lawyer and accountant.

Overview:

The Co-op Conversion Program facilitates the formation of co-operative housing corporations by providing financial incentives to existing owners and new sponsors of Mitchell-Lama housing developments, particularly those that have reached the end of their affordable use restriction period.

Legal Structure:

All borrowers participating in the Program will be organized under the New York State Business Corporation Law at the point of conversion.

Tax Abatement:

HDC will assist owners in determining an appropriate real estate tax exemption or abatement for the newly formed co-operative. The property would retain its Article II shelter rent tax exemption until it converts to co-op.

At the point of conversion, HDC expects that the borrowers would apply to retain shelter rent benefits under Article XI. These benefits are calculated (and would continue to be calculated) as 10% of the property’s income less allowable expenses, which include utility and other operating expenses.

Tax Benefit

Article XI Benefits Available

HDC would support the borrower’s application to obtain benefits under Article XI, which would result in the property’s retention of shelter rent tax benefits.

Approval Process

City Council Approval Required

Income Limits

No statutory requirement. HPD rules limit income to 165% of the Area Median Income (AMI) [about $62,000 for a family of 4]

Ownership Restrictions

Co-op owner must be an HDFC.

Timeframe:

Dependent on City Council Approval

HDC Financing:

HDC funds may be combined with other government program funds, assuming that all HDC Co-op Conversion Program requirements will be met.

• First Mortgage: This mortgage would be supportable by project cash flow and funded by HDC with taxable bonds. HDC requires a 1.10 DSC level on the first mortgage.

• Second Mortgage: A 1% second mortgage would be sized at approximately $10,000 per dwelling unit, depending on project needs. HDC expects that these 1% loan funds would be repaid to the Corporation as units are sold.

• Third Mortgage: For Mitchell-Lama properties in HDC’s portfolio, the Corporation will restructure a portion of the development’s existing second mortgage as a third position, 0% interest, non-accruing, non-cash flow note. HDC expects that these funds would also be repaid to the Corporation as units are sold after initial conversion. Following payback of the second mortgage described above, the third mortgage would assume the position of the second.

All participating developments will require a sponsor that will likely be one of the following:

• the current owner,
• a tenant association,
• a 3rd party, or
• a joint venture between the tenants and either the current owner or a 3rd party.

The sponsor will need to arrange financing (bridge loan) to finance the acquisition of the development from the current owner and to cover all costs of rehabilitating the property and converting the property to cooperative ownership. Several major banks have expressed strong interest in providing this financing and HDC can provide contacts. A combination of HDC’s financing plus shareholder purchase prices will be used to retire the bridge loan at the time of co-op conversion.

Sponsor Benefit:

HDC will permit sponsors to use the development’s 1% loan monies to pay down the sponsor’s initial equity investment, i.e., if the sponsor purchased the building from the existing owner, HDC 1% loan monies could be used to repay a portion of that equity at co-op conversion. The goal is to provide timely compensation to sponsors for the financial risk involved in co-op conversion. Existing owner equity take out with 1% loan monies would have to be negotiated with HDC.

Conversion Commitment & Displacement Protections:

Owners and/or potential sponsors who seek to participate in the Program must provide a letter of interest from at least 25% of the existing residents as well as an ability on the part of the residents to get mortgage financing. While 25% resident commitment is the minimum required for program participation, the targeted resident commitment level is 40%.

HDC expects that existing residents would pay 10% down payments to purchase their units. In addition, existing tenants who do not seek to participate in the co-op program will be protected under existing rent stabilization laws.

If the development currently receives HUD Section 236 payments, enhanced vouchers available through HUD can be used to protect the existing tenants, as well as to subsidize income eligible residents’ maintenance fees.

Pricing:

HDC expects to work with existing owners and/or sponsors to develop the co-op unit pricing structures. The Corporation expects that there will be three types of buyers:

• “inside buyers” who currently live at the development,
• “outside buyers” who purchase their units from the sponsor, and
• “future buyers” who buy their units from existing owners, e.g., they buy from inside buyers or outside buyers after reselling their units.

In all cases below, combined maintenance and monthly mortgage payment on shareholder end loans should not exceed more than 33% of the potential shareholder’s income.

Unit pricing will vary depending on the income levels of the building residents.

Below is an example of a possible pricing structure:

• Inside Buyer Pricing
  Inside buyer pricing is expected to be affordable to residents earning approximately 90% of the area median income or less (currently $63,810 for a family of four).

• Outside Buyer Pricing
  Outside buyer pricing is expected to be affordable to residents earning up to a maximum 165% of the area median income (currently $116,985 for a family of four). This limitation is connected to the Article 11 tax exemption.

• Future Buyer Pricing
  When inside buyers and outside buyers sell their units they will need to sell the units to “future buyers,” who cannot earn more than 165% of the area median income or less (currently $116,985 for a family of four).

HDC Second Mortgage Fund Allocation:

The goal of HDC’s second mortgage monies are to provide enough funds to ensure that residents earning between 50% of AMI and 90% of AMI can afford the insider purchase price set at 90% of AMI. The Corporation expects that the second mortgage funds will be provided to the developer who will in turn use the monies to offer concession pricing to residents earning between 50% of AMI and 90% of AMI. HDC also expects to implement an asset test for purchasers who qualify for subsidy. If a resident has non-retirement assets greater than 1.5 times the purchase price, then the resident is ineligible for subsidy and must pay the full 90% of AMI purchase price.

Fees and Equity Requirements:

After the initial sell-out level of 25% is reached, HDC expects to share future sales revenue from units sold to outsiders at a 60/40 split (60% to owner/40% to HDC) until all of the owner sponsor’s equity and fees are repaid. After all owner/sponsor fees are repaid, HDC will split the sale proceeds equally with the owner/sponsor until all of HDC’s debt is repaid.

Rehabilitation:

Owners and/or sponsors will be required to obtain a physical needs assessment to determine what capital work is required for the building. This is of particular importance for Mitchell-Lama properties, some of which are over 30 years old.

Sponsor Eligibility:

Owners and other entities seeking to become sponsors must demonstrate to HDC the ability to carry out the transaction based on previous experience. In addition, they must also complete HDC’s disclosure process.

Future Re-Sale:

Shareholders would be able to sell their units to households that meet the 165% of area median income restrictions for future buyers, as discussed above. HDC will charge the following fees for shareholders that seek to sell their units:

• Years 1-3 – Shareholders would have to pay 100% of their profit to HDC to repay the co-op’s existing debt.

• Post Year 3 – Shareholders would be required to pay 50% of all profit to repay HDC co-op’s existing debt, including the first, second and third mortgage debt.

• After Debt Repayment – After HDC’s debt is repaid, resale of units will result in a 20% flip tax payable to the co-op. HDC expects that the flip tax will be used to keep maintenance fees for existing residents affordable.

Succession:

Shareholders may bequeath their units to their inheritors if the inheritors meet the 165% of AMI limit. If the unit were to be inherited or sold by an owner’s estate within years 1-3, the owner’s estate would only have to pay 50% of the profit to repay HDC debt, i.e., the estate would not be required to pay 100% of the profit required during years 1-3.