[Continued from Friday’s Part 9 and the preceding Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, and Part 8.]
By: David A. Smith
Friday’s Part 9 nearly completed our review of the public-policy implications of a Southbridge Towers privatization in the changing demographics now (slow income concentration) and after privatization (slow aspirational gentrification), as well as the desire by many, particularly elected officials, to keep the housing affordable even though the government has long since stopped providing subsidy or financial incentives to do so.
Providing ongoing subsidy isn’t my problem
Sources used in this post
New York Daily News (October 23, 2005; deep purple font)
Downtown Express, Letters to the Editor (November 2, 2006; robin’s-egg blue font (Michael Altman), gray-blue font (Jared Brown), teal font (Rosemarie Ferrara), and navy blue font (Michael Wishner))
Downtown Express, Letters to the Editor (February 1, 2007; lime font (Wallace Dimson), olive font (Stephen Seifer), and forest-green font (Seymour Schleimer))
Downtown Express (May 24, 2007; pink font)
Law360 (October 4, 2012; plum font)
Travel Studies blog (April 23, 2013; brick-red font)
Wikipedia on co-op flip tax; tangerine font
Should we privatize: No and Yes (Downtown Express, June 19, 2014; No from Victor Papa in red font, Yes from Jesse Mandel in green font)
DNA Info the vote (October 1, 2014; charcoal-gray font)
The Broadsheet Daily (October 7, 2014; pecan font)
Downtown Express (October 15, 2009; caramel font)
Broadsheet Daily (November 6, 2014)
The New York Times (November 14, 2014)
Because Mitchell-Lamas are highly regulated, any two minutes’ Googling will produce many more factual links, such as this, this, this [Its 2013 audited financial statement], this (search for ‘Macrucilli’), and this; eventually, in mental-health self-defense, I had to stop.
It’s just a vote, dear, not the end of the world
Much of the sturm und drang you may read about the adverse tenant consequences of Mitchell-Lama privatization arises from people unhappy at the prospect or consequences of a rental Mitchell-Lama conversion.
For supporters of Mitchell-Lama, the Southbridge vote delivers a painful blow.
One cannot let that statement pass unquestioned: as it implies that supporting the program means expecting a property to stay in it forever.
“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.”
Mr. Fratta on his balcony, looking west
A tragedy for whom? Clearly not for the current residents, who voted for it by a two-thirds majority, but that didn’t prevent some local elected officials, perhaps drawn by the prospect of favorable press coverage, from weighing in:
In early October, board members who don’t want privatization (for reasons unknown) had an open meeting against privatization. The guest speaker invited by those who didn’t want privatization was Borough President Scott Stringer.
[Illuminating personal sidebar details about Mr. Stringer from November 6, 2014 here. – Ed.]
Asking the NYPD to drive his wife to work
Three times he mentioned getting thrown out. Thank goodness the majority of residents at the meeting were for privatization. When he was pinpoint-questioned on being thrown out, he backtracked and said he was talking about a different housing situation and not our situation, admitting no one in Southbridge could be thrown out if we go private. The question and answer part of the meeting was abruptly ended when things were not going the way certain anti-privatization parties anticipated.
Michael Wishner
3.G. Does the state/ city win from the transaction?
We’ve already seen that the City of New York will gain a significant revenue stream from higher real estate taxes – $6,450,000 annually and then rising, which at New York City’s bond rate (roughly 3.0%) has a capitalizable value in the vicinity of $215 million, which the city could monetize tomorrow if it wanted to devote that sum to building new housing. Additionally, opponents of privatization have suggested that the state itself would win another large amount on the privatization:
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.
While this argument was presented without analysis in the Times piece, from my own experience I was pretty confident that the ‘Cuomo tax’ (as it was known in real estate circles) wouldn’t apply here; the wondrous research tool The Google surfaced a reference list, a brief exposition, and what I consider a compelling refutation of that claim:
Coney Island High-Rise Dodges $21M Transfer Tax On Appeal
By Karlee Weinmann
Law360, New York (October 04, 2012, 1:46 PM ET) — The owners of a Brooklyn, N.Y., high-rise do not have to pay a $21.2 million tax improperly tied to the complex’s exit from an affordable housing program, a New York Court of Appeals panel ruled Wednesday, reversing a lower court’s order that the city-leveled tax should stand.
As the issue relates to state law (in this case, the state’s real estate transfer tax), it must be litigated in state courts, not Federal, and the NYS Court of Appeals is the second highest court in the state, so the decision has plenty of weight, especially as it was unanimous (hence less likely to be reversed on a subsequent state-supreme-court appeal):
A change in ownership is the basis for the tax.
Ownership means transfer of the title deed
A Mitchell-Lama conversion, as we’ve seen, is not a change in ownership: the shareholders are the same after as before. Nor is it a real estate transfer – no new deed is signed and recorded. Hence on the plain meaning of the statutory words, the Mitchell-Lama dissolution isn’t a transfer:
In a unanimous decision (pdf here), the appellate panel said Trump Village was shielded from the real property transfer tax, or RPTT, because when it shifted from an affordable housing complex to a corporation in 2007, its shareholders remained the same.
[When it privatized], Trump Village stripped all Mitchell-Lama references and associations from its certificate of incorporation, bylaws and stock certificates. It issued amending stock certificates in the same quantities to existing shareholders to complete its transformation to a private cooperative corporation.
In earlier parts of this post, I mentioned that regulators tend to invent, discover, or discern new obstacles to leaving their regulatory net, and here New York City did not disappoint:
New York officials first slapped Trump Village with a notice that it owed the $21.2 million tax in 2009, two years after the complex’s shareholders opted to leave the Mitchell-Lama program, designed to spur the development of housing for low- and middle-income families in New York. Trump Village’s decision to reconfigure itself came after it repaid low-interest government loans received as part of the program.
Perhaps the NYC DoF was seeking to discourage other entities like Southbridge Towers (which had voted to proceed with privatization and had filed the initial draft prospectus with the NYS attorney general’s office).
The New York City Department of Finance had contended that Trump Village, a collection of three 23-story buildings at the border of Brooklyn’s Coney Island neighborhood, warranted the tax in choosing to shift away from the state-sponsored Mitchell-Lama affordable housing program and reincorporate itself. The city has said that in the switch, Trump Village essentially became a new corporation, taking the reins from an “old” Trump Village in what amounted to a property transfer, the opinion says.
‘Essentially’ is a tipoff word – translated, it means The words don’t say what we want, so we want you to reinterpret them.
The housing complex’s owners [that is, all its co-operative residents] had contended that the transfer tax only applies when property or economic interests in it changes hands — not, as in its case, when the property kept all its same shareholders at the same levels, as it did through its transition out of the Mitchell-Lama program.
In general, courts dislike being asked to redo the legislature’s job by rewriting what the legislators wrote – it’s fundamental high-school-civics separation of powers and statutory construction for the courts to reject what I call the Humpty Dumpty argument:
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”
Let me see those arguments, young lady
But the appellate panel couldn’t cobble together case law to support the city’s logic.
“Upon amending its certificate of incorporation, Trump Village remained the same entity, although it was relieved of various restrictions previously imposed upon it by the Mitchell-Lama housing program,” the opinion says. “Accordingly, the city has failed to establish … that the RPTT was applicable to Trump Village’s actions and, thus, failed to establish that the RPTT was properly imposed upon Trump Village.”
Naturally, this being the government the owners were suing, the government having imposed a contested tax, the government required Trump Village to post the cash collateral before contesting it.
You want to challenge the tax? Post it first
New York State Supreme Court Justice Richard Velasquez was unconvinced in earlier court proceedings, ordering Trump Village in February 2010 to pay the multimillion-dollar balance on its tax tab. Trump Village brought the original suit to challenge the RPTT in October 2010.
Judge eng
Presiding Justice Randall T. Eng and Justices Peter B. Skelos, Ariel E. Belen and Jeffrey A. Cohen sat on the appeals panel. In light of its declaratory judgment, the panel remitted the case to the lower court for entry of a judgment declaring the tax was improperly leveled.
The Southbridge Towers privatization proponents addressed the potential transfer tax head on:
It’s extremely unlikely either ruling will be overturned on appeal. But it’s budgeted for, under any circumstances with a contingent, 33%, rather than 28%, transfer fee (flip tax) on first-time free-market sales post-reconstitution.
In other words, if the current decision were reversed by the New York State Supreme Court, then Southbridge Towers would bump its flip tax by five points to create the extra revenue necessary to cover its payment without disturbing the remaining residents.
[Continued tomorrow in Part 11.]