[Continued from yesterday’s Part 10 and the preceding Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, and Part 9.]
By: David A. Smith
As our survey of Southbridge Towers’ impending privatization reaches its conclusion, we can come back to the most basic question of all:
3.H. Whose wealth is it, anyway?
If it’s yours, then you own it … don’t you?
Privatization creates wealth and liquidity, and it transfers that liquidity (net of the increased real estate taxes, which I’ve previously mentioned have a capitalizable value of $215 million or so, and the potential real property transfer tax of $27 million) to the co-op’s owners. Even net of those expenses, the aggregate value is breathtaking: over a billion dollars at an average value of $650,000 per apartment.
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.
For most people this is big money and a big life opportunity:
[2009] Louis Trazino, a former board member, said he sees no downside to suddenly having a valuable piece of real estate in his name.
“Every week these people go out and play the lottery,” Trazino said of his neighbors. “They drop a dollar on something they’re never going to win. But here these people have already won the lottery, and all they have to do is have the courage to step into the future.”
Ownership of housing is forced and invisible saving, and that makes it a powerful lever of positive life change.
Trazino’s family has lived Downtown since the 1890s, but he would be the first one to own property here — and he said he wouldn’t want to miss the chance to pass on the apartment to his two children, 11 and 13 years old.
Is it too much to call this the American Dream?
For the shareholders who support the plan, privatizing provides options they did not have before. They can take out home equity loans to pay for college for their children, purchase and combine existing units to create a larger home, or sell and move elsewhere in an expensive city.
As current Board chair Mr. Dimson said it:
Moreover, Mr. Altman significantly underestimates the power of equity to improve people’s lives. Taxes and fees are costs associated with conducting business in a market economy. The tradeoff is that the equity that Southbridge residents will acquire at no cost will enable them to secure their retirement, relocate, provide for home health care, or leave an inheritance to their children.
Wallace Dimson
People like this:
“People say it’s closing the door and it’s true, but this helps generations to come for the people in Southbridge,” said Rachel Nash, 38, a lawyer who lives there with her husband and 7-year-old twins and supports privatization. “My children will have more financial security than they would have had otherwise. If it is helping me, it helps them even more so.”
Seeing the value of ownership
4. What happens next
The vote has been held, and as of the Times article’s date, the owners were awaiting DHCR confirmation of its validity.
What is the verdict, m’lud?
A memorandum circulated by the Southbridge board of directors to residents on October 29 says of the HCR review, “both HBA and Southbridge have responded to these inquiries in a prompt and complete manner. While we expected the review process to be completed sooner, it is our understanding that we can now expect that the Attorney General will respond to the voting amendment on or about November 13, 2014. If this timeline is maintained, shareholders will receive a copy of the amendment on or about November 24, 2014.
[As of this writing I couldn’t find any update on the internet; I’ll come back to this story some months from now and see what the updates are. – Ed.]
At that point, the Exclusive Period will commence, during which shareholders will have 90 days to decide whether they wish to participate in the plan or opt out.” This refers to a 12-week period (following the date on which the Attorney General’s office certifies the results of the September vote as valid), during which the Southbridge privatization offering mandates that two-thirds of the residents must agree to participate in the plan.
I expect the vote will be upheld; that’s what the previous five years’ preparation was for.
If no irregularities are found in the voting process, shareholders then must choose one of three options.
[1] They can agree to participate, which means they become shareholders in a market-rate development.
[2] They can relinquish their shares to the co-op, get their equity back and leave.
[3] They can relinquish their shares and stay on as rental tenants with annual rent increases of no more than 5% a year. As renters, they would lose their stature as shareholders, but they would not risk paying steep maintenance increases should costs rise.
Option [2] is economically ludicrous in Southbridge Towers, so its inclusion must be a statutory or regulatory requirement.
Option 2? That’s ludicrous!
In order for the plan to become final, two-thirds of the shareholders must agree to become market-rate shareholders. If this occurs, residents could begin selling their apartments by next summer.
Quote DImson about people who vote No before the dissolution, then once they know it’s going forward, the inevitability effect takes over and now it would be foolish to vote No.
At this point, moving forward with the privatization still requires one more step. Two-thirds of residents will have to sign an agreement to “opt in” to the privatization. They will soon receive the agreement and will have 90 days to sign, Dimson said. Residents can choose to “opt out” of the plan, which will essentially make them renters, who do not have the ability to sell their apartment. Rents will be below market rate, but can increase up to 5% each year.
Actually, I expect the individual votes to buy co-op homes to be much higher than 67%. The reason is simple: when voting whether to privatize or not, you were hoping to influence the aggregate vote – but once that vote is lost and you know the privatization is inevitable, the decision you make is entirely personal, and your choices (as we just saw) are different; and becoming a tenant means, if I understand things correctly, that you forfeit the chance of eventual residual value in your apartment.
[2009] Joe Scelso, 81, said that even if his maintenance charges go up because of higher taxes, the benefit of owning Manhattan real estate without putting any more money down far outweighs any short-term costs. Also, he pointed out that under privatization, residents would be allowed to give their apartments to family members or leave them to family members in their wills, which is not allowed now unless the relatives already occupy the apartment.
And remember, to buy the apartment takes no cash; it just means a change in your potential monthly occupancy cost from the increased real estate tax assessment. I can see a resident remaining a tenant if he or she is very old, or very poor and with no family, but any resident with family honestly, if you have family, whether you’re poor or not you’d have rock in your head not to buy your apartment.
Can we buy apartments here?
Personally, I’ll be quite curious as to what Mr. Hovitz, Mr. Altman, and the other opponents of privatization will do. If I knew them, I’d advise them to set aside their commitment to abstract others and do what is more appropriate for themselves and their families – namely, buy their co-op homes. In my view that’s not the slightest bit inconsistent or immoral, so I hope they do it.
“If you have an opportunity to have ownership of a piece of Manhattan real estate in one of the fastest growing areas, does that outweigh any of these negatives?” Mr. Dimson said. “I think most people will tell you yes.”
A man for whom the positives outweigh the negatives: Board chair Wally Dimson