By: David A. Smith
Compared with all the generations that came before us, we today live in a world of unprecedented rate of change, both in dimensions – technology, medicine/ biology, war/conflict, and human society/ moral values – and in speed. To survive and orient within this continuous shock of the new, we have learned to internalize, use, and take for granted technology or challenges that would have been impossible only ten years ago, indescribable thirty years ago.
Against this backdrop of continuous change stands (literally and figuratively) real estate, because whereas living things that age continuously and even subconsciously evolve to adjust to their age, property that ages does not evolve, it simply obsolesces or deteriorates. Property changes only when its occupants or owners consciously and affirmatively decide to change it, and when more than one person has a say in those choices, conflicts can erupt, as I explored at immense length (eleven parts) in a micro-implies-macro study of Southbridge Towers in Manhattan, presented in One man’s windfall is another man’s score: Part 1, “Crazy, stupid, or no thank you?”:
Hey buddy, I live here too
Question 1: Is the impending privatization of Southbridge Towers a windfall, or is it deserved reward?
Southbridge Towers, from FDR Drive
Question 2: Is it something we as policy-oriented bystanders should cheer, or boo?
Add two more zeros if you want an estimate of Southbridge Towers’ value
Though as we’ll see these two questions are each profound, and to answer them will take many parts of this mega-post, because the Southbridge Towers privatization raises so many of the core issues of affordable housing: for whom, for how long, by what rules, and by whom decided – though you wouldn’t know that by the New York Times’ (November 14, 2014) headline:
Divided by a Windfall
Affordable Housing in New York City Sparks Debate
In fact, the actual story by Times real estate columnist Ronda Kaysen is reasonably balanced, although far less substantive than it could have been had Ms. Kaysen not been shackled by word-count limitations.
[“What are we going to do about that?” crises the faithful reader plaintively – Ed. “Have no fear, blog-man is here.” – Auth.]
Change the letters, maybe?
Like so many other works, this post grew in the telling, because like other biographies, the story of its life showed also the changing times (four decades), the changing city (New York), and the changing imperatives and legal/ financial environment (more rigid, less flexible).
Back then we needed flexibility
The post grew also because so much of its story was readily available at one’s Google-tips, as evidenced by my eventual source list:
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.
Like the elephant to which I have often compared large housing properties, Southbridge silently endured, unconsidered until it threatened to rouse itself.
For everyone except those who lived there, Southbridge Towers was a part of the landscape, something overlooked if not taken for granted, until a momentous vote in September:
More than two-thirds of those living in Southbridge — a 1,607-unit [More likely 1,651, but with 44 apartments ineligible to vote – Ed.] complex of several towers that sits between Pearl, Frankfort, Gold and Fulton streets — cast ballots over the past three days to turn their subsidized co-op into market-rate apartments, a decision that will likely allow residents to sell their units for upwards of $1 million.
Most New Yorkers would look upon the good fortune of the residents of Southbridge Towers with envy.
One doesn’t have to be a New Yorker to envy the Southbridge Towers residents:
In September [2014], a majority of residents voted to privatize the buildings and to begin selling their apartments at market-rate prices.
These are variously estimated at anywhere from $350,000 to over $1,000,000, depending on apartment size and views:
As I referenced elsewhere in the post, that made Southbridge Towers worth well over $1 billion, and the co-op board members elected were in effect the management committee of a billion-dollar enterprise, so the entity’s value had way outgrown its governance structures, and like others who suddenly find themselves rich beyond their governance-system’s natural scale (Saudi Arabia), their newfound wealth brought willfulness and strain among them.
They paid, on average, $17,500 for their Lower Manhattan apartments, many with stunning East River views.
To gain the right to sell the apartments, the co-op owners had to decide to do so by super-majority (two-thirds):
In a bitterly contested three-day referendum, residents of 1,082 Southbridge apartments voted in favor of the plan to withdraw from the State’s Mitchell-Lama program. This was a margin of ten votes more than the two-thirds legally required for the plan to move forward.
[For arithmetical reference: (1,082 – 10) / (2/3) = 1,608; I conclude that was the number of owner-occupied apartments at the time of the vote. – Ed.]
The vote itself is the culmination of a seven-year campaign by the current Southbridge Towers board to create the option of privatizing.
Any question that takes seven years to be presented for decision has a massive and absorbing back story, and in a blog one can pursue that back story – hit pause on reality, as it were –
Hyperlinks are like hitting the pause button
– as I did for three whole parts, concluding in Part 2, “If you can’t sell or bequeath it”, and Part 3, “Cuomo gag order”: with an exploration of the critical Mitchell-Lama program commitment:
The option to go market … eventually
Although developments are allowed to eventually leave the program, few of the co-ops have. Of the city’s 97 Mitchell-Lama co-ops, encompassing more than 70,000 units, only seven have privatized.
There are three inter-related reasons for this:
1. Location. Many of the Mitchell-Lama co-operatives are located in middle-income neighborhoods; few of them have seen such a dramatic transformation of their location as Southbridge Towers.
Southbridge would be the eighth, according to New York University Furman Center for Real Estate and Urban Policy.
2. Statutory hurdles. Over the years and decades, the legislature and city added more and more procedural barriers and exit costs to a Mitchell-Lama dissolution. (This is a pattern in affordable housing programs; due to the production paradox, whatever market-conversion contractual agreement made by the public sector to induce the private sector to develop affordable housing it will later rethink, and in many cases simply cancel or suspend on one pretext or another, such as in LIHPRHA.)
Mitchell-Lama is the more fascinating because (speedy human mental rationalization at work) commitments made forty years ago by elected officials desperate to get people to invest and live in lower Manhattan (which back then was only a little less dire than Detroit’s situation today) have not only been forgotten in the interim, but the forgetting has itself been forgotten, leading to new regulators who are on the opposite side as their long-retired forebears.
I contradict myself? Very well then, I contradict myself
3. Regulatory resistance. Perhaps because so many Mitchell-Lamas are rental, or perhaps because regulators like things to stay regulated, it is an incontrovertible fact that regulators will resist any property’s or owner’s withdrawal from their program.
One is the 7-year period it took the sponsors to complete the prospectus –
A lesser person would think it was a conspiracy against him
It’s called a prospectus because the privatization is treated as a (re)issue of securities – the residents own shares, and those shares are a security subject to restrictions – so this is a tender offer to existing shareholders of a complex transaction, and the issuer (the entity itself) owes them a fiduciary duty and a duty of disclosure. (The shareholder-securities governance is a little-known feature of co-op living, such fun.)
As another example of regulatory unhelpfulness, consider this:
Let the record show no offense was offered
[2009] Cuomo gag order. Missing from the privatization debate are some of the voices who are most knowledgeable about the proposal’s benefits and pitfalls: the members of the Southbridge Towers board. Cuomo’s office, which governs the privatization process, has informally told board members that they are not allowed to speak publicly or privately about the red herring until it becomes a final document. During this period of open public comment, and the next phase, when the attorney general may modify the plan, the board members are barred from giving their views.
The reason for the gag order appears to be a purely legal one: The attorney general’s office considers the Southbridge board the “sponsor” of the privatization effort, a role often taken by a landlord in Mitchell-Lama rentals. The purpose of the gag order is to prevent parties with a large financial interest in the project from influencing the debate.
To me that seems an administrative over-reach. While the board members should not be allowed to use inside knowledge, for instance stating details of the plan before those details are approved for public disclosure, there shouldn’t be any penalty to them explaining their reasoning or views in a general way. I suspect the board concluded it would not give the attorney general’s office any ammunition at all to claim that the pre-prospectus procedures were defective, and concluded it was better to keep silent.
But in this case, though the Southbridge board is almost unanimously in favor of privatization, the board members do not stand to benefit any more than any other resident. And it was a vote of the complex as a whole that authorized the creation of the red herring in the first place.
Board members have asked the attorney general to clarify the need for the gag order, but they have not received anything in writing. The attorney general’s office refused to comment on the issue and did not provide a defense of their decision to Downtown Express.
By not answering, the attorney general [At the time, Andrew Cuomo, now New York’s embattled governor] pocket-vetoed the board members’ attempt to speak publicly, because had they done so, then the privatization’s opponents could have sued claiming that the whole vote was invalid because of ‘improper influence.’ By saying nothing, the attorney general helped the opponents … and I’m more than confident AG did so because he wanted the privatization to fail.
Warren Green, a lawyer and former Southbridge board member, said the A.G.’s position makes sense legally but not practically.
More importantly, it made sense politically, and that, I believe, is how the state attorney general chose to decide it.
I decide when to create a public-corruption commission, and I decide when to disband it
When they get that close, I squeeze them
[Continued Friday in Part 2.]