In increasing numbers, residential developments constructed under New York's Mitchell-Lama housing program are considering the option to privatize - or "buy out" of the program - when they become eligible to do so. Understanding this trend and the ramifications of taking such an action are critical for any Mitchell-Lama property.
New York State's Mitchell-Lama Housing Program was created in 1955 when former Manhattan Senator MacNeil Mitchell and former Brooklyn Assemblyman Alfred Lama sponsored legislation to provide incentives for the construction of affordable housing for moderate income families. Under the program, a total of 269 rental and cooperative properties with an aggregate of more than 105,000 dwelling units were built, including such recognizable developments as Co-op City in the Bronx, Rochdale Village in Queens, and Trump Village in Brooklyn. Both Mitchell-Lama rental properties and co-ops were - and continue to be - supervised by either New York City or New York State housing authorities, notably the New York City Department of Housing Preservation and Development (HPD) and the New York State Department of Housing and Community Renewal (DHCR). This supervision provides guidance to the owners and boards of Mitchell-Lama developments on how the properties should be run.
Funding for the original construction of Mitchell-Lama developments was provided by either New York State, or New York City. This funding, which was financed by the sale of municipal bonds with low interest rates that corresponded to comparatively low rent or carrying charges, was complemented by real estate tax abatements. Over the years, the program has been supplemented by various low interest loans for capital improvements and further tax abatements.
Under the program, owners of Mitchell-Lama rental properties are limited to a fixed profit in the form of dividends. In Mitchell-Lama co-ops, apartments are particularly affordable, and shareholder profit on resale is limited to the original purchase price plus, in most cases, the shareholder's proportionate share of any mortgage amortization during the period of residency.
Of greatest significance to this inquiry is the fact that all Mitchell-Lama developments are eligible to withdraw from the program after 20 years upon prepayment of the mortgage, or after 35 years in the case of developments assisted by loans prior to May 1, 1959. Such withdrawal and privatization is called a buyout. When a Mitchell-Lama property privatizes through buyout, it is no longer subject to regulation by such agencies as HPD, DHCR, or Housing and Urban Development (HUD), and it is no longer required to be affordable for moderate income families.