At the heart of the crisis currently affecting affordable housing in New York City are the dozens of HDFC co-op buildings that are threatened with foreclosure by New York City for real estate tax delinquency or failure to pay water and sewer charges. While the obstacles facing the shareholders in these buildings may seem insurmountable at times, often the best way forward is to take a breath and size up the situation and what can be done to correct it.
Why Do These Foreclosures Occur?
One of the bedrock obligations for any property owner, co-op, landlord or commercial operator is the payment of real estate taxes. For many, those payments are simply a matter of proper financial management. But HDFC co-ops frequently suffer from both poor management and the inability to pay.
According to Glory Ann Hussey Kerstein, the organizer of advocacy group HDFC Coalition Anti-Foreclosure Committee: “The biggest factor in HDFC foreclosures is the City’s flawed model of disposing of landlord-abandoned buildings in the 1980s and 1990s to the tenants then in place. The City’s treasury was hemorrhaging, and in the rush to unload these buildings to rid itself of the cost of building ownership, little to no repairs and sub-par training for tenants were the City's order of the day. Tenants got buildings ‘as-is’ and received no training in housing court procedures, probate court requirements, negotiating commercial leases, lead paint abatement or vacancy management, or how to conduct sales. No surprise that 90 percent of the HDFCs now facing foreclosure were incorporated as co-ops in the ‘80s and ‘90s when this flawed model prevailed.”
The bottom line is that the population who became owners under this program -- primarily lower-income rental tenants -- were ill-equipped to manage the buildings themselves. In most cases, they couldn’t afford to hire professional management, as would be the common case in wealthier, ‘market’ co-ops. That lack of effective knowledge, experience, and financial wherewithal has led to a perfect storm of circumstances resulting in these foreclosure actions.
Interestingly in most cases, unlike market-rate co-op buildings, HDFC co-ops rarely have a formal underlying permanent mortgage held by a financial institution. Under virtually all standard mortgages, the mortgagee—i.e., the bank—collects a portion of the real estate taxes owed each month with the monthly mortgage payment. This is known as a real estate tax escrow. The bank forwards these monies twice a year to the City in payment of real estate taxes to keep the taxes current and to protect the lenders’ collateral position secure. In the case of many HDFC co-ops—especially because there is no permanent lender—no one is collecting the tax money. And often the proper notice from the City about taxes owed and due, or the non-payment of said taxes, is never received by the shareholders.