Mitchell-Lama Building Owner Prevented from Making Market-Rate Conversions

A recent court decision could affect the ability of owners of former Mitchell-Lama buildings to convert thousands of apartments citywide to market-rate rents.

A recent court decision could affect the ability of owners of former Mitchell-Lama buildings to convert thousands of apartments citywide to market-rate rents.

The Mitchell-Lama Housing Program is a form of housing subsidy. It was proposed by New York State Senator MacNeil Mitchell and Assemblyman Alfred Lama and signed into law in 1955 as The Limited-Profit Housing Companies Act. The program's publicly stated purpose was the development and building of affordable housing, both rental and co-operatively owned, for middle-income residents. Under this program, local jurisdictions took land by eminent domain and provided it to developers for extremely little money to develop housing for low- and middle-income tenants.

According to the New York State Division of Housing and Community Renewal (DHCR), “A total of 269 Mitchell-Lama developments with over 105,000 apartments were built under the program.” Developers receive tax abatements as long as they remain in the program, as well as low-interest mortgages, subsidized by the federal, state, or New York City government.

The Buyout Provision

Owners generally may remove the developments from Mitchell-Lama and privatize them by prepaying the mortgage. In most cases, that happens 20 years after the project was developed, but in some cases, special land-use agreements specify more time. When a building is privatized, it loses its tax abatement.

What happens to the tenants in those buildings depends on when they were built and public policy. Tenants in buildings built before 1974 go into rent stabilization upon leaving Mitchell-Lama. This means their rents increase according to the New York City Rent Guidelines Board orders for each new lease, as well as according to orders by the state's Office of Rent Administration for major capital improvements and landlord hardship.

In addition, apartments that were occupied after July 1, 1971, and all apartments in buildings constructed between March 10, 1969, and Jan. 1, 1974, are subject to an additional increase in the initial rent-stabilized rent due to “unique or peculiar circumstances,” an increase that could raise the rents substantially.

The Lawsuit

In November 2007, the DHCR enacted regulations stating that just removing a pre-1974 Mitchell-Lama building from the program is not a “unique or peculiar circumstance” justifying a substantial rent increase. Building owners have challenged that policy in court, asserting that it contradicts a court decision, KSLM Apts. v. NYS DHCR, and a lower court's reference to DHCR policy letters, in Columbus 95th Street, LLC v. DHCR (December 2010). The New York State Supreme Court ruled that the regulations are legal, and the owners appealed to the state's mid-level Appellate Division.

Latest Decision

In a decision that lawyers say could affect 17,000 current and former Mitchell-Lama apartments statewide, the appellate court ruled on Dec. 28 that tenants at Columbus House, a former Mitchell-Lama building on the Upper West Side, were protected against rent increases after the building was sold.

The current owner, following the 2006 acquisition of the building for $68 million, applied for rent increases for 248 individual apartments at Columbus House, but the applications sat at the DHCR for more than a year.

According to the latest decision, where the Mitchell-Lama rents had been set by HUD, the last HUD rents became the first rent-stabilized rents when the buildings converted. Although the owner claimed that the 2005 Court of Appeals case, KSLM v. DHCR, ruled that owners were entitled to rent increases for unique or peculiar circumstances solely based on prior Mitchell-Lama status, the DHCR and tenant groups successfully argued that the KSLM case merely ruled that owners subject to stabilization under the Emergency Tenant Protection Act (ETPA) could apply for unique and peculiar circumstance increases, but those subject to regulation under the Rent Stabilization Law of 1969 couldn't.

The court ruled that the KSLM decision did not guarantee owners automatic entitlement to rent increases for unique and peculiar circumstances. It simply acknowledged owners' rights to apply for such rent increases.

The owner had also claimed that the DHCR improperly set public policy through the code amendment, since the legislature never amended any law on that question. But the court ruled that the DHCR had broad rulemaking authority, and the code amendment was consistent with the DHCR's authority and with governing law. Otherwise, tenants who had no control over an owner's decision to opt out of Mitchell-Lama would face drastic rent increases. The amendment simply clarified the law.

This ruling will allow tenants at Columbus House and other buildings to remain in their apartments at affordable rents, which the owner's lawyers said would have otherwise doubled or tripled in some cases. This ruling could affect thousands of tenants across the city, as a wave of buildings have been acquired from the Mitchell-Lama program in recent years, with owners converting vacant apartments and charging market-level rents to newly renovated apartments.