Gallet Dreyer & Berkey, LLP | Court Upholds the Authority to Impose Emergency Rent Increases in Mitchell-Lama Affordable Housing Developments
This links to the home page
Media

Court Upholds the Authority to Impose Emergency Rent Increases in Mitchell-Lama Affordable Housing Developments

09/08/2014 | Fall 2014 Newsletter
In a recent court case, a New York Supreme Court found that the government agency which regulates Mitchell-Lama housing developments was within its right to permit an emergency rent increase in order to maintain the operation of the development.

Although Mitchell-Lama affordable housing developments are normally subject to strict limitations on rent increases, regulations contain an exception allowing these developments to exceed these limitations in financial emergencies when they are facing “serious financial difficulty.” In a recent decision, a New York Supreme Court upheld the authority of Mitchell-Lama developments to obtain permission for emergency rent increases in such financial emergencies.

FINANCIAL EMERGENCY
Facing almost certain bankruptcy, Mitchell-Lama cooperative Masaryk Towers Corporation sought approval from its governing agency to impose an increase in monthly carrying charges on its shareholders. Despite having approved a similar increase just the year before, the New York City Department of Housing Preservation and Development (“HPD”) granted the request in order to preserve the continued operation of the cooperative. A group of shareholders challenged the authority of HPD and Masaryk Towers to implement the additional increase, alleging a violation of HPD’s regulations and the shareholders’ due process rights, in Acevedo v. Masaryk Towers Corp. The shareholders complained that Masaryk Towers’ request was in contravention of the mandated two year interval between such requests, and that the increase was approved without a public hearing. The court dismissed the petition, finding that HPD was within its rights to invoke the emergency provision set forth in its regulations permitting HPD to do what is necessary to maintain the operation of a Mitchell-Lama housing development.

BACKGROUND ON THE MITCHELL-LAMA AFFORDABLE HOUSING PROGRAM
The Mitchell-Lama program (named after its legislative sponsors, State Senator MacNeil Mitchell and Assemblyman Alfred Lama) was created to encourage and facilitate the construction and continued operation of affordable rental and cooperative housing in the State of New York. Mitchell-Lama housing is either State or City supervised, by the New York State Homes and Community Renewal agency (“HCR”) or HPD respectively. It provides affordable apartments for hundreds of thousands of middle-income New Yorkers. The State and the City have made a substantial investment in the program by providing private developers with low-interest loans and tax exemptions to build apartments subject to regulated rents and purchase prices. Preservation of these developments is especially important in New York City where middle-income families may earn too much to qualify for federal government housing vouchers, yet struggle to pay market-rate rents.

Mitchell-Lama projects include both rental and cooperative buildings, and are owned by private housing companies created pursuant to the Private Housing Finance Law. Under this statute, HCR and HPD are each responsible for the supervision and regulation of the developments. To fulfill this mandate, these agencies have promulgated, and are responsible for enforcing, rules and regulations which address all aspects governing tenancy in Mitchell-Lama apartments, from eligibility, application and approval process, conditions for continued tenancy, and provisions for termination, vacatur and surrender of apartments.

In addition, HCR and HPD are charged with ensuring that the housing companies select tenants and establish rents in a fair manner, adequately maintain apartment buildings, properly conduct contract procurements, comply with financial and other reporting requirements, and generally operate on a sound basis. They are also responsible for ensuring that housing companies make debt service payments on mortgages, establishing rents, approving tenants, approving cooperative and corporate bylaws and contracts, reviewing project expenditures, and generally enforcing the regulations applicable to each individual development. Periodic audits of housing companies by HCR and HPD include an inspection of a complex’s buildings and grounds as well as a review of documents, such as tenant application and selection records and annual tenant recertifications to identify ineligible tenants.

COMMON LEGAL ISSUES FACING MITCHELL-LAMA DEVELOPMENTS
Mitchell-Lama tenancies are normally issued to applicants on the cooperative’s waiting list (which are often years long), or applicants who qualify for rights of succession (by demonstrating specific criteria). All persons who meet eligibility requirements related to income, family size, and other criteria may rent or buy Mitchell-Lama apartments. Once a tenant, individuals must maintain the apartment as their primary residence and comply with both the governing agency’s and the housing company’s rules and regulations. Common defaults include circumventing the waiting list, failing to maintain the apartment as their primary residence, and illegally subletting. As in private rentals and cooperatives, violations also include creating a nuisance by harboring a dog in a “no-dog” building, making unreasonable noise, and failing to pay rent or carrying charges. Tenants who breach these rules and regulations face eviction and can be disqualified from obtaining another Mitchell-Lama apartment.

Significant focus is placed on tenants in Mitchell-Lama cooperatives who have improperly obtained apartments, do not maintain them as their primary residence, or are illegally subletting them, as the law permits housing companies to withdraw from the Mitchell-Lama program and become private companies after a certain period of time if the mortgage is fully paid. These tenants attempt to retain their apartment until the conversion to a private cooperative so that they may reap substantial profits after a private sale.

In New York City, where an acute shortage of affordable housing still exists, the demand for affordable housing nearly always exceeds the supply. The continued viability of Mitchell-Lama rentals and cooperatives and the diligent enforcement of its governing regulations are of paramount importance to ensure that these apartments are occupied by those legitimately entitled to them. The occupation of subsidized apartments by ineligible tenants creates additional scarcities for those intended to benefit from the program. Careful supervision and enforcement by both Mitchell-Lama housing companies and their respective governing agencies ensures the continued availability of affordable housing for qualified New Yorkers.

About the author: Ms. Quinn is an associate at Gallet Dreyer & Berkey LLP in the real estate litigation department. She represents businesses and individuals in commercial and residential landlord-tenant litigation, including summary proceedings, involving cooperatives, Mitchell-Lama housing developments, redevelopment companies, and tenancies protected by New York State Rent Regulations. Ms. Quinn and our firm represented Masaryk Towers in the Acevedo v. Masaryk Towers Corp. litigation. Ms. Quinn can be reached at mpq@gdblaw.com.