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WARNER PARTNERS, P.C.
ATTORNEYS AT LAW
950 THIRD AVENUE
NEW YORK, NEW YORK 10022
TELEPHONE
(212) 593-8000
TELECOPIER
(212) 593-9058,
April 4, 2014
Hon. Shirley Werner Kornreich
Justice
| Supreme Court, New York County
60 Centre Street
New York, New York 10007
Re: Rudman et ano. v. Deane et al.; Index No. 650159/10
| Dear Justice Kornreich:
We write in response to the Court’s order, dated March 28, 2014, requesting that the
parties provide additional information with respect to certain “affordable housing programs or
| subsidies” mentioned in defendants’ motion for summary judgment.
Background
Starrett City — consisting of 5,881 affordable housing units — is legally owned by Starrett
City, Inc. (“SCI”), a limited-profit housing company formed in 1972 pursuant to the Mitchell-
Lama program. Starrett City’s beneficial owner is Starrett City Associates LP (“SCA”), of
which SCI is a general partner.
From its inception in the 1970’s, Starrett City (the “Project”) has participated in various
affordable (i.e., subsidized) housing programs administered by New York State and the federal
government. The principal programs are Mitchell-Lama (NY PHFL, Article 2), Section 236 of
the National Housing Act (12 U.S.C. §1715z-1) (“Section 236”) and Section 8 of the United
States Housing Act of 1937 (42 U.S.C. §1437f) (“Section 8”). Until the December 2009
refinancing, Starrett City was financed by a mortgage held by the New York State Housing
Finance Agency (“HFA”), with the interest payments partly subsidized by the United States
Department of Housing and Urban Development (“HUD”) pursuant to Section 236.
At the time of the 2009 refinancing at issue in this case, all of the Project’s 5,881 units
were subject to the New York Mitchell-Lama and the federal Section 236 programs. Among
those units, 1,031 also received project-based assistance pursuant to a Section 8 Housing
Assistance Payment (“HAP”) contract, and 2,538 also received project-based assistance pursuant
to a Section 236 Rental Assistance Payment (“RAP”) contract. Poll Deposition Ex. 219 at 2.
One of the significant restrictions imposed by Mitchell-Lama is that a project owner
cannot refinance its project for any more than the actual project cost. PHFL §21. This
restriction had the practical effect of making it impossible for Mitchell-Lama project owners toWARNER PARTNERS, P.C. Hon. Shirley Werner Kornreich
April 4, 2014
Page 2
take out the increased equity value of their property by a refinancing and remain within the
program; they could only do that by selling the property or by “privatizing” the project (i.e.,
removing it from the restrictions and subsidies of Mitchell-Lama). The Memorandum of
Understanding (“MOU”) between SCI and multiple government agencies dated May 2008 and
renewed in October 2008 addressed only a sale. SCI also had outstanding a written notice of its
(alternate) intention to privatize.
In 2009, after the collapse of the sale process, the Managing General Partner (“MGP”) of
SCA had discussions with government officials concerning the feasibility of a refinancing
transaction. Also in 2009, the MGP began an intensive lobbying campaign to convince the
Legislature to amend Mitchell-Lama to permit an equity takeout in the event of a “preservation”
refinancing (i.e., a refinancing for a project that remained under Mitchell-Lama, thereby
“preserving” the property as affordable housing). As a result of those lobbying efforts, the
Legislature amended Mitchell-Lama in July 2009, permitting Starrett City for the first time to
obtain financing in excess of the project costs. Under the terms of the amendment, SCI was
required inter alia to commit to remain subject to Mitchell-Lama’s restrictions for a period of at
least 30 years. PHFL §22-b.
The availability of equity take-out refinancing for Starrett City as a result of the
legislative amendment made it possible for the MGP to anticipate a significant equity
distribution to its limited partners. The December 2009 refinancing, now economically feasible,
followed.
The Mitchell-Lama Program
Mitchell-Lama is a New York housing subsidy program to promote the building and
maintenance of affordable housing for moderate and middle-income residents. The program was
created in 1955 with the enactment of the Limited Profit Housing Companies Act, sponsored by
State Senator MacNeil Mitchell and Assemblyman Alfred Lama. Mitchell-Lama is codified as
Article Il of New York’s Private Housing Finance Law. “Limited-profit housing companies”
formed pursuant to Mitchell-Lama are provided with certain benefits, including an exemption
from real property taxes and eligibility for low interest mortgage loans. In return, the statute
requires limited-profit housing companies to accept various restrictions, including limitations on
profits, indebtedness, rents and tenant income.
After 20 years from a project’s initial occupancy, a limited-profit housing company may
voluntarily dissolve and leave the program. PHFL §35. As noted above, in connection with the
December 2009 refinancing, SCI agreed to continue in the program for an additional 30 years.
Until 2012, the program was regulated and monitored by the New York State Division of
Housing and Community Renewal (“DHCR”). The program is now under the supervision of its
successor agency New York State Homes & Community Renewal (“HCR”).WARNER PARTNERS, P.C. Hon. Shirley Werner Kornreich
April 4, 2014
Page 3
Section 236
The Section 236 program, enacted by Congress as part of the Housing and Urban
Development Act of 1968 (codified at 12 U.S.C. §1715z-1), authorizes the government to
subsidize the debt service costs on covered projects for loans taken for the development and
maintenance of affordable housing. The subsidies came in the form of “Interest Reduction
Payments” (“IRP”) made by HUD to the mortgage holder. Participation in the program
effectively reduces the mortgagee’s interest rate to 1%, since HUD pays the balance to the lender
pursuant to an Agreement for Interest Reduction Payments (“IRP Agreement”).
Depending on the income level of the tenants some projects in the Mitchell-Lama
program do not need or receive any other subsidies beyond what Mitchell-Lama provides.
Others, including Starrett City, whose tenants have a wide-range of income-levels, needed and
obtained additional subsidies under Section 236 (and its RAP program) and Section 8 (and its
HAP program), all of which were overseen by the federal government through HUD.
1. The HFA Mortgage and Interest Reduction Payments. In the 1970’s, Starrett
City’s owners obtained three separate mortgages from HFA, which were eventually consolidated
at $362,720,000 at an interest rate of 8.5% for a term of 40 years (“the HFA mortgage”). In
conjunction with these mortgages, Starrett City’s owners (by assignment) and HUD entered into
an IRP Agreement by which HUD agreed to make payments on behalf of Starrett City’s owners
to the lender (HFA) to reduce the effective interest rate to 1%.
Under the Section 236 program HUD establishes two sets of rents: (1) a “market rent”
which was not based on actual market rent levels but rather was based on the rents needed to pay
operating expenses and debt service on the actual mortgage obtained, and (2) a “basic rent,”
which is based on the rents needed to pay operating expenses and debt service on the mortgage at
a 1% interest rate. Under the Section 236 program, each tenant pays the greater of the basic rent
or 30% of his/her income, but in no case would rent payments exceed the market rent. The
Section 236 rent structure is intended to provide the owner with sufficient rent to cover operating
costs and debt service while maintaining affordability for the tenants.
2. Decoupling. By the late 1990’s the 20-year prepayment prohibition period (i.e., no
prepayment of an affordable housing mortgage for the first 20 years of operation) applicable to
many Section 236 mortgages had expired or would soon expire. As a result, in 1999, in an effort
to encourage owners to continue to maintain Section 236 projects as affordable housing,
Congress amended Section 236(e) of the National Housing Act to permit project owners to
maintain their Section 236 assistance even after a mortgage is refinanced in exchange for the
owner’s agreement to maintain the project as an affordable housing project for the duration of
the Section 236 assistance plus an additional five year period. 12 U.S.C. §1715z-1(e)(2). HUD
called this arrangement “decoupling” because it “uncoupled” mortgage subsidies from an
original mortgage and allowed the subsidies to be applied against a subsequent mortgage. See
HUD Notice H00-8 (May 16, 2000) at 3. Under the decoupling process, any money that had
previously been allocated to fund a project’s IRP Agreement that remained unused at the time of|
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WARNER PARTNERS, P.C. Hon. Shirley Werner Kornreich
April 4, 2014
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the refinancing could be used to reduce the effective interest rate on a new mortgage. At the
time of the December 2009 refinancing, Starrett entered into a new contract which continued its
IRP until 2020.
3. The Rental Assistance Program (RAP). RAP is codified at 12 U.S.C. §1715z-
1(f)(2). It was created as part of the Housing and Community Development Act of 1974 to
provide project based assistance to very low income tenants residing in Section 236 housing
projects. Due to rising operating costs at Section 236 projects, many low income tenants could
no longer afford even the basic rents specified by the Section 236 program. Under RAP (as
subsequently amended), participating households are required to pay the greater of 10% of their
gross annual income or 30% of their adjusted income towards rent. SCI entered into a RAP
contract with HUD on February 18, 1976. The contract’s term lasted “until the termination or
maturity of the mortgage on the Project ... or 40 years from the date of the first Rental Assistance
Payment made hereunder, whichever occurs first.” Bates No. GS00001443. Absent a
determination of need by HUD, RAP subsidies were limited to 20% of the total units of a
project. SCI subsequently obtained such a determination, and by the time of the December 2009
refinancing the RAP contract covered more than 40% of the units at Starrett City.
Section 8
The Section 8 housing program was enacted in 1974.
1. Section 8 Project-Based Assistance (HAP). Under the Section 8 program the federal
government subsidizes the rental payments for low-income housing tenants. Pursuant to the
Section 8 program, an owner could enter into a HAP Contract with HUD under which the owner
agrees to rent the subject apartments to low-income tenants, and HUD provides rent subsidies
equal to the difference between the tenant’s rent contribution (generally 30% of adjusted income)
and the HUD-approved contract rent. HUD Contract payments are administered by the local
Public Housing Authority (“PHA”), which in the case of the Project is the HFA. In 1981, the
Project entered into its first 15-year HAP contract with HUD, which covered 3,343 units in
Starrett City. GS00001447. After its expiration, the HAP contract was renewed on an annual
basis.
2. Mark Up to Market Program (MUTM). In 1997, as a result of the expiration of
many project-based assistance contracts throughout the country, and the desire of for-profit
owners to opt-out of the subsidized housing market, Congress enacted legislation which
permitted HUD to enter into “Mark Up to Market” HAP Contracts with market-comparable
rents, as determined in a rent comparison study. See Multifamily Assisted Housing Reform and
Affordability Act of 1997, Section 524, et seg.(42 USC §1437f, note). The resulting higher
MUTM rents that the Owner can charge are subsidized by HUD.
As a result of lobbying efforts by SCA’s MGP, Senator Schumer sponsored federal
legislation, included in the Housing and Economic Recovery Act of 2008, which made the
Project eligible to join the MUTM program. As part of the December 2009 refinancing, Starrett"WARNER PARTNERS, P.C. Hon. Shirley Werner Kornreich
April 4, 2014
Page 5
City’s HAP and RAP contracts were replaced with a new HAP Section 8 MUTM contract,
covering all 3,569 units that had been receiving HAP or RAP assistance. Poll Deposition Ex.
219 at 8. The MUTM contract is administered by the New York State Housing Trust Fund and
CGI, its contractor.
3. Enhanced Section 8 Vouchers. Congress has authorized enhanced Section 8 vouchers
(sometimes called “sticky” vouchers) to assist tenants who would otherwise face rent increases
as a result of the prepayment of a subsidized mortgage or an owner’s decision to opt out of the
project-based Section 8 program. Tenants who receive enhanced vouchers generally pay a rent
contribution equal to 30% of adjusted income, and HUD pays the difference between the tenant’s
rent contribution and the rent charged by the owner, which may not exceed a market comparable
rent. Asa result of the prepayment of the Project’s Section 236 mortgage, certain tenants at the
Project receive enhanced vouchers, thus enabling them to remain living at Starrett City despite
(potentially unaffordable) increases in the rent charged for their units.
Respectfully,
WARNER PARTNERS, P.C.
Attorneys for All Defendants (except
Carol Gram Deane and Spring Creek Plaza LLC)
By: K pers E. (oarren
Kenneth E. Warner
NEWMAN & GREENBERG LLP
Attorneys for Carol Gram Deane
Richard A. Greenberg
FOLEY & LARDNER LLP
Attorneys for Spring Creek Plaza LLC
Peter N. Wang, Esq.
Jonathan H. Friedman, Esq.
ce: All Counsel of Record (via e-filing)
Preview
WARNER PARTNERS, P.C. ATTORNEYS AT LAW 950 THIRD AVENUE NEW YORK, NEW YORK 10022 TELEPHONE (212) 593-8000 TELECOPIER (212) 593-9058, April 4, 2014 Hon. Shirley Werner Kornreich Justice | Supreme Court, New York County 60 Centre Street New York, New York 10007 Re: Rudman et ano. v. Deane et al.; Index No. 650159/10 | Dear Justice Kornreich: We write in response to the Court’s order, dated March 28, 2014, requesting that the parties provide additional information with respect to certain “affordable housing programs or | subsidies” mentioned in defendants’ motion for summary judgment. Background Starrett City — consisting of 5,881 affordable housing units — is legally owned by Starrett City, Inc. (“SCI”), a limited-profit housing company formed in 1972 pursuant to the Mitchell- Lama program. Starrett City’s beneficial owner is Starrett City Associates LP (“SCA”), of which SCI is a general partner. From its inception in the 1970’s, Starrett City (the “Project”) has participated in various affordable (i.e., subsidized) housing programs administered by New York State and the federal government. The principal programs are Mitchell-Lama (NY PHFL, Article 2), Section 236 of the National Housing Act (12 U.S.C. §1715z-1) (“Section 236”) and Section 8 of the United States Housing Act of 1937 (42 U.S.C. §1437f) (“Section 8”). Until the December 2009 refinancing, Starrett City was financed by a mortgage held by the New York State Housing Finance Agency (“HFA”), with the interest payments partly subsidized by the United States Department of Housing and Urban Development (“HUD”) pursuant to Section 236. At the time of the 2009 refinancing at issue in this case, all of the Project’s 5,881 units were subject to the New York Mitchell-Lama and the federal Section 236 programs. Among those units, 1,031 also received project-based assistance pursuant to a Section 8 Housing Assistance Payment (“HAP”) contract, and 2,538 also received project-based assistance pursuant to a Section 236 Rental Assistance Payment (“RAP”) contract. Poll Deposition Ex. 219 at 2. One of the significant restrictions imposed by Mitchell-Lama is that a project owner cannot refinance its project for any more than the actual project cost. PHFL §21. This restriction had the practical effect of making it impossible for Mitchell-Lama project owners toWARNER PARTNERS, P.C. Hon. Shirley Werner Kornreich April 4, 2014 Page 2 take out the increased equity value of their property by a refinancing and remain within the program; they could only do that by selling the property or by “privatizing” the project (i.e., removing it from the restrictions and subsidies of Mitchell-Lama). The Memorandum of Understanding (“MOU”) between SCI and multiple government agencies dated May 2008 and renewed in October 2008 addressed only a sale. SCI also had outstanding a written notice of its (alternate) intention to privatize. In 2009, after the collapse of the sale process, the Managing General Partner (“MGP”) of SCA had discussions with government officials concerning the feasibility of a refinancing transaction. Also in 2009, the MGP began an intensive lobbying campaign to convince the Legislature to amend Mitchell-Lama to permit an equity takeout in the event of a “preservation” refinancing (i.e., a refinancing for a project that remained under Mitchell-Lama, thereby “preserving” the property as affordable housing). As a result of those lobbying efforts, the Legislature amended Mitchell-Lama in July 2009, permitting Starrett City for the first time to obtain financing in excess of the project costs. Under the terms of the amendment, SCI was required inter alia to commit to remain subject to Mitchell-Lama’s restrictions for a period of at least 30 years. PHFL §22-b. The availability of equity take-out refinancing for Starrett City as a result of the legislative amendment made it possible for the MGP to anticipate a significant equity distribution to its limited partners. The December 2009 refinancing, now economically feasible, followed. The Mitchell-Lama Program Mitchell-Lama is a New York housing subsidy program to promote the building and maintenance of affordable housing for moderate and middle-income residents. The program was created in 1955 with the enactment of the Limited Profit Housing Companies Act, sponsored by State Senator MacNeil Mitchell and Assemblyman Alfred Lama. Mitchell-Lama is codified as Article Il of New York’s Private Housing Finance Law. “Limited-profit housing companies” formed pursuant to Mitchell-Lama are provided with certain benefits, including an exemption from real property taxes and eligibility for low interest mortgage loans. In return, the statute requires limited-profit housing companies to accept various restrictions, including limitations on profits, indebtedness, rents and tenant income. After 20 years from a project’s initial occupancy, a limited-profit housing company may voluntarily dissolve and leave the program. PHFL §35. As noted above, in connection with the December 2009 refinancing, SCI agreed to continue in the program for an additional 30 years. Until 2012, the program was regulated and monitored by the New York State Division of Housing and Community Renewal (“DHCR”). The program is now under the supervision of its successor agency New York State Homes & Community Renewal (“HCR”).WARNER PARTNERS, P.C. Hon. Shirley Werner Kornreich April 4, 2014 Page 3 Section 236 The Section 236 program, enacted by Congress as part of the Housing and Urban Development Act of 1968 (codified at 12 U.S.C. §1715z-1), authorizes the government to subsidize the debt service costs on covered projects for loans taken for the development and maintenance of affordable housing. The subsidies came in the form of “Interest Reduction Payments” (“IRP”) made by HUD to the mortgage holder. Participation in the program effectively reduces the mortgagee’s interest rate to 1%, since HUD pays the balance to the lender pursuant to an Agreement for Interest Reduction Payments (“IRP Agreement”). Depending on the income level of the tenants some projects in the Mitchell-Lama program do not need or receive any other subsidies beyond what Mitchell-Lama provides. Others, including Starrett City, whose tenants have a wide-range of income-levels, needed and obtained additional subsidies under Section 236 (and its RAP program) and Section 8 (and its HAP program), all of which were overseen by the federal government through HUD. 1. The HFA Mortgage and Interest Reduction Payments. In the 1970’s, Starrett City’s owners obtained three separate mortgages from HFA, which were eventually consolidated at $362,720,000 at an interest rate of 8.5% for a term of 40 years (“the HFA mortgage”). In conjunction with these mortgages, Starrett City’s owners (by assignment) and HUD entered into an IRP Agreement by which HUD agreed to make payments on behalf of Starrett City’s owners to the lender (HFA) to reduce the effective interest rate to 1%. Under the Section 236 program HUD establishes two sets of rents: (1) a “market rent” which was not based on actual market rent levels but rather was based on the rents needed to pay operating expenses and debt service on the actual mortgage obtained, and (2) a “basic rent,” which is based on the rents needed to pay operating expenses and debt service on the mortgage at a 1% interest rate. Under the Section 236 program, each tenant pays the greater of the basic rent or 30% of his/her income, but in no case would rent payments exceed the market rent. The Section 236 rent structure is intended to provide the owner with sufficient rent to cover operating costs and debt service while maintaining affordability for the tenants. 2. Decoupling. By the late 1990’s the 20-year prepayment prohibition period (i.e., no prepayment of an affordable housing mortgage for the first 20 years of operation) applicable to many Section 236 mortgages had expired or would soon expire. As a result, in 1999, in an effort to encourage owners to continue to maintain Section 236 projects as affordable housing, Congress amended Section 236(e) of the National Housing Act to permit project owners to maintain their Section 236 assistance even after a mortgage is refinanced in exchange for the owner’s agreement to maintain the project as an affordable housing project for the duration of the Section 236 assistance plus an additional five year period. 12 U.S.C. §1715z-1(e)(2). HUD called this arrangement “decoupling” because it “uncoupled” mortgage subsidies from an original mortgage and allowed the subsidies to be applied against a subsequent mortgage. See HUD Notice H00-8 (May 16, 2000) at 3. Under the decoupling process, any money that had previously been allocated to fund a project’s IRP Agreement that remained unused at the time of| | | | | | | | | | WARNER PARTNERS, P.C. Hon. Shirley Werner Kornreich April 4, 2014 Page 4 the refinancing could be used to reduce the effective interest rate on a new mortgage. At the time of the December 2009 refinancing, Starrett entered into a new contract which continued its IRP until 2020. 3. The Rental Assistance Program (RAP). RAP is codified at 12 U.S.C. §1715z- 1(f)(2). It was created as part of the Housing and Community Development Act of 1974 to provide project based assistance to very low income tenants residing in Section 236 housing projects. Due to rising operating costs at Section 236 projects, many low income tenants could no longer afford even the basic rents specified by the Section 236 program. Under RAP (as subsequently amended), participating households are required to pay the greater of 10% of their gross annual income or 30% of their adjusted income towards rent. SCI entered into a RAP contract with HUD on February 18, 1976. The contract’s term lasted “until the termination or maturity of the mortgage on the Project ... or 40 years from the date of the first Rental Assistance Payment made hereunder, whichever occurs first.” Bates No. GS00001443. Absent a determination of need by HUD, RAP subsidies were limited to 20% of the total units of a project. SCI subsequently obtained such a determination, and by the time of the December 2009 refinancing the RAP contract covered more than 40% of the units at Starrett City. Section 8 The Section 8 housing program was enacted in 1974. 1. Section 8 Project-Based Assistance (HAP). Under the Section 8 program the federal government subsidizes the rental payments for low-income housing tenants. Pursuant to the Section 8 program, an owner could enter into a HAP Contract with HUD under which the owner agrees to rent the subject apartments to low-income tenants, and HUD provides rent subsidies equal to the difference between the tenant’s rent contribution (generally 30% of adjusted income) and the HUD-approved contract rent. HUD Contract payments are administered by the local Public Housing Authority (“PHA”), which in the case of the Project is the HFA. In 1981, the Project entered into its first 15-year HAP contract with HUD, which covered 3,343 units in Starrett City. GS00001447. After its expiration, the HAP contract was renewed on an annual basis. 2. Mark Up to Market Program (MUTM). In 1997, as a result of the expiration of many project-based assistance contracts throughout the country, and the desire of for-profit owners to opt-out of the subsidized housing market, Congress enacted legislation which permitted HUD to enter into “Mark Up to Market” HAP Contracts with market-comparable rents, as determined in a rent comparison study. See Multifamily Assisted Housing Reform and Affordability Act of 1997, Section 524, et seg.(42 USC §1437f, note). The resulting higher MUTM rents that the Owner can charge are subsidized by HUD. As a result of lobbying efforts by SCA’s MGP, Senator Schumer sponsored federal legislation, included in the Housing and Economic Recovery Act of 2008, which made the Project eligible to join the MUTM program. As part of the December 2009 refinancing, Starrett"WARNER PARTNERS, P.C. Hon. Shirley Werner Kornreich April 4, 2014 Page 5 City’s HAP and RAP contracts were replaced with a new HAP Section 8 MUTM contract, covering all 3,569 units that had been receiving HAP or RAP assistance. Poll Deposition Ex. 219 at 8. The MUTM contract is administered by the New York State Housing Trust Fund and CGI, its contractor. 3. Enhanced Section 8 Vouchers. Congress has authorized enhanced Section 8 vouchers (sometimes called “sticky” vouchers) to assist tenants who would otherwise face rent increases as a result of the prepayment of a subsidized mortgage or an owner’s decision to opt out of the project-based Section 8 program. Tenants who receive enhanced vouchers generally pay a rent contribution equal to 30% of adjusted income, and HUD pays the difference between the tenant’s rent contribution and the rent charged by the owner, which may not exceed a market comparable rent. Asa result of the prepayment of the Project’s Section 236 mortgage, certain tenants at the Project receive enhanced vouchers, thus enabling them to remain living at Starrett City despite (potentially unaffordable) increases in the rent charged for their units. Respectfully, WARNER PARTNERS, P.C. Attorneys for All Defendants (except Carol Gram Deane and Spring Creek Plaza LLC) By: K pers E. (oarren Kenneth E. Warner NEWMAN & GREENBERG LLP Attorneys for Carol Gram Deane Richard A. Greenberg FOLEY & LARDNER LLP Attorneys for Spring Creek Plaza LLC Peter N. Wang, Esq. Jonathan H. Friedman, Esq. ce: All Counsel of Record (via e-filing)