NEWS AND ISSUES
January 14, 2009
Dear East Midtown Plaza (EMP) Shareholder:
As you know, I have been a proponent of keeping EMP in the Mitchell-Lama program since the co-op began exploring privatization in 2002. While there is always a strong moral rationale for Mitchell-Lama shareholders to stay in the program, I have long maintained that at EMP there is a strong financial rationale as well. This is certainly true given the generous government support available if EMP stays affordable and the risky nature of the privatization plan.
The very real risks of the privatization plan are only more apparent today in the wake of the stock market collapse, credit crunch and real estate slump. And while the January 2009 New EMP News blares that "Financial Stars Align Over A Private EMP," if we've learned anything from the Bernie Madoff scandal, it's that if it sounds too good to be true, it is.
Nonetheless, the EMP Study Group continues to churn out propaganda on how EMP will thrive under privatization.
Which will you believe – New EMP News or sources like The New York Times and The Wall Street Journal?
New EMP News says "apartment values are still going up in our neighborhood."
But that's not what The New York Times says:
"For those New Yorkers who wondered what the Manhattan real estate market might be like without the ever-rising bonuses of Wall Street's elite, the answer is now emerging: an abrupt decline in transactions, tottering prices and buyers who are still looking but unwilling to sign a contract."
"Striking Declines Seen in Manhattan Real Estate Market,hThe New York Times, January 6, 2009
The Wall Street Journal concurs:
"Manhattan, among the nation's most expensive housing markets, has been largely immune from the national housing downturn. But that's about to change as the area braces for significant price declines in 2009, according to two industry reports scheduled to be released Tuesday."
"Manhattan's Sterling Real-Estate Market Begins to Tarnish," Wall Street Journal, January 6, 2009
New EMP Newsalso says that even though EMP does not yet have a lender secured if it goes private, "Banks are eager to provide EMP with all the money we need."
Really? Here's what The New York Times is saying about bank lending:
"Banks, naturally skittish after this year's mortgage crisis, are tightening their purse strings, and it takes a lot to tug them open."
"The Tighter Loan Market,hThe New York Times, December 3, 2008
And New York real estate magazine The Real Deal tells a similar story:
"Brokers and developers struggled to salvage the sales theyfd already made, as banks tightened lending restrictions and many buyers panicked in the face of uncertainty...And even the most well-qualified buyers are continuing to experience trouble getting financing."
"Residential Market Halts in its Tracks,hThe Real Deal, November 2008
In fact, the January 2009 New EMP News is riddled with attractive fictions about the privatization plan. And you don't need to look in media accounts to find the truth – you just need to look in the Offering Plan.
It's not for nothing that the original Cooperative Offering Plan (Black Book) issued in February 2008 enumerated 28 specials risks (Black Book, pages i-xvi), including the fact that more than 40% of the private coop's income is projected to come from flip taxes, which are by their nature unpredictable and dependent on sale prices and turnover (Black Book, page ix, number 9).
In fact, the First Amendment to EMPfs Cooperative Offering Plan (First Amendment), issued in December 2008, cites among additional special risks the fact that the report on which the projected flip tax revenues are based gis dated August 13, 2008 and reflects values effective as of July 22, 2008. Such dates are prior to the turmoil in the financial, mortgage and housing markets since the beginning of September, 2008cThese conditions have made it much more difficult for purchasers of cooperative apartments to secure financing, created great uncertainly as to the value of residential properties including cooperative apartments, and could have a significant adverse impact upon the value of apartments at East Midtownh (First Amendment, Introduction, pages 26-27).
While the January 2009 New EMP News identifies First Funding Corp. as gthe mortgage broker who will obtain a 30-year mortgage for the co-op,h the First Amendment indicates that based upon a term sheet from First Funding of New York, LLC, EMP anticipates taking out a ten-year $71 million balloon loan and a $6 million revolving line of credit (First Amendment, Introduction, pages 17-20 and Schedule B, pages 11-12). The First Amendment shows that when the two loans totaling $77 million come due in ten years, the private coop would still owe a principal balance of approximately $67 million (First Amendment, Introduction, page 23, number II). That huge debt would have to be refinanced or paid for by those who have not moved elsewhere.
To help pay the debt service on the $77 million in loans (a projected $4.3 million in the first year), as well as real estate taxes from which the Mitchell-Lama cooperative is largely exempt, (a projected $4.2 million in the first year – though it was calculated before the recent 7% hike in New York City real estate taxes), the offering plan anticipates flip tax revenue in the first year of privatization of $8.7 million (First Amendment, Schedule B, page 2). This is slated to come from the sale of 22 apartments with an average sale price of $895,440 per unit (First Amendment, Schedule B, page 3).
However, Corcoran Groupfs latest Manhattan real estate market report found that the number of closed sales in the fourth quarter of 2008 declined by at least 30 percent compared with the fourth quarter a year earlier. Miller Samuel Real Estate Appraisers, which co-wrote a market report with Prudential Douglas Elliman, found that average prices of units that are under contract but havenft yet closed declined 20% since August 2008.
Even if many EMP shareholders are anxious to sell and apartments that are now vacant immediately go on the market, current economic conditions would make it difficult for potential purchasers to obtain mortgage financing from banks. Real estate attorneys may advise their clients against buying into a cooperative with such shaky financials. And if a glut of EMP units went on the market, well-financed buyers would undoubtedly negotiate lower prices.
Meanwhile, New Yorkfs economy is not expected to get better anytime soon, dampening prospects for EMP to generate the needed flip taxes for years to come. According to the January 9, 2009 New York Times item gLong Downturn Predicted in City,h gBarack Obama could be running for re-election by the time New Yorkfs economy is humming again.h
It seems like a scheme designed to fail – except for those early sellers, who in spite the high flip taxes and likely lower-than-anticipated sales prices, might nonetheless realize a windfall profit on their paltry initial investment. Pity the remaining shareholders who would have to pay significantly more or be evicted from their apartments if the Sponsorfs projections donft come to pass.
The EMP Study Group likes to tout the fact that apartment maintenance charges would actually decrease by an average of 27% under the privatization plan. However as special risk #9 in the Black Book says, if the projected flip tax revenue doesnft materialize, the board of the private cooperative could increase maintenance or impose assessments to make up the shortfall (Black Book, page ix). And as special risk #4 says, gNo assurances can be given that other factors will not cause an increase in the monthly maintenance chargesh (Black Book, page iv). So the maintenance decrease, like the flip tax revenue, is pure speculation.
And while the January 2009 New EMP News says gRecessions come and go but home ownership is forever,h that is simply not true. As special risk #6 says, gin the event that a tenant-shareholder fails to pay the maintenance charges such tenant-shareholder will be subject to evictionh (Black Book, page vi). How much can you afford to have maintenance go up before you canft make the payments?
By contrast, there is a government safety net available to EMP if it stays Mitchell-Lama. The offering plan, which seeks to paint the worst possible picture of what would happen if EMP doesnft withdraw, concedes that if EMP stays Mitchell-Lama, the New York City Housing Development Corporation (HDC) would restructure and refinance its existing mortgages at preferential terms; make an outright $7 million grant towards EMPfs projected $20 million in essential capital improvements, and make a $13 million low-interest repair loan to cover the balance (First Amendment, Schedule B-1, page 9).
And while the plan says that gthere is no guaranty or assurance as to the amount of funds available from HDC (as a loan and/or a grant),h in fact, the amount HDC has been willing to offer EMP has consistently increased over the years. It has gone from a $3-4 million grant and a $10 million low-interest loan when the Board first met with HDC at the New York State Attorney Generalfs insistence in fall 2006, to a $6 million grant and potentially a $14 million loan in the Black Book issued in February 2008 (Black Book, pages 84-85), to a $7 million grant and $13 million loan in the First Amendment issued in December 2008. Clearly HDCfs commitment to helping EMP is only growing.
To discourage staying Mitchell-Lama, the offering plan asserts that if EMP fails to withdraw, apartment maintenance charges would increase an average of 21%, but it neglects to detail government incentives available to limited equity housing companies that could reduce, if not eliminate, that increase. These include a New York State Energy Research and Development Authority (NYSERDA) grant of up to $1.2 million towards capital improvements that increase energy efficiency at least 20%, and New York City J-51 tax abatements on capital improvements.
It is true that if EMP stays in the Mitchell-Lama program and remains affordable to middle-class New Yorkers, you will not have the potential to borrow on your apartment, sell your apartment at a profit, or leave your apartment to your children. However, you will still own your apartment, just as you do now, and you will continue to reap the benefits of the Mitchell-Lama program every month by having more cash on hand to save or spend than you would if you lived in a market rate rental or a co-op where you had a mortgage and carrying charges that werenft subsidized.
As the State Senator from New Yorkfs 29th District, it is my responsibility to strongly support what I believe is most financially prudent and in the best interests of you the cooperators, my constituents. It is also my responsibility to help preserve affordable housing for all my current and future constituents.
On January 14, I urge you to think very carefully: Do you really want to risk your home and the homes of your neighbors? The privatization plan is in fact a house of cards. Recent events show what happens when a house of cards collapses. Stay safe. Stay Affordable. Stay Mitchell-Lama.
Thomas K. Duane
New York State Senate