RIOC Board Considers Conflicts in Affordable Housing vs. Revenue Need

by Dick Lutz

What should the priority be as the Roosevelt Island Operating Corporation (RIOC) goes about parceling out the Island's remaining land for development, and negotiating with current apartment-building owners for future ground rents? Should it be to maximize RIOC revenue? Or to keep housing affordable for current residents?

Two weeks ago, members of the RIOC Board confronted that question, briefly. It came up during discussion of changes in the real-estate consulting contract of Paul Mas of Jones, Lang, LaSalle, but also touched on an impending State law, the Public Authorities Accountability Act - which itself was brought on by the MTA's attempt to sell development rights over Manhattan's West Side railyards at a price perceived to be much lower than market-rate.

Governor George Pataki is expected to sign the bill, which will require State entities like RIOC to get best value for assets. But that legal requirement could present a conflict with Roosevelt Island's affordable-housing charter, or could make it difficult for RIOC to give rent-free space to the Youth Program (which wants the former Lilies School), the Visual Arts Association (which occupies the former Bigelow Pharmacy space), or other non-profits.

The substantive matter under discussion was a reconfiguration of commissions on real-estate deals to make it practical for Mas to switch part of ground-rent payments into deductible tax payments, to the potential advantage of owner-developers and therefore, at least potentially, to the advantage of RIOC's bottom line.

Here are excerpts from the discussion, only slightly abridged (the uncut version is available on Website NYC10044 at nyc10044.com). It started with a question to RIOC attorney Kenneth Leitner by resident Board member Mark Ponton:

"Ken, when you and I talked this afternoon, I thought from reading this that there might be a conflict of interest. It says that Jones, Lang, LaSalle is going to be compensated by the amount of money they bring to RIOC. The more money that the ground lease brings in, the more Jones, Lang, LaSalle gets paid. [It] seems to me, though, that the issue is, what is RIOC here for? Is RIOC here to perpetuate affordable housing, or to get the most money for the property they have? If they're in the business of getting the most money for the property they have, there's no conflict. If they're in the business of providing low-cost housing, or affordable housing, then there is a conflict because the idea would be to drive the cost of the ground lease down to nothing, and therefore ask little if anything of the residents.

"Ken explained to me that there [is] no issue because, even if RIOC is trying to drive the cost as high as they can get it, the General Development Plan (GDP) income requirements impose a natural limitation.

"The problem I have with that is two-fold. Number one, the GDP can be amended at will, and we have proven that just by calling City Hall and saying, 'Change the numbers.' The second thing is that if the GDP is going to be the outline, then we really don't need a consultant because the plan itself tells you, 'You're going to pay this, your income can't be that. Now have I adequately explained that or have I not?'"

While Leitner's brief response was unintelligible because he was speaking off-mike, resident Board member Deborah Beck raised the same question, stating it another way:

"Could I ask [Board chair] Mary Beth [Labate] a question? There has been discussion of late as to the fiduciary responsibility of public authorities to bring in the highest and best value for the State. That is a fiduciary obligation of [this] Board. The Board also recognizes and desires that Roosevelt Island remain affordable for the vast majority of people now or who might come in the future. Those two things are somewhat in conflict, and I think that what Mark is trying to do is put a great light between those two things, and I don't know that it's really possible to do that, because of those conflicting obligations of the Board. We have to be judicious in what we do, but I think we're trying to bring in revenue to the Island as much as possible to insure that the Island be brought back to [a] high standard of maintenance level and that, as we did with our $4 million for Southpoint, [we] increase the quality of life for residents and possibly for visitors. But that takes money, and if our goal is [also] to create the lowest possible cost for the residents of the Island to live here, those two goals are in conflict. You have to find some middle ground and there isn't one clear answer or another clear answer."

Before Labate could respond (she was also inaudible, off-mike at the time) John Mannix stated his version of the same question:

"A law has been passed by the Legislature, but not yet signed by the governor, which requires directors of public authorities to maximize the value of any asset they dispose of - real estate or otherwise. This is on the heels of the MTA fiasco with the West Side stadium. That creates a real conflict for those of us on the Board who understand what the development plan says and understand what the spirit of the Board is with respect to affordable housing. A light should be on it because we are in the middle of negotiations where we will be disposing of corporation property, through these [apartment-building] leaseholds, at less than market-rate prices in order to accommodate those people whose incomes don't support market-rate prices. So we are smack-dab in the middle of a very serious conflict with respect to those negotiations at the moment. I'd like to get some clarity on it. This is a law. This isn't something that can be interpreted. Assuming it gets signed by the governor, as I suspect it will by January 1st, we don't have a choice. You're talking about breaking the law if we vote through a deal that doesn't maximize value, and I think we somehow have to come to terms with that sooner rather than later."

Resident Board member Patrick Stewart: "We have Southtown [the new residential buildings south of Blackwell House], Northtown [Phase One, consisting of Westview, Island House, Rivercross, and Eastwood, often called "the WIRE buildings" because of their initials], which I like to call 'old town,' we have Manhattan Park, and we will soon have Octagon. That's really four separate entities, probably four separate communities. The people in 'old town' are the people who mostly came here under Mitchell-Lama laws and practices, in good faith. My own personal opinion is that, in terms of the Board keeping good faith with the community, the good faith lies with the people who are here now, mostly in 'old town,' under Mitchell-Lama. Now, I understand the law, and I understand going out of Mitchell-Lama and all those things, but as a moral concept, if you will, I think that the people who are here now deserve first dibs. They need to be protected any way we can possibly protect them. The rest of it is a whole 'nother ballgame, and we have been treating it as a whole 'nother ballgame. What I'm interested in is that the corporation profits and, if the corporation profits, and [when it does], so does the community."

Board chair Mary Beth Labate (who announced her departure from the Board this week; see page 3) responded, partly inaudible. In what follows, her apparent intent has been filled in: "The law the Governor will soon sign may determine our ability to insure those protections. I need to remind all of us that this Board has laid out some very clear principles about our commitment to maintaining affordability for low-income residents. Have we said [that for] everyone, regardless of income, we will negotiate something that keeps you in your current status? Absolutely not. That would certainly fly in the face of any fiduciary responsibility that we have to bring in a fair-market value. But this Board has been very clear that we are committed to taking steps to protect the low-income people in those units and, in fact, it's been Paul Mas who has advised us on [how to] structure those deals to allow that to happen. So can there be this conflict of interest? I guess there could if the Board was giving Paul no advice and Paul was working on it as he would any deal in the rest of the world, but this Board has clearly given Paul guidance [and] Paul is the one who has come to the table with very innovative ideas on how to protect the low-income units, and I would point out that those ideas will net Paul no commission. So in theory, could there be a conflict of interest? Perhaps. But I think you have to look at the practice, and I think it's this Board's responsibility, working with Paul, to insure that there is [no conflict].

Mannix: "The world is full of conflicts of interest. The question is whether you take advantage of those conflicts of interest in order to line your own pockets. I can also say that Paul has been leading the charge and has been the architect in those negotiations to make sure that the residents who the Board has said will be protected, are protected."

Beck: "And those residents, by the way, if I understand our conversations correctly, are residents who have incomes of 150% of median income and below, so it's really low-, moderate-, and no-income."

Resident Board member David Kraut then joined the discussion: "The question of conflict of interest is always relevant and germane. The Board has many instances, just as I have them, in building my own house. I want it to be as inexpensive as possible, and I want it to be as safe as possible, and those interests are in conflict, because the more safe a house is, the less inexpensive it is, obviously. And so you reach some kind of point where you balance your interests as well as possible. I see no conflict with that kind of question, in authorizing this resolution [to modify the Jones, Lang contract under which Paul Mas works].

Resident Board member Michael Shinozaki: "This [proposed resolution] is asking for a couple of things - that Paul [can] try to get [ground rent] converted to deductible tax payments, in negotiation with the various taxing authorities. It's [also] asking whether he can renegotiate the money that we can get out of the rest of Southtown so the community can get more money so that we can develop a park, or whatever. But we still have to approve anything he comes up with. This has nothing to do with whether it's going to kill affordable housing or not."

Labate: "Right. The only issue is, do we amend his contract to allow him to represent us on [buildings] 5 through 9 [in Southtown], and if he negotiates tax-like payments [to RIOC] instead of ground rent [payments to RIOC], that those become commissionable. Obviously, it's all revenue that comes to RIOC. Those are the the only two issues before us."

Shinozaki: "Living here, I get stopped at Gristede's and walking down the street, [and] everyone says, we need to look at [buildings] 5 through 9 in Southtown so that we can actually generate revenue. So if he can get more money per square foot for what we get for 5 through 9, that's good for the Island, and that sounds like what he's asking for here, and then, as far as what gets built, we still have the GDP to worry about, so you know, a certain percentage of the overall population of the Island must be affordable housing; the [only remaining] question is, how much should developers have to pay us for the right to build affordable housing here?"

Board chair Mary Beth Labate then called for a vote, and the resolution changing the terms of Paul Mas's compensation passed unanimously. But John Mannix then pursued the issue further:

"I'd just like to add that the real issue of the conflicting obligations really has to be brought to ground as soon as possible, because understanding the mission of the Board and reading that law, I think we're going to have to get some kind of a special waiver or someone's going to have to step in and say that affordable housing does not violate the law, or this Board's going to find itself having to vote on something that might violate the law."

Shinozaki offered a possible resolution of the conflict: "The GDP says a certain percentage of housing must be affordable housing. That's not a question; we need to do that. The [only] question is, how much do we charge the developers for the right to develop housing here? Because they get a certain percentage that is affordable, a certain percentage is market-rate, according to the GDP, and they've got to pay for the right to build here."

Mannix: "Your interpretation would be that, because we're obligated to provide affordable housing, any deal which supports that obligation is fair-market value?"

Shinozaki: "I'm saying that if we have [several] builders that want to build affordable housing, we've got to get the best deal from this - pick the builder that's going to give us the best deal for affordable housing."