Under an agreement reached this week, Island House tenants are to  become the owners of their apartments – and their building – by sometime next year.

"Oh, man – ecstatic!" was the way Dorothy Davis, Chair of the Island House Tenants Association (IHTA), described her reaction to the Letter of Intent worked out between the building’s owners and the Board she heads. That was Wednesday afternoon; Wednesday night, in a meeting that stretched to three and a half hours, Davis and members of the IHTA Board described the agreement to tenants, then responded to their questions.

Essential points of the Letter of Intent (LOI):

• IHTA will acquire Island House for $200 per square foot. That puts the price at $81.1 million for the "405,660 square feet contained in the apartments... subject to the normal adjustments for an apartment house sale."
   

• Tenants who opt not to buy their apartments will retain them as rentals, with restrictions on rent increases.
   

• The owners will change management (of both Island House and Westview) "to a well known company experienced in conversions." As a practical matter, this means that Blackwell Management, the management firm created as a partnership between Island House’s owners and the Sheldrake Organization, will be replaced by the end of February.
   

• The building comes "as is," making IHTA responsible for determining necessary repairs and providing for them financially.
   

• The LOI creates an exclusive seller-buyer relationship between the owners and IHTA that ends only with failure to complete the deal, but is to become a "definitive and binding Purchase and Sale agreement" 60 days after taxes and ground rent are determined, "but in no event later than April 30, 2006."

This provision, with others, puts the deal on a tightly scheduled fast track. The combination of the April 30 deadline for a Purchase and Sale agreement, along with other deadlines listed in the LOI, means the transfer of ownership is to be completed before the end of 2007.

The plan protects renters. During the period between withdrawal from the State’s Mitchell-Lama affordable-housing program (about July 1) and completion of a sale, rent increases to existing tenants will be limited:

• Tenants with incomes below Area Median Income (AMI) will get one-year lease renewals with increases limited to those allowed by the City’s Rent Stabilization Board.
   

• Tenants with incomes falling between the AMI and double the AMI will get increases two percent over the stabilization guidelines.
   

• Tenants with income more than double the AMI will get increases five percent over the guidelines.

These same provisions on annual increases will apply, after execution of the Purchase and Sale agreement, to residents who stay as renters.

But apartments that are vacant when the building leaves Mitchell-Lama "will be rented at market rates." These empty apartments – currently 32, according to figures given at Wednesday night’s meeting – will be sold at market prices if the IHTA is successful in its plan to acquire the building. They were described as an important source of immediate income for the building once it is owned by its residents’ corporation.

Apartment Prices

The Letter of Intent leaves open the question of whether Island House will become a condominium or a cooperative.

• Appraisals are to be used to determine apartment prices. The LOI contains language requiring "that all tenants are treated equitably. Accordingly, this Letter is conditioned on the Purchaser commencing a tenant-sponsored, non-eviction offering to the tenants... which must contain" specific elements, including:

• The price of each apartment "will be based on the reasonable relationship of the space in each apartment and its location to the total purchase price of the property as recommended by an independent appraiser, which appraisal is to be used by [IHTA] in the allocation" of shares in the building. At Wednesday night’s meeting, a member of the IHTA Board, Lee Edelman, explained that this means apartments will vary in price according to such factors as height, view, proximity to amenities, and other determinants of value. Presumably, that allocation of shares will also have a direct bearing on monthly "carrying charges," commonly referred to as "maintenance."

The signing of the Letter of Intent gives IHTA standing to negotiate future ground rent with the Roosevelt Island Operating Corporation (RIOC), and future taxes (or Payments In Lieu Of Taxes, known as PILOT payments) with tax authorities. Those amounts are critical to the determination of an overall cost of ownership and therefore the viability of the deal. RIOC may require, in addition to ground rent, some "transfer fee" – a cut of the sale price – on sales of apartments – either all future sales, or just the first sale. It is also likely that the final plan for funding the purchase and maintenance of the building will require that resident sellers pay a transfer fee to the building. (Such transfer fees are also contemplated in discussions of removal of the Rivercross cooperative from the Mitchell-Lama program.)

Wednesday night’s meeting in which the LOI was presented to Island House tenants occasionally became contentious during the Q&A period that followed formal presentations by IHTA Board members, but the general mood was near celebratory, mostly tempered only by the momentousness of tenants reaching this watershed moment in which resident ownership appears finally to be within reach.

In fact, IHTA Chair Dorothy Davis began the session by recognizing the contribution of earlier incarnations of groups working toward resident ownership, such as the Island House Ownership Committee (IHOC) and the previous IHTA Board, which resigned when new bylaws imposed conditions they felt would impede their work. Davis asked them to stand, and each group was applauded.

Members of the Board paid tribute to IHTA’s attorney, Stuart Saft (who also represents Rivercross in its privatization effort), saying his experience and contacts for mortgage funding had been instrumental in allowing IHTA to commit to the deal described in the LOI.

In describing the $200 per square foot deal, IHTA Board member Lee Edelman hastened to point out to residents that, "The cost to you will not be $200 per square foot. We’re taking the building as is, so you won’t get the $200 price." He went on to describe other factors that will make buyers’ figures higher, or possibly lower – such as the appraisals and, as he put it, "We are going to have to bear the cost of purchasing the apartments that people don’t buy." But those apartments will be sold at market prices, he said, "near $450 per square foot. That can add some $15 million to the pool for helping us with these other expenses." Those other expenses, Board members emphasized, include catching up on deferred maintenance.

Edelman pointed out that "much depends on the ‘subscription rate,’" that is, how many tenants become buyers, what the cost of common areas will be, and other factors. He said, "I would hope that we can bring this in between $225 and $250 per square foot [for tenants who buy], but that depends on the taxes and the ground rent."

Edelman said, "We felt a need to get this pinned down," adding that the IHTA Board moved quickly "to box out any possibility that Sheldrake would come back into the picture."

But Attorney Stuart Saft told the gathered tenants, "Sheldrake is still taking the position that they have a valid contract. Last night, I received a call from Sheldrake’s lawyer saying that if tenants attempted to stand in the way of the transaction, Sheldrake would sue the tenants. I said to him, ‘So you’re telling me that you will sue the tenants for trying to enforce a 1972 agreement, and the basis is that you’re trying to abrogate an agreement made long before you ever saw the property.’" Saft was referring to a 1972 letter giving tenants a right of first refusal in purchasing Island House. "It was very depressing to have this discussion," Saft said.

In reviewing the immediate past history of IHTA negotiations, Saft reminded tenants attending the meeting that in November, it appeared the Sheldrake Organization was about to close an acquisition deal. (Indeed, based on Saft’s appraisal of the situation, the December 3 headline in The Main Street WIRE was, "Sheldrake to Be Sole Owner of Island House and Westview." A subsidiary headline added, "Tenant Groups Left With Fewer Options, More Time Pressure.")

"We can’t expect that Sheldrake is just going to disappear," Saft added.

When questioned on Thursday, a Sheldrake spokesman voiced a terse, "No comment," after conferring with top officers of Sheldrake, later adding, "I cannot confirm that such a statement was made to Mr. Saft by any representative of Sheldrake. Beyond that we have no further comment."

On a positive note, Saft said, "We all think the price is an excellent price, considering the market."

From Board Chair Davis, attorney Saft, other Board members, and some tenants, there were calls for unity. Davis pointed out that potential lenders will be alert to signs of disunity within the building, or will be looking for a united front. That’s likely to be true of government bodies, as well. Elizabeth Blair, a former Board member who resigned from the current Board, backed the Board’s choice of Stuart Saft as attorney, and urged residents, "Before you do anything crazy – any group in this building – you better be sure you find another lawyer." She said Saft’s rate of $425 an hour is about 40 percent less than other possible attorneys who specialize in Mitchell-Lama buyouts. "You cannot get a better lawyer than Stuart Saft," she said.

"Back up this Board, as crazy as they are," Blair said.

During the Q&A session, Tim Johns, a longtime resident who labored for years on the Island House Ownership Committee (IHOC), suggested that residents avoid focusing on possible deal configurations that were discussed in the past. "We have to move forward from this agreement. We all have our histories. We’ve all made mistakes. This is a devilish process. I think this LOI is great news, but one needs to bear in mind the financial impact that the cost of ownership will have on every one of us, if we can afford to buy." He added, "This is probably the best deal possible. It is so far better than the deals being discussed before that, all I can say is it’s great news if we can work it. A lot will depend on the subscription (buying) level and the number who can afford it. But for once, there is something reasonable to work on and there is a failsafe if the agreement goes through." But Johns added that he is worried about the tight timeframe; he pointed out that the government entities involved – RIOC, the State Division of Housing and Community Renewal (DHCR), and the Empire State Development Corporation (ESDC) do not always move as rapidly as citizens might like.

The calls for unity notwithstanding, the current IHTA Board was criticized during the Q&A period for excessive secrecy, which brought an explanation that distribution of copies of the LOI was delayed based on an insistence by Charles Lucido, representing the owners, that it not be distributed widely so that it would not be seen by representatives of the Sheldrake Organization. (The plan had been to have Board members hold copies, which could be reviewed by tenants.) Permission to distribute it wasn’t given until Wednesday, Saft said.

The Letter of Intent calls for a media blackout. "Prior to the execution of the Purchase and Sale Agreement, neither Purchaser nor Seller shall issue any Press Releases or similar material with regard to this Letter without the prior approval of the other party to this Letter nor shall either party discuss this Agreement with any media representative and Purchaser shall so instruct its Board members and all other members."