What’s holding up the deals for tenants to become owners in Island House and Westview?

Who’s holding up the deals?

The path to resident ownership is downright simple and obvious – or distressingly complex and obscure – depending on who’s making the judgment.

The downright simple and obvious version is represented by a path that the Island House Tenants Association (IHTA) laid out in a letter of intent (the "LOI," in the shorthand language of the deal): Work out a price, get an engineering report to figure out what repairs are needed and whether those are cause for an adjustment in the price, get a ground-lease extension agreement from RIOC, make a deal on taxes, find mortgage money, and 3, 2, 1, launch – and get most of it done – right up to asking tenants to vote on it – by April 30.

A more complex and difficult version is embodied in a kind of Special Case of Murphy’s Law that seems to apply to anything and everything in New York real estate and is compounded massively when the special situation of Roosevelt Island is involved – the Island being New York City property leased to New York State and managed by appointees of the governor through an authority-like public-benefit corporation with its burden of patronage appointees and political agendas and financial interests that have to be satisfied. And, of course, there’s the further special situation of the buildings, being State-sponsored affordable housing that has come of age and is eligible to leave the Mitchell-Lama program.

But there’s more:

• There’s a lawsuit. The Sheldrake Organization, once steering the deal from the owner side of the sell/buy equation, is now suing the owners.

• And there’s an argument about the Island’s General Development Plan (GDP). Does the GDP somehow prohibit market-rate sales that will come out of any plan in which the buildings move out of the State’s Mitchell-Lama affordable-housing program?

• And then, of course, there’s RIOC – the Roosevelt Island Operating Corporation – and its special relationship with a real-estate agent who has the authority – or may not have the authority – to push the deal along.

By late last week, the deals seemed thoroughly stuck. The April 30 expiration of arrangements in Island House’s LOI, which in January was three whole calendar pages away, was and is suddenly near, a mere handful of days away.

The Sheldrake suit came about when Charles Lucido, who manages the owner partnerships, concluded that Sheldrake had failed to meet contractual deadlines. Sheldrake would become the purchaser of the buildings, the original contracts said, paying $44.5 million for Westview and $49 million for Island House, after getting a ground-lease extension agreement from RIOC by an "initial outside date" of May 30, 2004. Why a ground-lease extension? Because leases on the land under the buildings will expire early in 2028. That’s too short a time to satisfy lender requirements for multi-million-dollar mortgages.

That "initial outside date" could be extended, said the contracts and amendments, in exchange for "extension down payments" by Sheldrake to the sellers – $350,000 for an extension to September 30, 2004, $400,000 for another to March 1, 2005, $750,000 to December 31, 2005, in the case of Island House. There were similar arrangements in the Westview contract.

When Sheldrake missed payments, Lucido considered the deal off. As the language of the contract puts it, "Failure of Purchaser to... timely pay the respective Extension Down Payments... shall constitute defaults by Purchaser." Lucido began discussions on his own deal to sell to the tenants.

In response, Sheldrake filed suit: "The parties all fully recognized that it would be difficult to predict the timing of obtaining the various consents and approvals from the government agencies and lenders... All of the parties involved were aware of the inherent, and unique, difficulties and obstacles at the heart of the transactions... Notably absent from the contracts are any provisions making the closing dates ‘Time of the Essence.’" Sheldrake is asking for damages of $100 million in the suit.

Even though Sheldrake is not suing either tenant group, the lawsuit against the owning partnerships is a sci-fi-size fly in the ointment that could gum up the gears as the tenant groups and the owners try to move toward a deal. Lenders able to provide massive mortgage funding are sure to be reluctant to commit to a purchase that could be derailed in court or held up for years. RIOC has also reportedly cited the suit as a reason for delay.

If the suit is quickly dismissed, Sheldrake will be firmly out of the picture. But IHTA leaders fear that some compromise might be worked out that will bring Sheldrake back into the picture. The alternative – waiting out protracted court proceedings – is also dangerous, in their view: It could make Lucido, who is 72 and would like to retire, antsy to make a sale at a pace that wouldn’t suit careful movement toward resident ownership.

When conversations with the Sheldrake Organization went badly, the Westview tenant organization took an aggressive stance. It advanced the argument that provisions of the Island’s General Development Plan (GDP) – part of the lease between City and State – require specific proportions of affordable housing in Northtown. It calls for this breakdown of housing:

• 20% for persons and families eligible for Federally-assisted public housing;

• 20% for persons and families eligible to benefit [from] section 236 of the National Housing Act;

• 35% for families eligible to occupy limited profit housing financed under Article 2 of the New York State Private Housing Finance Law;

And, most critically, market rate:

• 25% for persons and families who can afford conventionally financed and fully taxpaying units.

The key point in a lawyer letter opposing Sheldrake was that, without a plan to preserve Westview’s contribution to the GDP proportions, a sale to Sheldrake should be disallowed.

State Assemblymember Pete Grannis, who represents Roosevelt Island and has been a determined advocate for residents and their affordable housing here, signed on to that argument. Other politicians backed the position, as well.

A Grannis aide, Tony Morenzi, says, "When you go back to the GDP, there’s no more room [in the equation] for market-rate units." That’s because over 800 units in Manhattan Park rent at market rates. The GDP allowance for market-rate units – 25% – would allow for just over 800. What’s more, Eastwood has now left the Mitchell-Lama program and the landlord intends to rent vacated units to newcomers at market rates. In short, the GDP’s allowance for 25% of Northtown units to be market-rate units has been used up.

"We want all that information on the table so everybody knows what they’re dealing with – so everybody knows what they’re doing," Morenzi told The WIRE on Wednesday. "That’s the unknown factor: What happens after you come out of Mitchell-Lama, in terms of the GDP? We have no answers from RIOC or from DHCR."

Tenant leaders speculate that Grannis has dug in his heels on the issue and put the State Division of Housing and Community Renewal (DHCR) on notice. Its head, Judith Calogero, chairs the RIOC Board of Directors. Asked whether Grannis has pressured Calogero to stall its own or RIOC’s negotiations with tenants, Morenzi says, "We have no control over her." Even so, tenant leaders are convinced that the Westview letter and Grannis’s stance have become a giant shadow over tenant negotiations with RIOC on an extension of the ground leases in a tenant purchase of the buildings.

The attorney for Island House, Stuart Saft, says he can’t understand the worries about the GDP. "If Island House’s deal with Lucido goes through, every single tenant will have the opportunity to buy their apartments or remain as a rental tenant, paying what they’re paying now. The deal doesn’t change the demographics or percentages in any way whatsoever. This has nothing to do with the GDP. We structured the deal so that every solitary tenant could remain in place."

Asked about the potential for the allowed percentage of market-rate apartments to be exceeded by likely market-rate sale of apartments, Saft said, "In order to fund the cost of carrying the apartments of the tenants who aren’t going to buy and want to remain at their current rent, we need to sell 25 vacant apartments at market, which is money that will then be used to fund the shortfall on those other apartments. We are talking about only six percent of the apartments. That doesn’t significantly change the Northtown percentages."

Saft says the position Morenzi outlined "says that we’re not going to let this plan, which allows some 375 tenants to become owners, go through. Come June 30, these 375 will no longer be protected by the Mitchell-Lama law, and I want to know what any public official will [then] do to protect these tenants. I know what I’m doing – I’m attempting to make it possible for them to buy their homes at a reasonable price or be able to continue to rent. But the alternative is that every one of these tenants will have to move come July 1."

Saft continues, "Let’s come up with a solution to this problem. Ignoring it is not the solution. It’s not going to go away. They’re betting on a court determination and there’s no certainty that they’re right. If Tony Morenzi is wrong in his interpretation of the GDP, 375 tenants are out on the street. Their blood is on his hands."

There’s also the problem of decay. The buildings are now a generation old – leaky in places and in general need of repair, updating, and some aggressive upkeep. That work, goes the tenant argument, is not possible under the restrictive provisions governing Mitchell-Lama buildings, but would become possible with income from fees charged against apartments being sold at market prices. Some see "privatization" (the term applied to removal from Mitchell-Lama because building mortgages are then privately held rather than State-backed) as a "save the building" necessity.

In the past, the GDP has been amended by agreements signed by the RIOC president and the City’s mayor. That could happen again – the 25% limit on market-rate housing in Northtown could presumably be increased or swept away with the strokes of two pens. But Morenzi speculates that Mayor Mike Bloomberg, who has been working to increase the City’s stock of affordable housing recently, would be loathe to agree to such a change. Others suggest that Governor George Pataki, who is believed to favor privatization, might be able to persuade the mayor that he should go along with moderate-income tenants wanting to claim their piece of the American home-ownership dream.

Time may be a factor. While Pataki might back any RIOC move to loosen up the 25% market-rate clamp, there’s no guarantee the next governor will do so.

But would anyone take action if market-rate rentals or purchases drove Northtown’s percentage of market-rate units over 25%? How would the GDP provisions be enforced? Since the GDP is a contract between the City and the State, only the City would have contractual standing to sue. Would the City sue if the number reached 26%? Or 27%? Or wait until it reached 30%? Would it seek a restraining order to prevent market-rate rentals of vacated apartments in Eastwood? For the owner of Eastwood, where government funds supplement tenant payments for some 80% of the units, it wouldn’t matter a great deal.

For Island House and Westview tenants attempting to privatize, however, the limits in the GDP – and even a slight potential for legal action against market-rate sales and rentals – could hobble attempts to get the mortgages necessary to buy either building.

In short, it appears a change in the GDP could be necessary to remove legal clouds over any significant number of market-rate sales or rentals at Island House and Westview – and therefore necessary to set the financial table for tenant ownership.

The Roosevelt Island Operating Corporation, in its role as developer and manager of the State’s project here, is also a factor likely to delay privatization efforts past Island House’s end-of-April deadline.

There’s RIOC’s queasiness over setting upon a course that could open the door to litigation, but that’s not all. When negotiating real-estate deals with developers or potential purchasers, RIOC asks those developers to pay RIOC’s legal costs. In a letter to Charles Lucido, RIOC has billed his owner groups for over $32,000 in legal costs the Sheldrake Organization had agreed to pay. RIOC has also asked for an additional $50,000 against which future legal costs will be charged. The Lucido-IHTA letter of intent passes such costs on to the tenant group. With its own legal fees to pay, and no resources to draw on except tenant contributions, Island House isn’t able to raise the $50,000 to support RIOC legal work, leaving aside the question of the short time available and the "blank check" nature of the demand. (Rivercross has also been asked for such funding before RIOC will discuss privatization.)

Saft, the attorney for Island House tenants, told The WIRE on Wednesday, "I’m rather shocked that something that certainly is in the best interests of the Island and the residents in Island House is being held up by the inability of the tenants to pay almost $100,000 before RIOC will even speak to its constituents."

Tenants point out that RIOC has several lawyers on staff, and that RIOC staff is ultimately paid by Island residents. They suggest that RIOC should not be asking tenants to fund work RIOC is in business to do. On Monday, resident RIOC Board member David Kraut agreed to suggest to the RIOC administration that the fees be collectable on the back end of the deal – after mortgage money and other funding for the deal is in place.

Whether RIOC will ultimately accept a deal excusing the owner (and through the owner, the tenants) from an immediate advance payment for legal fees remains an open question as this issue of The WIRE goes to press. So far, RIOC’s negotiators have shown a reluctance to allow the tenants’ attorney to attend discussions without having its own legal representation at the table, and won’t send its attorney to the table without an advance payment. RIOC therefore makes the controlling decisions on whether meaningful RIOC-tenant negotiations will happen, and no deal is likely to get written without the lawyers at the table.

Kraut expressed concern about the timing. "The Island House [leadership group] and the owner agreed to an extremely accelerated schedule, as these things go," Kraut told The WIRE. "It called for a major, complicated, multi-year, multi-million dollar ground lease to be negotiated within 90 days, among at least three and as many as seven major stakeholders, all fielding a full battery of lawyers. I thought the agreement was an unrealistic proposition when I heard of it, and said so publicly. Be that as it may, RIOC is committed to the protection of residents during the conversion process, and so I shall do everything I can to accomplish the April 30 deadline."

Meanwhile, judging by the reports of resident leaders who have tried to move things forward, there’s at least some measure of disarray at RIOC. Leaders of the Island House Tenants Association (IHTA) said that, at one point, RIOC President Herb Berman referred IHTA to real-estate consultant Paul Mas. (As part of a overall real-estate advisory and sales deal, Mas has agreed to advise RIOC on deals for the residential buildings.) Apart from difficulties in simply getting a return phone call from Mas, the tenant leaders say that at least one RIOC lawyer has told them that Mas is "too far ahead of the Board" on real-estate discussions and that it might be unwise to rely on his representations in meetings.

Tenant leaders like Dorothy Davis, who heads IHTA, have found the delays frustrating – even threatening, given the short time remaining before a deal is to be in place.

It’s not certain that Lucido, representing Island House owners, will grant an extension of the LOI past its April 30 expiration. That means that every lost day in which negotiations don’t occur, or the project doesn’t move forward, produces increased worry that the deal will die. Lucido says he has potential outside buyers interested in the properties. The fear is that with a coming June 30 expiration of a one-year waiting period (triggered a year ago by notice to DHCR that Island House would be removed from Mitchell-Lama), Lucido will privatize and sell to one of them. If that happens, a new owner would be free of DHCR supervision and free, presumably, to raise rents and take a chance that the GDP will be altered or that other action or inaction will allow the increased charges.

Tenants have hoped that wouldn’t happen, of course. One possible barrier has been the expiration of the ground leases in 2028. The question goes, Why would a buyer take on a building whose ground might become unavailable in 22 years, when financing would have to run for 30 years or more? There are two possible answers, says Lee Edelman of IHTA. One is that a buyer may have adequate resources to do the deal without a mortgage, and be willing to take a chance on getting a ground-lease extension. Another is that if a new owner doubled rents, he could make an adequate return on the investment even if the land became unavailable in 2028. That means a new owner could take on the buildings without any guarantee regarding extension of the ground lease. Edelman speculates that once a new owner had possession, sometime between now and lease expiration, a lease extension would be worked out. On that basis, he says, a well-backed buyer could take the chance: Buy the corporation that owns the buildings, increase rents to insure a good return regardless of the 2028 expiration of the lease, leave ground-lease negotiation for later, and then consider an extended ground lease a bonus when and if it is negotiated with some future RIOC administration.

Island House leadership is so frustrated at the lack of progress, and so feeling the threat of the April 30 deadline in the LOI, that the IHTA chair, Dorothy Davis, wrote angrily to DHCR Commissioner Judith Calogero last week. She quoted a January 28 WIRE editorial which encouraged progress on the deal, saying. "It can be done," The WIRE opined, suggesting that "there’s reason to believe RIOC will do all it can."

"Apparently not," says Davis’s letter. "After meeting with Herb Berman [and Mas] on February 22 and being told by both of them that RIOC is very much interested in working something out... and then meeting with Mas on February 24, we haven’t moved a hair’s width forward toward consummating this deal!" The letter goes on to note, in capital letters, "the clock is ticking."

"We can’t even bring our attorney to the table," Davis’s letter continues. "RIOC won’t allow [that] because they are tying us up with a financial issue that has nothing to do with us" – that issue being the requirement that the building owners pay RIOC’s legal costs. "This means that RIOC expects the IHTA to pay $50,000 in order for our attorneys to come to the table to even start talking... Yet we are the ones who are supporting the salaries of all government officials and entities involved!"

Davis’s letter to Calogero, copies of which went to a battery of public officials and to The WIRE, goes on to criticize Assemblymember Grannis. "We have not heard a word of outrage from our State government representatives." It says Grannis skipped a scheduled meeting and delegated Morenzi, to meet with IHTA officers, and, "All Tony Morenzi could talk about was the GDP and how there is no precedent." It continues, "He knows RIOC is stalling us."

To Calogero, Davis wrote, "We have even tried to set up an appointment to meet with you, as well. We were told you couldn’t do so during the month of April – knowing full well that our deadline is April 30. How preposterous!"

Davis’s letter raises the spectre of the June 30 privatization date. That is tied to the April 30 expiration of the LOI because there are additional steps necessary after RIOC gives the OK to a ground-lease extension: A tax deal with the Empire State Development Corporation (ESDC), a mortgage, and then a month of resident discussion and education before a vote.

Westview’s situation parallels that of Island House, though it is running behind its neighbor building. Its Task Force has no letter of intent with Lucido, and no agreed-upon price. At Westview, there is a concern that the price IHTA has agreed to, $81 million, could influence the price Westview tenants will have to pay for that property, when Sheldrake initially was to pay just $93.5 million for both buildings.

The $81 million figure in IHTA’s LOI with Lucido is not necessarily final. At $200/square foot, substantially above the $121 Sheldrake was to pay Lucido’s investors.  Nothing in the letter is necessarily binding, because it’s just an agreed-upon framework for a process leading to a deal. But it does stand out when held against a total purchase price for both buildings of $93.5 million (later, with amendments, $98.5 million).

Geof Kerr, the IHTA’s numbers man, told The WIRE, "We’ve had hints from RIOC that we might be paying too much." Indeed, there are some indications that RIOC is reluctant to push the deal along because of the price.

But there may be reasons for the $32 million difference having to do with an existing mortgage and other factors. Lucido told The WIRE that the market had changed upwards and that the price to Sheldrake reflected seller expectations that Sheldrake could put a final deal together rather quickly, whereas a greater span of time will be required in a sale to tenants, which also involves greater risk of failure. Attorney Saft points out that the $81 million price is much lower than what Sheldrake was asking tenants to pay.

As for Island House’s April 30 deadline, Lucido told The WIRE this week that he’s "prepared to work with the tenants in every reasonable way to accomplish what we mutually want to accomplish." But he points out, "There are parties out there interested in buying the property. We are most interested in seeing the tenants do well, but if any of the major stumbling blocks don’t get resolved... I’m concerned that if it is too difficult for the tenants to get it done, we may be back in the posture of looking at one of the many [potential buyers] we’ve been contacted by about the property."

Ruefully, he adds, "We’re also saddled with litigation. Unless it goes away, we are prevented from doing anything with anyone."