Cristina Scofield, Mary Beth Combs, and Jason M. Barr                   October 26, 2022

The post-World War II period was a time of massive government intervention for cities. Public Housing was meant to replace the “slums” with affordable and clean shelter for the poor. While land deeds, federally-backed home loan programs, and highway building allowed members of the white middle class to buy free-standing homes in the suburbs.

But the lure of cheap land and the ability of Americans to fully embrace a car-based lifestyle worked too well. Central city areas, like Manhattan and the Bronx in New York, saw the flight of the middle class. Manhattan became a borough of the ultra-rich and ultra-poor, while the Bronx was for the poor and minorities who were boxed out of the suburbs through zoning and racial discrimination.

To counter the unintended consequence of “White Flight,” the New York State government enacted the so-called Mitchell-Lama (ML) housing program to encourage developers to build middle-class housing in central cities. Little did they know that they were setting themselves up again to generate a new set of unintended consequences that would reverberate long into the future.

The Mitchell-Lama Program

In 1955, the New York State legislature passed the Limited Profit Housing Law, which included a provision for the Mitchell-Lama (ML) program. ML has funded the majority of affordable units out of all the supply-side programs in New York City.

Under the provisions of ML, developers get financial incentives (such as low-interest mortgages and/or real estate tax benefits) in exchange for the construction of affordable rental and cooperative housing units aimed at middle- and moderate-income tenants. Current statutes reflect a minimum 20-year “affordability period” in which profits are limited, income caps are placed on tenants, and properties are subject to regulation and oversight by government agencies.

But the affordability period has varied over the years. The original period at the time of adoption as 35 years, after which owners could engage in a “buyout,” but which also carried many financial stipulations and costs. In 1959, during Governor Nelson Rockefeller’s administration, the buyout clause was changed dramatically, reducing the minimum affordability period to only 15 years and eliminating the stipulations on buyouts to encourage the construction of affordable housing.

Updates

In 1961, all laws regarding government-aided middle-income housing (including Mitchell-Lama) were consolidated into Article 2, Section 35 of the Limited Profit Housing Companies Law of the State of New York. This section, which is in effect today, allows for voluntary dissolutions (colloquially, “buyouts”) after 20 years. To exit the program, owners must have paid off all principal and interest of the original mortgage. Once out of the program, the landlord loses the tax benefits but is no longer under government supervision and can charge market rents.

In the case of Mitchell-Lama cooperative apartments (co-ops), a different dissolution process is required to convert the coop to market rate. Originally, two-thirds of co-op residents had to vote for privatization for a coop to leave the ML program (and thus waive Mitchell-Lama tax benefits). A 2021 New York State bill signed by Gov. Kathy Hochul, however, raised the co-op dissolution requirement to 80% of residents as part of an effort to retain the affordability and availability of these properties. Upon a successful vote, privatization follows. Residents remain owners of their units but must begin to pay market-rate real estate taxes. Many co-op owners, however, sell their units, often for a significant profit. For example, Southbridge Towers, located in Lower Manhattan, was one such Mitchell-Lama co-op that voted to privatize; residents who sold their apartments saw profits in the hundreds of thousands of dollars.

Overall, the program in Gotham has generated about 140,000 housing units (New York has nearly 3.7 million units). Since the turn of the millennium, buying out has been alluring as the prices of market-rate units have skyrocketed. In 2004, there were 125,000 units (53% in co-ops). There are fewer than 96,000 ML units today, and about 70% are co-ops. So, rental buildings have been more likely to exit.

Incentives

It’s easy to see the incentives for favoring a buyout.  Once landlords get through the regulatory red tape, they are free to raise rents and operate outside the auspices of government oversight, opening the door to higher profits. These landlords can also sell their buildings for big gains. Or, in the case of co-ops, unit owners can sell out and receive huge windfalls.

But this leads us to wonder if the buyout opportunity might not lead to some perverse incentives in terms of building maintenance. Are landlords purposely neglecting buildings as they near the buyout date, either to displace rent-regulated tenants to make room for market-rent-paying tenants or with the intention of selling an empty building for a big profit?

There’s certainly some anecdotal evidence. In 2010, the New York Times reported on 1520 Sedgwick Avenue in the Bronx. It was bought by private investors after it exited from Mitchell-Lama. The article reported that “[s]ince the new owners took over… in the fall of 2008, the number of violations has jumped to 598 from 82, an increase of more than 600 percent, according to the Department of Housing Preservation and Development.” Life for tenants became miserable, as the new landlord sought to replace them with those who would pay higher rents.

But is this a larger, more systematic problem? To answer this question, we turned to the data.

Buyouts and Building Maintenance: The Evidence

As a stipulation of government oversight, all Mitchell-Lama buildings are subject to inspections by the NYC Department of Housing Preservation and Development (HPD). HPD publishes the results of these inspections online at NYC OpenData. HPD inspectors enforce the Housing Safety Code, issuing violations of different classes in varying severity. In particular, Class C violations are “immediately hazardous” and refer to issues with lead-based paint, window guards, pests, mold, and heat/hot water violations.

We looked at the incidence of housing safety code violations in Mitchell-Lama properties over the years to see if there was any correlation between the arrival of the expiration of affordability and the incidence of building neglect.  To this end, we performed a statistical (regression) analysis, looking at the drivers of Class C violations for ML properties. (Sources and results here.)

In the first set of analyses, we compared ML buildings to large non-ML rental buildings, controlling for building characteristics, locations, and the number of inspections citywide. We found that overall, Mitchell-Lama properties have, on average, 1.69 more yearly violations than comparable regular market-rate rental properties (regardless of rental or cooperative status).

The Buyout Window

In another analysis, we looked at the number of violations of the ML buildings within a 10-year window around the benefits expiration year, controlling for building location and characteristics,  and the number of total inspections citywide. The data show average increases of 3.5 violations in the year immediately preceding expiration, 2.5 violations in the year of expiration, and 6.35 violations in the year immediately following expiration.

While these numbers may seem small when taken separately, it is important to remember that this means a three-year period would see an average of 12-13 new Class C violations. Within the span of one year until expiration to four years after expiration, there is an average increase of 21.4 new violations. The incidence of up to 12-13 violations within the three-year period and 21-22 violations within five years around expiration is troubling. One Class C violation might mean an entire family is without heat in the middle of winter. Twelve of these violations within a concentrated period make a building virtually uninhabitable.

In short, the data strongly suggest that the buyout opportunity is driving owners to neglect their proprieties to replace low-income tenants with higher-paying ones.

The Policy Implications

Given the evidence, new housing code compliance incentives must be implemented, particularly for ML properties.

Inspections

In addition to traditional code enforcement inspections, both annually by HPD and those requested by tenants, New York City could gravitate to a model where inspections are based on predictive algorithms that use data from tax assessors’ offices, utilities, public works, and other sources to identify housing-related health risks and to prioritize properties for inspection and coordinated service provision. And in this case, being close to expiration for an ML property is a risk for tenants.

A recent study of a neighborhood in Boston found that risk-based inspection using a machine learning model resulted in an 1.8-fold increase in the number of inspections that identified code violations.  Beyond these inspection measures, New York also could increase the number of inspections of buildings owned by repeat offenders, such as setting the timing for a building’s next inspection based on how many violations were discovered at its last inspection.

Capital Reserve Funds

Similar to the rules already in place for New York City co-op boards, non-co-op ML building owners could be required to create a capital reserve fund to cover future significant repair and replacement costs.  In addition to regular maintenance of roofs, elevators, fire escapes, and fire doors, building owners should be required to hire a professional architect or engineer every five years to determine a capital budget that looks ahead as far as five years.

Fine structures

HPD violations may result in civil penalties imposed by the Housing Court if an owner fails to comply with the violation and certify the correction or if the owner certifies the correction falsely.  The degree to which these fines are levied and enforced has been questioned by others researching housing code violations.

New York Times reporter Kim Barker shows that the fines are too small to create an incentive for building owners to comply, particularly if they are planning to sell the building after they force the current owners (either through neglect or harassment) to move.  Often the millions of dollars in profit earned by converting and selling at market rates far exceeds the relatively small fines levied against building owners who do not correct code violations.

Stories of landlords who try to drive tenants out of regulated apartments are legend: “In the 1980s, one moved in drug dealers and prostitutes to harass tenants. One landlord legendarily roamed the halls with snarling pit bulls. Several earned tabloid nicknames, such as Dracula Landlord and Reptile Landlord.”

If building owners who want to marketize a building are more likely to neglect the building and/or harass tenants , then fine structures should be reconfigured to incentivize compliance better.  A fine system could be tied to a percentage of the sale price of the building and is based on the number of violations per year in, say, the five years immediately before the sale of the building.

The Future of Middle-Class Housing in New York?

More broadly, Mitchell-Lama housing is becoming a “dying breed.” The real problem is the discrepancy between market prices and the benefits generated by being in the ML program, even with generous subsidies.

While the ML has provided housing for hundreds of thousands of New Yorkers, it raises bigger questions about its overall sustainability. The spike in building class violations that we found around the expiration dates provides evidence of the program’s structural problems.

Going forward, New York needs to devise or revise its methods for encouraging middle-class housing. Back in 1955, when they were writing the law, they did not think of or care about one simple fact: incentives matter.

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