MR Management — Mann Report Management September 2014
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Housing Development Fund Corporations: Is Now the Right Time To Privatize?
Leni Morrison Cummins, Adam Leitman Bailey, P.C.

In the 1970s the City created HDFCs via Land Disposition Agreements (LDAs) to promote developing blighted and underdeveloped areas into affordable housing. The LDAs transferred land to cooperative housing corporations in exchange for the promise that those cooperatives would adhere to strict principles to create and maintain affordable housing. The LDAs provide for HUD/FHA-subsidized financing, property tax breaks, and HPD regulation of the HDFCs. There are income restrictions for apartment owners and sale price formulas that ensure that the apartments remain affordable. In the last few years, the majority of the LDAs and regulatory agreements have expired and government- subsidized loans have been paid off. The shareholders of these HDFCs face probably the biggest financial decision of their lives: Does the cooperative continue as affordable income housing, or does it privatize and allow its shareholders to make big money selling their cooperative shares on the free market?

The latter is enticing, especially since many of these cooperatives, decades later, are located in prime locations. The shareholders find themselves with the possibility of selling their units for more money than they ever thought possible. However, many of the shareholders are opposed to privatization because they wish to remain in their units and may not be able to afford to do so if the benefits of HDFC regulation (e.g. tax abatements, low interest financing) are lost. For those cooperatives that ultimately decide to pursue privatization, there are serious legal questions:

Does privatization of an HDFC require the filing of an offering plan with the New York State Attorney General?

For HDFCs, not necessarily. However, it may be prudent given recent Mitchell Lama case law. While it would seem that simple amendments or a reincorporation transferring the same number of shares to the same shareholders would not constitute an "offering or sale," which would require Attorney General oversight, the New York State Court of Appeals held in East Midtown Plaza v. Cuomo, in November of 2012, that "however it is packaged, the privatization. . . falls within the parameters of the Martin Act," and "a significant change in the nature of the investment or in the investment risks amount to a new investment." Privatization would enable HDFC residents to sell their shares at market rates, in stark contrast to the original restricted resale prices of the HDFC shares, and cause the HDFCs to lose eligibility for government-subsidized financing and property tax reductions. Both of these changes affecting shareholders may be deemed substantial enough to constitute a different investment such that the privatization would be characterized as an "offering or sale" of securities under the Martin Act. The Martin Act requires that offering plans be filed for all security offerings or sales, which include the offering of cooperative shares. However, it is important to note that East Midtown Plaza was a Mitchell Lama cooperative, not a HDFC cooperative. Therefore, an argument can be made that this case does not apply to HDFCs.

Does privatization of a HDFC subject the cooperative to a transfer tax?

Probably not. In the case Trump Village Section 3, Inc. v. City of New York, the Appellate Division, Second Department, held in September of 2013, that the dissolution and reconstitution of a Mitchell Lama Cooperative in connection with it privatizing was not subject to transfer taxes because it "remained the same entity, although it was relieved of various restrictions previously imposed upon it by the Mitchell-Lama housing program." The court further stated that "[t]his is so even if we adopt the argument of the City defendants that the word 'reconstitute' is synonymous with the word 'reincorporate.' In the Trump Village case, the court held that "when a residential housing cooperative corporation amends its certificate of incorporation as a part of its voluntary dissolution, reconstitution, and termination of participation in the Mitchell-Lama housing program. . . because there is no transfer or conveyance of any real property or an interest in real property under those circumstances, no taxable event occurs." Therefore, it is likely that courts would find that a transfer tax is not due upon privatization of an HDFC, so long as the only changes made to the governing documents pertain to privatization. (All shares and shareholders would need to be the same.)

However, it should be noted that the Trump Village Appellate Division decision is currently before the New York State Court of Appeals.

Conclusion

While there are a number of risks to consider, under the current state of the law, HDFC shareholders may pursue privatization without the burden of paying a transfer tax. The window of opportunity, however, may close if the Court of Appeals in the Trump Village case rules that a transfer tax will be due upon privatization.

Leni Morrison Cummins
Partner
Adam Leitman Bailey, P.C.
120 Broadway, 17th Floor
New York, NY 10271
www.alblawfirm.com
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