Mitchell-Lama cooperatives become destabilized battlegrounds when privatization is put on the table. Since ML cooperative developments are governed by an elected Board of Directors, the first step toward privatization is often when those seeking to privatize take over the majority on the Board.
The problems that arise are many and include dissemination of inaccurate and misleading information and promises about privatization, hiding of information favorable to staying in the ML program (like refinancing packages or repair loan offers), warehousing of apartments, and moving forward on votes about privatization under false pretenses.
Many of the battles in these developments have gotten ugly, turning neighbors against each other. Residents who oppose privatization find little recourse through the supervising agencies charged with monitoring these developments — HPD and HCR routinely ignore resident grievances and take no or minimal steps to correct Board and management malfeasance.
To go private, a Mitchell-Lama cooperative must:
- Pay off any government sponsored mortgages (called the ‘buy-out’) — often taking on much more expensive debt service costs
- Start paying regular real estate taxes — greatly increasing operating costs
- Give up surcharge income — this reduces the income to the building
- Pay, often hundreds of thousands of dollars (in one development the cost was in the millions), to facilitate the votes for, and develop the offering plan for privatization
- Return capital reserve funds to NYC (in City supervised buildings)
The step-by-step process to privatize
- Hold a vote to fund the preparation of a ‘feasibility study’ (FS) on privatization and to fund it with a special assessment. (With the passage of the new law, privatization may no longer be funded out of the operating budget—the costs must be borne by all shareholders through a special assessment.) To move forward with it, 67% of all the apartments in the development (one vote per apartment) must vote in favor. If it fails, the process stops and may not begin again for five years. If the vote succeeds, a FS is prepared. Since those who favor privatization push for these studies, they have consistently been biased toward privatization. In a few instances, the professionals hired to conduct these studies have been chastised for their pro-privatization bias and forced to send statements correcting their bias to shareholders. Unfortunately, in these instances, the damage from the misinformation has already been done and is hard to correct.
- Hold a vote to fund the development of the Red Herring (the draft Offering Plan) though a special assessment. This must pass by 80% of the apartments or the process stops, and may not be begun again for five years.
- Once written, the Red Herring is reviewed by the Attorney General’s office to determine if it has adequately spelled out the risks of privatization and the benefits lost by leaving Mitchell-Lama. Often the risks have NOT been adequately disclosed and the Attorney General’s office issues “deficiency letters” outlining what must be corrected. Often it takes many drafts (sometimes called “blacklines”) of the Red Herring over a period of as much as several years before the Attorney General’s office is satisfied that the risks have been properly disclosed. Once that occurs, the Red Herring is accepted for filing, and it is at that point that it becomes the Black Book/Final Offering Plan.
- Voting on the Black Book/Final Offering Plan. This must also pass by 80% of the apartments, or privatization fails.
- If it does pass by the 80% threshold, then dissolution of the Mitchell-Lama cooperative and reconstitution as a market rate co-op occurs.
This whole process typically takes at least 5 years and often longer.
The threat of privatization has been greatly reduced due to the passage of The Mitchell-Lama Reform Bill of 2021. The Mitchell-Lama Reform Bill of 2021 raised the threshold for the second two votes—to prepare the red herring, and on the black book—to 80%. Unfortunately during negotiations with the Governor's office, the bill was weakened to require only a 67% vote to start the process with a feasibility study.