With 'affordable housing' buildings for sale, tenants worry

With dozens of 20-story apartment towers looming behind her, Lashonda Carmichael looks out over a frozen inlet to the bay and the world beyond Brooklyn.

"This is where I come for peace of mind," she says as she balances her 2-year-old son on her hip.

Since she was a child, Ms. Carmichael has roamed these shores on the edge of this massive, affordable housing complex where she grew up. Most New Yorkers know it as Starrett City. Global economic forces now threaten to disrupt her calm and that of the almost 14,000 other tenants, almost 90 percent of whom pay rents below market rates.

That's because the complex is still on the auction block for a whopping $1.3 billion, despite Friday's decision by the federal government to block the sale. While the decision is a major blow to the proposed buyers, they insist they are committed to making the deal work.

Starrett City, although privately owned, is the nation's largest affordable housing complex because of various state and federal low-interest mortgages and subsidies.

In many residents' estimations, it's also the most successful – a racially and ethnically diverse, well-maintained community that operates with its own schools, parks, power plant, and shopping center. They see it as a safe city within a city. Most tenants pay up to $1,200 monthly for the apartments. But the proposed $1.3 billion price tag has fueled tenants' concerns that rents may skyrocket.

"I just hope I'll be able to pay the rent," says Fred MacKenzie, a retired garment industry worker who has lived here since 1993. "That's the world today, those with the money buy what they want, and I can't stop them."

Economists chalk up Starrett City's high price to the billions of investment dollars pouring into the nation's commercial housing market from places like Australia, India, and China. That money is now driving prices for apartment buildings in hot real estate markets such as New York to historic highs. In November, investors paid a record $5.4 billion for Peter Cooper Village and Stuyvesant Town, adjacent affordable housing complexes in Manhattan.

"We have not lived through this kind of an era before where so much of the capital of the US and the world is commingled," says Shekar Narasimhan, managing partner of Beekman Advisors in McLean, Va. And that, he says, has fundamentally changed the economics of investing in apartment houses. It used to be that investors used a property's rental income to calculate its value. Now, they calculate it by the building's potential future worth on the real estate market and compare that to other investments, say in stocks or bonds. As a result, Mr. Narasimhan says, prices have "become disconnected from reality."

The record prices investors are now willing to pay are generating fears that new owners may raise rents in places like Starrett City to help pay for them. If that happens, many working and middle-class families who have made Starrett City home since it opened in the 1970s may not be able to afford it.

"This trend obviously could result in the displacement of some lower income families, and it's been particularly hard on the elderly and those with fixed incomes," says Conrad Eagan, president and CEO of National Housing Conference, a nonprofit that advocates affordable policies. "Many families had anticipated they could stay [in their apartments] for a long period of time, and then suddenly they find the property being sold out from under them."

Starrett City, like 47 other apartment complexes in New York, was financed in part by state-backed low-interest mortgages in exchange for the developers' commitment to keep the units affordable for the length of the mortgage. The program is known as Mitchell-Lama, after the lawmakers who wrote the bill that created it. Under current state law, if a complex was built after 1974 the units can be priced at the market rate once the Mitchell-Lama mortgages are paid off.

The Starrett City sale will allow the current owners to pay off their Mitchell-Lama mortgage. Despite that, the potential buyers have pledged to maintain the affordable character of the complex. "We have said again and again our intention is to preserve the affordability of Starrett City," says Lloyd Kaplan, an attorney representing Clipper Equity, the proposed buyers.

On Friday, the Department of Housing and Urban Renewal blocked the sale until Clipper Equity can prove to its satisfaction that the complex will remain affordable. Also last week, state Democratic lawmakers introduced a bill that would require all units at Starrett City and the 47 other Mitchell-Llama affordable housing complexes in the state be rent stabilized if they're sold and their mortgages are paid off.

"We want the state to step in and say, 'For two generations the state has given you huge interest deductions, essentially free money with taxpayers' dollars, and you have an obligation to keep the rents affordable regardless of whether you sell it or who owns it," says Jonathan Rosen of NY-ACORN, a tenants' rights organization that is working with Starrett City tenants.

Mr. Rosen says such legislation is needed because since 2001 more than 13,000 affordable Mitchell-Lama housing units have been sold and have reverted to market rates. That has made them unaffordable to most middle-class and working-class New Yorkers.

But skeptics of regulatory responses to the loss of affordable housing note that in similar past disputes courts have sided with developers. In part, because the developers signed a contract with the state that said for 20 or 30 years they would keep the properties affordable, and after that, the state had agreed in the contract that they could go to market rate prices.

"When the Congress and other state institutions said, 'We really didn't mean that, for public policy now we can't afford for this housing to be taken out of the affordable stream, we'll give you another subsidy but you have to keep it affordable," says Narasimhan. "Virtually every court ruled against the states and said you can't go back and change the rules."

Narasimhan says the best the tenants and state can do at Starrett City may be to negotiate a "basket of goodies" to keep the rents stable for the next 20 years to encourage the developers to keep the units affordable.

Tenants like Carmichael want the new owners to respect Starrett City's diverse and supportive community. "I really hope the people that are going to buy this are going to do it to benefit the community, not just to enrich themselves," she says. "Because this is our community, this is our life. You can't just demolish that."