Legislators try to slow loss of low-income housing

Frank Splaine leans over his balcony rail and gives a wry answer to a sobering question. Where would he and his roommate move if, as many expect, their subsidized two-bedroom apartment in the Clarendon Hill apartment complex were converted to a condominium or high-rent apartment? The septuagenarian points to a field across the road. ``Over on the ball field, you see?'' he says, deadpan. ``We could pitch a tent. And there's a swimming pool right beside it, so we could take a bath.''

Mr. Splaine is one of some 6 million Americans - mainly senior citizens - who may lose their homes to market forces in the next decade. In that time, the private owners of some 2.5 million low- and moderate-income apartment units may legally convert them to either condominiums or market-rate rental units.

This month Congress will try to hammer out a law to slow the process. The House recently passed a bill requiring owners to give six to 12 months' notice before converting their properties. It would also authorize money for nonprofit groups to buy the properties; nonprofits would continue to rent the units at below-market prices. The Senate is toying with similar provisions.

But some states worry that no federal law will be tough enough, and are trying to put extra teeth into local laws.

``This is the most significant housing issue before us,'' says Massachusetts state Rep. John McDonough, who last month introduced by far the toughest bill on conversions of any state.

``At the heart of the dispute,'' he says, is whether low-income housing policy should be ``functionally designed for the benefit of developers'' or for tenants.

The shortage of affordable housing in many areas of the country is rapidly reaching crisis proportions, housing experts say. Construction of new low-income housing virtually halted under the Reagan administration. And now several forces will likely make existing housing too expensive for tenants, says Phillip Clay, a professor at the Massachusetts Institute of Technology, who has just completed a study on low-income housing.

First, tax reform took away many of the benefits (such as accelerated depreciation, capital-gains treatment, and income sheltering) that made low-income housing attractive to investors. Suddenly, rents became the sole income source in determining whether a property was profitable or not. Owners now have an incentive to get the highest rent possible, or to sell the units as condominiums.

Second, in some areas of the country, such as the East and West Coasts, real estate values have skyrocketed. For example, Frank Splaine and his roommate at Clarendon Hill in Somerville, just outside Boston, pay $440 a month, utilities included. Nearby apartments go for around $800 a month, not including utilities, and if the apartments were sold as condominiums they would likely fetch $200,000 or more apiece.

The owner of Clarendon Hill, a New York City developer, stands to make $50 million just by converting the 500 units to condominiums, according to one estimate. And tenants, noticing the new potted plants and extra touches that make properties more attractive to prospective buyers, suspect the developer will do just that. Neither the developer nor its lawyers could be reached for comment.

``The private sector will act as it normally acts - rationally, to advance its own return,'' says Dr. Clay. And that often means getting out of partnership with the government and charging the prices the market will bear - prices that people on fixed incomes cannot bear.

Owners of low- and moderate-income buildings cannot simply up and convert their properties. Most of them agreed to wait a few years before converting. For many, that waiting period is almost over.

For example, in October 1969, the Clarendon Hill developer agreed with the government that it would build the project and rent the apartments cheaply for at least 20 years. In return, the developer got a 40-year, low-interest loan (1 to 3 percent a year), and the Department of Housing and Urban Development (HUD) insured it. In two years, Clarendon Hill will have met its end of the bargain. It can ``prepay'' the loan - pay it off 20 years early - and do whatever it likes with the property.

Nationwide, there are about 334,000 apartments like Clarendon Hill, according to HUD. Not everyone will pay off the loan at the first opportunity. Project developers in, say, Detroit or Houston, where the market is soft and rents are low, would probably choose to keep the low-interest loan.

But ``economic situations change, and sometimes dramatically,'' notes Susan Peck of the Sacramento, Calif., office of the Housing Assistance Council, an organization that favors keeping low-income housing in the hands of nonprofit groups.

``In Texas, for example, if oil comes back, everything would change. So we always have to be alert to prepayments.''

Tenants who live in areas that used to be rural but are now considered valuable land have the same problem as their urban counterparts. In Vermont, for example, owners are selling buildings that are near ski resorts for a mint. Silicon Valley was countryside a few years before the computer boom; it now boasts the most expensive real estate in the country, and developers are itching to set their units loose on the free market.

For these developments, it was the Farmers Home Administration (FmHA), rather than HUD, that made low-interest loans to developers. Any such FmHA loan made after 1979 can't be converted for 20 years. But the developers who got loans before that are ``poised to prepay,'' says Art Collings of the Housing Assistance Council in Washington, D.C.

They will have to be poised awhile longer. On June 30, Congress extended a moratorium that prohibits owners from converting their buildings until Sept. 30. Unless Congress keeps extending the moratorium, about 166,000 apartments will enter the free market this fall. And by the turn of the century, another 200,000 will be eligible.

Perhaps the biggest danger comes not from prepayment, but from owners ``opting out'' of providing subsidized housing. That's what the people at Richardson Highlands found out.

In 1979, a developer built the 200-unit complex overlooking (if one cranes one's neck) San Francisco Bay. He agreed to rent out 40 of the apartments to low-income tenants for below-market prices. The government, under a so-called Section 8 contract, agreed to pay the difference between what the tenants spent (30 percent of their income) and what the fair market rent was. After five years, the developer wanted to ``opt out'' of the Section 8 contract, because, a lawyer involved in the case said, he found that he could rent all of the units at the higher prices. The local government pressured him to continue with the Section 8 contract, but after a year he sold the property to VMS, a Chicago developer. Rents quadrupled in some cases, and today only one of the 40 low-income tenants remains in the building.

There are some 2 million Section 8 apartments. Every five years, owners can ``opt out'' of the contract and raise the rents, as did the developer of Richardson Gardens.

Now state legislators, who have been relatively complacent about the plight of their low- and moderate-income constituents, are scurrying around for ways to stem the flood into the free marketplace.

California is considering two bills that would require a six-month notice period and establish an agency to raise money to buy up the properties. A Minnesota law passed in June allows the state to buy some low-income rental properties when the owner pays off the loan.

By far the most far-reaching, and controversial, move is taking place in Massachusetts. Last month Representative McDonough introduced a bill that would prevent owners of the 18,000 affordable housing units in the state from either raising rents more than 10 percent, or from converting them into condos, unless they got a waiver. The bill, which has 99 cosponsors out of a 200-member legislature, also requires that owners tell the state and the tenants of their plans a year ahead of time. The bill has some tough sledding ahead of it, concedes Mr. McDonough. But he and others say that if anything close to it is passed, it would likely encourage other states to follow suit.

In the end, it may be appearances rather than laws that keep tenants in their apartments. ``There are social and political incentives'' to continue with the affordable-housing contracts, says Howard Cohen, a lawyer representing housing owners in Boston. ``No owner in his right mind would look forward to evicting everyone in his building.''