City for Sale

By Robert Neuwirt.

Published May 15, 2004

The Gates-Patchen apartments are nothing fancy–just two unassuming buildings on a quiet block in Bed-Stuy. They’ve got none of the up-market appeal of their high-buttoned brownstone neighbors. They’re prosaic, proletarian, hardly even noticeable. So why are speculators sniffing around the twin-building complex?

The answer is that the buildings at 940 and 950 Gates Avenue may soon be foreclosed upon and auctioned off to private bidders at a fire-sale price–courtesy of the federal government. At press time, the auction was scheduled for May 5.

“It feels like an invasion,” says Nadiyah Abdullah, a social worker in the public schools who has lived in Gates-Patchen for 24 years. “I’ve invested too much time here for them to treat me like this. It’s just not fair.”

If the 104-unit complex is sold, it will be a dispiriting portent of the fate that could befall tenants in 70 other city buildings that were built or renovated under the federal Section 8 subsidy program and have been cited for deteriorating conditions.

Fourteen buildings around the five boroughs have failed inspections and have been scheduled for some sort of enforcement action by the Department of Housing and Urban Development–the federal agency that insures the mortgages on these buildings and provides housing subsidies. Foreclosure for them may be imminent. Another 56 buildings are borderline–meaning that conditions there are troubling and, though the buildings are not scheduled for foreclosure, they may be headed that way if their owners and managers don’t clean up their acts.

Tenants in these 70 buildings–more than 10,000 families–are at risk of losing their homes and potentially their rent subsidies if the foreclosure and auction process continues unabated.

That’s because in a real estate market like New York’s, where demand far outstrips supply, there’s no shortage of speculators willing to wager that they can take control of neglected buildings–and pay HUD handsomely for the privilege. HUD has made it clear that it will take the money from the highest bidder, with or without guarantees that their tenants can stay.

“These actions should punish landlords, not tenants,” says Anne Lessy, director of New York City organizing for Tenants & Neighbors, who has been working with tenants in many endangered project-based Section 8 buildings. “Foreclosure can be an excellent tool with which to remove neglectful landlords. But the solution could turn out to be worse than the problem.”

Some observers suggest that HUD bureaucrats are using the foreclosure and auction process to get speculators to simply take these deteriorating buildings off the agency’s hands. “Their real goal is to reduce their portfolio, which they believe loses them money,” says Jon Sheiner, a former high ranking HUD staffer who is now chief legislative aide for New York City Congressman Charles Rangel.

Nonsense, responds HUD’s New York spokesperson, Adam Glantz. “We’re trying to do the right thing,” he says–fix the buildings and get them into good hands, without violating what he calls HUD’s “obligation to the taxpayers.”

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When the twin structures at 940 and 950 Gates Avenue were constructed in the early 1970s, they offered tenants a sense of affordable luxury: brand-new apartments with elevators and balconies, security intercoms at the front doors, and the guarantee of a federal rent subsidy that seemed like it would last forever.

They were built as part of a federal program known as project-based Section 8, which offered developers two important financial incentives to encourage them to build or substantially renovate affordable rental housing. Landlords who participated were given 40-year federally insured mortgages; the long time period ensured that monthly payments were relatively low, thus boosting likely profit margins. And after the buildings were finished, all apartments were guaranteed Section 8 rental assistance for at least 20 years.

Under Section 8, tenants pay one-third of their income in rent, and the government pays the landlord the difference between that and market rent. This meant that owners could build quality buildings in difficult areas and still recoup a decent profit.

Project-based Section 8 was a successful program. Between 1974, when it commenced, and 1983, when it was phased out, 394 buildings in New York City were built or renovated using its formula, and 54,665 families at any given time got the opportunity to have decent affordable homes.

Gates-Patchen was a good building for much of its existence. The decline started in earnest about five years ago, when managers who had taken an active interest in the building were replaced by folks who didn’t seem to care. Tenants report that one live-in superintendent was more interested in running a carpentry business out of the basement than in making repairs. Now, years of deferred maintenance and neglect have left the building in a hole. It needs a massive infusion of capital–as much as $6 million, according to federal estimates.

“Every apartment in here leaks, from the roof on down,” says Delores Morris, who knows the problems intimately from her 13 years as a Gates-Patchen tenant. “And if it rains hard, it leaks in the hallways, too.”

Morris, Adbullah and other tenant leaders battled to stop the slow death of the Gates-Patchen complex. They repeatedly requested that the management company make repairs. They blocked one resident manager who was trying to take money under the table to move people into vacant apartments. They even complained to the federal agency that administers the rental assistance for the buildings.

But last year, when the elevators broke and no one was prepared to fix them, it became starkly clear that their attempts to work within the system had failed. The tenants went public, inviting WCBS-TV newsman Arnold Diaz to expose the problems. Prodded by Diaz’ “Shame on You” segment, the management company finally restored elevator service. But other repairs languished.

Now, months later, HUD, which holds the mortgage on Gates-Patchen, has finally responded to the building’s deterioration. But the action the feds propose may be much more dangerous for tenants than the crumbling conditions.

HUD has decided to foreclose and immediately resell the buildings to the highest bidder. If this happens, Gates-Patchen will lose its guaranteed Section 8 rental subsidy, and tenants will have to apply individually for what are called Section 8 vouchers. “Anyone that is income-eligible will be getting a voucher,” promises Glantz, the HUD spokesman.

Though this offers tenants a measure of protection, it may still leave them in a precarious position. That’s because the vouchers will be valid at Gates-Patchen only if the buildings pass a code inspection–which may be difficult because HUD already considers them seriously deteriorated. Tenants could move elsewhere using their vouchers, but that would force them to find a new apartment in a very tight private market.

In addition, the vouchers may be a temporary fix. The Bush administration is seeking to chop 29 percent from the Section 8 budget by 2009. New regulations tying local spending to previous years’ levels may further restrict the number of vouchers available. Glantz insists, however, that qualifying Gates-Patchen tenants will get vouchers irrespective of any future budget cuts.

And there’s another complicating factor–the fate of the vacant apartments in the complex. Currently, 17 of Gates-Patchen’s 104 apartments are empty, and once the foreclosure sale is complete, those apartments could rent at market rates. Glantz promises HUD will fund enough vouchers for these apartments, but it would be left to the new landlord’s discretion whether to accept Section 8 tenants or instead rent the apartments on the open market, for which it could charge a higher price.

According to the information package HUD has handed to prospective bidders, whoever buys the building may be able to raise rents by as much as 50 percent on vacant units after the sale goes through. HUD estimates that an owner could make a profit of better than $600,000 a year.

The tenants, working with the Urban Homesteading Assistance Board, have offered a different proposal: “Let us own and manage the building. Let us do what we know we can do–manage it justly and fairly,” says tenant activist Abdullah. (In the interest of full disclosure: UHAB is a sponsor of City Limits, its executive director is on the board of the magazine’s parent organization, and the two groups share office space.) To that end, the tenants propose that Gates-Patchen be turned into a low-income cooperative.

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Foreclosures and auctions aren’t necessarily bad, for they can be used to wrest control of buildings from neglectful or unscrupulous owners and put into the hands of better ones. Since HUD rules allow localities a so-called “right of first refusal” on these buildings, HUD has sometimes been able to work with cities to find ways to bar speculators from taking the buildings. In the waning years of the Clinton Administration, for instance, the city of Dallas successfully acquired a building in an effort to keep tenants in their homes. Similarly, in Newark, HUD worked with tenants (including mayoral candidate Cory Booker) to salvage a project-based Section 8 complex that was slated for foreclosure and demolition.

Here in New York, there are precedents for tenant takeovers. They have typically been initiated via legal action on behalf of tenants that force HUD, as the mortgage-holder, to gain legal possession of the properties. In 2002, HUD handed the Medgar Evers Houses, just down the road from Gates-Patchen, to a consortium involving the tenants and several nonprofits–finally ending the decades-long odyssey of horror that had made their homes unfit and unsafe.

Of course, market conditions have changed since these deals were cut. Property values in New York are skyrocketing, and rents are also ramping up. Many of the 14 project-based Section 8 buildings that now face foreclosure and auction have low mortgages and are in neighborhoods where they can command high rents–and this may make them particularly appealing to speculators.

Whatever its reasons, HUD has seemed resistant to the city’s recent attempts to negotiate a future for these buildings that is favorable for low-income tenants. An impressive array of community groups, elected officials, and city bureaucrats have lined up behind the co-op plan outlined by Abdullah. Pols like Senator Chuck Schumer and Congressman Ed Towns, among others, have been prodding the federal agency to transfer the buildings to the city, which has promised to work with the tenants to make their dream of homeownership a reality. As of late April, though, HUD has only made one move to address tenants’ concerns about the upcoming auction. After initially judging that repairs on the apartment complex will cost about $2.9 million, HUD has now doubled its estimate, and projects rehab costs to be closer to $6 million–something would-be buyers will have to take heed of.

The clock is ticking. “We have to negotiate a deal before May 5th,” says Harold Shultz, special counsel for the City’s Department of Housing Preservation and Development (HPD).

As the slated auction date approached, tenants discovered they may have more ammunition than they thought. The organization that owns the buildings, Gates-Patchen HDFC, reportedly sought to sell the properties to an investor, George Fakaris. Investigating the proposed sale, UHAB and HPD discovered that Gates-Patchen sits in an urban renewal zone, governed by a decades-old agreement that appears to give the city the power to approve or nix any sale of the buildings. What’s more, to the residents’ amazement, a second provision awards tenants the right to decide whether or not they want to take over and run Gates-Patchen as a co-op. At press time, it still wasn’t clear how these legal covenants might affect the auction plans. HUD insists the auction is moving forward as planned.

Since it was common for Section 8 buildings to be erected in urban renewal zones, more buildings facing the auction block may also have such protections. But most tenants have no hope of a fairy-tale ending. Last year, HUD foreclosed on a Bronx complex, Pueblo de Mayaguez. On its face, the building seemed a good candidate for foreclosure. Things were so bad under the old owner that life had become surreal: Drug dealers had moved couches into the hallways and were running a comfortable drug supermarket right inside. Tenants organized to take control of the building themselves.

But HUD’s auction was surreal, too: It was an outdoor event on the steps of the Bronx courthouse. “The bidding went from $100,000 to $4.9 million in about thirty seconds,” says Dina Levy, an organizer with the Urban Homesteading Assistance Board, which was working with the tenants to turn their building into a low-income cooperative. The final bid–by a Queens-based developer who owns other properties rife with housing code violations–was far in excess of the price UHAB’s analysts believed the rents could support.

After the sale, the federal agency started pouring extra money into the building, paying the landlord rents that are 20 to 25 percent higher than the Section 8 program typically allows. According to Legal Aid staff attorney Ellen Davidson, the new rents for the building’s 75 apartments range from $1,050 for a studio apartment to $1,600 for a 3-bedroom. “These are high rents for the Bronx,” she says. HUD’s Glantz denies that the agency is overpaying the new owner and insists that rents are within normal Section 8 guidelines.

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Why are so many HUD-subsidized buildings suffering such extensive physical distress simultaneously? In part, it appears to be a delayed reaction to changes to the federal tax codes more than 15 years ago.

As long as no major repairs were needed, these buildings continued to make modest profits for their owners. But, as the buildings aged, big-ticket items–like elevators and boilers–began to need work, and the profit margins weren’t giving landlords enough to pay for repairs on these major systems. In the past, owners could use the structures as lucrative tax shelters, reaping enhanced depreciation benefits for any major investments. The buildings now have to pay for themselves out of the rental stream. “There’s not a lot of cash flow,” explains Rangel staffer Jon Sheiner. “So it’s easy for a landlord to say, ‘I ain’t making any money, so why should I put money into my building.’ Even if the landlord’s a nice guy, it’s a tough job. And if he’s an indifferent bastard, it’s a real problem.”

The concerns over project-based Section 8 buildings accelerated during the last days of the Clinton Administration, when then-HUD Secretary Andrew Cuomo vowed to inspect all HUD buildings to ensure they were being well-managed. The new administration has continued this policy. In itself, this is a good thing. “Previously, HUD had been lax in enforcing physical standards,” says HPD’s Shultz. “The Bush administration is actually addressing this–which should be an applause line.”

But when buildings fail their inspections, HUD often acts precipitously, without informing tenants. A year ago, HUD allowed Section 8 assistance for one building in Boston to lapse, but never told the tenants. New rents there could range from $1,400 a month to $1,800–well beyond what Section 8 vouchers will pay. “HUD really screwed up,” charges Michael Kane, executive director of the National Alliance of HUD Tenants, which is based in Massachusetts. “Now the city could lose 80 units.”

While buildings that fail inspection are most immediately at risk, tenants in buildings that pass inspections also are vulnerable. The Section 8 rental assistance contracts on many of these buildings must be renewed in the near future–and owners are allowed to forego the subsidy if they think they can do better on the private market. The prospect of owners opting out of the program is a growing threat for tenants. One study showed that 56 buildings in Congressman Rangel’s Upper Manhattan district alone, containing more than 6,000 apartments, have their Section 8 contracts up for renewal this year and next.

Some elected officials and community groups are working to find ways of protecting tenants when federally and state-subsidized buildings–including those under the middle-income Mitchell Lama program–go market-rate.

Alan Gerson, who represents Lower Manhattan on the New York City Council, has introduced a bill to help protect tenants. Building on precedents from other cities, the proposal would give tenants advance notice when their buildings are at risk of going market rent, and make it city policy for the landlord to face a simple choice: accept a tenant-inspired offer to buy the building or remain in the subsidy program. Gerson also hopes to create a trust fund to pay for the purchase and renovation of buildings (though he has not yet identified specific sources of support). Says Gerson, “If we lose these tens of thousands of units citywide, we’ll never recreate them. And we’ll lose an incredible amount of diversity in our city.” Gerson adds that he is trying to line up support from the real estate industry and Mayor Michael Bloomberg. “We’re trying to come up with a win-win-win scenario. Win for the tenants. Win for the owners. And win for the city.” But he concedes that it’s not clear that the city has the power to tie HUD’s hands if the agency is determined to auction off its buildings.

Back at Gates-Patchen, the tenants are hoping against hope that HUD will negotiate with them. They have petitioned the agency to buy the building in the foreclosure action, and then turn it over to the city for a nominal price. The city, in turn, has promised to flip the building to the tenants.

Getting HUD to buy the property, however, is a long shot. While the agency can bid to buy the Gates-Patchen complex, the agency asserts it is legally limited to spending only the amount that remains on the mortgage plus the value of any capital improvements the government may have financed over the years. There’s only $1.4 million remaining on the Gates-Patchen mortgage, and HUD has spent very little money on the building. Levy, the UHAB organizer who has been working with the tenants, notes sadly that this would be a bargain-basement price in the overheated New York City market. “Anybody in their right mind will bid more than that,” she says.

If buying the building outright is impossible, the tenants are pushing HUD to add a series of restrictive covenants to the sale. One would stipulate that the buildings must be converted into a low-income cooperative within five years, irrespective of who buys them. This, tenants argue, would ward off speculators. In case all else fails, organizers are simply petitioning HUD to postpone the auction. HUD spokesman Adam Glantz confirms that negotiations are underway.

The tenants know the city doesn’t have enough money to go up against a determined speculator. “I feel like a sitting duck,” says Nadiyah Abdullah. “We wish we didn’t have to go through this process. We still don’t understand HUD’s motives.” Her neighbor Delores Morris believes in the power of positive thinking. “We can’t panic just yet,” she says. But she vows that if HUD sells the tenants out, the agency will feel her wrath. “If they do jerk us around, we are going to raise hell. We may be at the mercy of the developer. But not without a fight.”

So the future remains cloudy for Gates-Patchen. Only this much is clear: If HUD doesn’t change its mind or revamp its rules, Abdullah, Morris and other tenants may wind up being little more than spectators, condemned to stand on the steps of the Kings County Courthouse on May 5 and watch as their homes and futures are auctioned away.

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SIDEBAR: Prime Property Available

940 and 950 Gates Avenue, Brooklyn

51 Wadsworth Terrace, Manhattan

480 St. Nicholas Avenue, Manhattan

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SIDEBAR: HUD’s Housing Stock Options
Gates-Patchen is headed toward foreclosure because the complex failed several recent code inspections mandated by HUD. If a building scores extremely low on the inspections, or if it fails two inspections in a row, it is referred for what HUD calls “enforcement.” That’s the status of the 14 buildings immediately on the line in New York City right now. HUD can foreclose on the current owner and sell the building in an immediate public auction. But there are also 56 buildings on the bubble–they’ve done poorly on inspections, but not so poorly as to be referred for enforcement. In those cases, HUD has two other options. It can work with the current building owner to restructure the debt, make necessary repairs, and even put money into rehabilitation. In theory, that can help protect tenants. But this path, too, is fraught with dangers.

In Harlem, tenants of St. Phillips on the Park, a 260-unit project-based Section 8 complex at 134th Street and Eighth Avenue, spent much of the winter with no heat. Right around Christmas, they heard that the building’s owner had fallen behind on mortgage payments and was in danger of foreclosure. Selina Robinson, who has lived in St. Phillips since 1974 and is the corresponding secretary of the tenants association, turns to black humor to describe how she and her neighbors felt when they learned that they could lose their homes: “People hung themselves and started using heroin,” she says. “Seriously, it’s a very bad feeling. It was not a good holiday season.”

HUD has apparently backed off from the foreclosure threat. The owner has paid the back debt and promised to address maintenance issues, and to meet with tenants every month to offer a progress report. But Robinson and her neighbors remain wary. Even with a new HUD deal, the owner could still fail to make necessary repairs.

And there’s no guarantee that the owners will stick with the subsidy program in the long run. That’s because all owners of these project-based Section 8 properties can pay off the remainder of their mortgages and get out entirely from their obligations to house subsidized tenants. It’s an attractive option for owners in a newly hot neighborhood, who can renovate buildings and then make a profit by renting or selling on the private market.

This may be the fate awaiting Renaissance Court, at 51 Wadsworth Terrace in Washington Heights. This 49-apartment building is in an extremely valuable area. Though landlord Louis Evangelista, Jr., is behind in his mortgage payments, he has told tenant organizers that he wants to pay off the government and drop his federal rent subsidies, which are set to expire in August. Evangelista did not return phone calls seeking comment. If he follows through on his plan, tenants could be forced out of the building this year.
–RN