The popular Third Party Transfer Program developed from Local Law 37 of 1996. The following provides some history of the law and program as it was evolving.

No Title
Preventing Abandonment Without City Ownership Under NYC Local Law 37 of 1996

by Brian P. Kavanagh, Jonathan Springer and
Sarah Stevenson of New York University Law School

Introduction
This paper examines the history and underlying causes of housing abandonment in New York City, and the City policies that respond to these problems. We focus on the most recent attempt to prevent deterioration and abandonment of affordable housing stock, Local Law 37 of 196 (LL37). This statute has two goals: to transfer neglected residential property into the hands of responsible owners capable of remedying code violations and correcting hazardous housing conditions; and to encourage delinquent owners to pay their property taxes. These goals are accomplished by transferring "distressed" properties, those in tax arrears and with significant code violations, from the delinquent owner to a third party. Unlike New York's previous in rem foreclosure policy, the City does not plan to take title to the properties. Rather, they will be transferred, lien-free, to a pre-qualified third party, thereby avoiding City ownership and all of its incumbent burdens.

The authors of this paper have been commissioned by Jim Buckley, Director of University Neighborhood Housing Program (UNHP), to analyze LL37 and examine the legal, logistical, and financial issues it raises. Indeed, these issues must be addressed in order to understand how, and if, the procedure established by this statute will work. UNHP, like many other participants in New York's affordable housing market, is interested in LL37 as a tool to preserve and rehabilitate affordable housing. UNHP's catchment area, and therefore its primary area of interest, is Northwest Bronx, near the South Bronx where LL37 is being piloted.

The outcome of this pilot will be extremely valuable in gauging the potential of LL37, as well as identifying problems that need to be resolved. This paper attempts to elucidate some of these problems, and to propose recommendations that may enable the City to utilize LL37 to its fullest potential.

Section 1 describes the causes of abandonment and housing deterioration, first from a national and citywide perspective, and then from the perspective of the Bronx. Section II then describes the University Neighborhood Housing Program and its history of successful work in preventing decline and abandonment, promoting affordable housing, and addressing a range of housing related issues. Section III describes the City's previous intervention efforts to prevent deterioration and abandonment, setting the stage for the enactment of LL37. Section IV outlines LL37, its purpose and procedure, and the status of the City's efforts to implement the law in Tax Section 10 in the South Bronx. Section V discusses UNHP's particular interest in LL37 and presents some of the questions raised by LL37. Section VI contains case studies of three properties scheduled to enter the LL37 pilot in Bronx Tax Section 10. The body of the analysis is contained in Section VII, VIII, and IX, which respectively explore the legal, financial, and logistical issues posed by LL37. Finally, Section X explores the complementary roles of non-profits and for-profits in the third-party disposition program.

Executive Summary
This paper examines the history and underlying causes of abandonment of housing in New York City, and the City policies that respond to these problems, focusing on the most recent attempt to prevent deterioration and abandonment of affordable housing stock, Local Law 37 of 1996 (LL37). Whereas previously, the City had taken title to properties for which property taxes had not been paid, the City now seeks to transfer tax delinquent, residential properties with signs of physical deterioration directly to responsible third parties capable of remedying code violations and managing the properties responsibly.

This year, the City began to implement LL37's provisions for transferring distressed, tax-delinquent properties to third parties. The City identified 174 properties in a single tax section in the Bronx and notified the owners that the properties will be transferred to third parties if the taxes are not paid. The City expects to receive a court judgment in January 1998 authorizing the transfer of those whose taxes have not been paid. The City must then transfer title within eight months; if it fails to do so, title will remain in the current owners' hands.

Conclusion Regarding Legal Issues
There is some concern that an owner who loses title to a distressed property under LL37 may have grounds for a successful legal challenge of the transfer. This possibility, if real, would deter third-party participation in the program. We analyzed two potential bases for a legal challenge: due process and equal protection.

Due Process Challenges: According to the terms of LL37, there are no opportunities for an owner to recover property once the deed is conveyed to a third party. As the City has not previously transferred title directly to third parties, but instead conveyed title to itself, there are no precedents for a due process challenge to the transfer of property under LL37. However, an examination of related precedents suggests that the former owner, even in situations in which the circumstances of the transfer would have given rise to a successful challenge had the City retained title, may lose the opportunity to challenge foreclosure once the property is transferred to a third party, barring extraordinary circumstances of oppressive or unfair conduct on the part of the City.

Equal Protection Challenges: Owners whose property is transferred may be expected to press an equal protection claim against the City if other owners, similarly situated, do not lose title to their properties. In the event of such a challenge, the City will probably prevail based upon the constitutionality of identifying different classes of property, on a rational basis, and treating them accordingly, or uon a broader theory of governmental discretion.

Conclusions and Recommendations Regarding Financial Issues
The success of the distressed properties program will hinge, to a significant extent, on the City's ability to arrange renovation financing that will make building financially viable after transfer, thereby attracting legitimate third-party transferees. We have identified several measures that the City might take to accomplish this.

Property Tax Abatement: The City should grant full enriched (30-year) tax relief to all conveyed properties, including those with occupancy rates under 60 percent if the law permits, in order to decrease building expenses.

Rent Restructuring: Restructure rents in vacant apartments and in occupied apartments in which tenants are able to afford rent increases in order to increase building income, but preserve rents in other occupied apartments so as to avoid teant displacement.

Equity Requirement: Facilitate the participation of non-profit developers in the disposition program by waiving an equity participation requirement, when ncessary. Aternatively, allocate nine percent federal low income housing tax credits to non-profit developers to enable them to meet any equity participation requirement.

Maximize Inexpensive Loan Funds: Increase the allocation of one-percent City funds as necessary, depending on the number of units unredeemed by landlords, the renovation workscopes involved, and market interest rate fluctuations. On a citywide basis, the City is anticipated to require between $1.4 billion and $1.75 billion to ensure renovation of all distress buildings.

Conclusions and Recommendations Regarding Logistical Issues
Physical Access: The City should clarify the legal basis for physical access to the premises of distressed properties, by ensuring that legislative or administrative standards are in place that articulate the government interest that warrants an intrusion on landlords' privacy interests and specifies the scope and method of the required physical inspections.

Building Information: The City or an intermediary should prepare a dossier of all necessary records for each building and provide it to each prospective transferee. This would include, for example: rent records, certificates of occupancy and documentation of housing code violations, as well as records of any renovation work subsidized by the City in the past.

Workscopes: Instead of requiring each prospective transferee's architect to prepare a workscope for each building, the City or an intermediary should prepare a single workscope for each building for which there seems to be genuine interest. Prospective transferees should review these workscopes with due diligence.

Common Workscope Specifications: The City or an intermediary should prepare standard specifications for distressed buildings, listing the kinds of materials to be used in renovation.

Standard Loan Documents: Boiler-plate documents should be drafted, and approved in advance by the City and financial institutions, with blanks to be filled in as necessary, and terms reasonable to all parties preset.

Expedited Approvals: Participating financial institutionals and the City should expedite approvals and ensure that there are no unnecessary requirements that tasks be done sequentially that could be done in parallel. Perhaps the City could delegate some approvals to an administrative intermediary.

Smaller Geographical Areas: Pending the results of the pilot in Bronx Tax Section 10, the City should probably make use of its new power to vest properties in a smaller geographic area.

Intermediate Receivers: The City should develop a mechanism, perhaps using the existing 7-A Administrator program, to appoint receivers as soon as possible after a judgment authorizing third-party transfer is issued, to ensure that basic maintenance occurs in occupied buildings on the distressed properties list. Responsible non-profit and for-profit landlords should be invited to play this role.

Lengthening the Time Frame: If a mechanism, such as receivership, can be identified to ensure that distressed properties are not neglected during the post-judgment period, the City should amend LL37 to extend the eight-month deadline for third-party transfers.

 

Recommendations Regarding Non-Profit vs. For-Profit Transferees
Non-Profit Developers: Non-profit developers should be allowed to develop buildings where tenants have expressed an interest in working with the non-profit.

For-Profit Developers: Responsible for-profit developers with proven track records should be allowed to develop buildings, especially ones in proximity to buildings they already own.

All Developers: All developers with the requisite capacity should be allocated packages of buildings in order to achieve economics of scale in the development process.

Summary of the Affordable Housing Forum on the City’s Selective Vesting Process under Local Law 37 of l996

Joseph Muriana, the President of UNHP, called the meeting to order and introduced the panel: Sarah Stevenson and Brian Kavenagh of NYU Law school; Ted Weinstein of HPD, Bill Frey of the Enterprise Foudnation.

Sarah Stevenson and Brian Kavenagh presented the results of their study of Local Law 37:
The students presented background information on Local Law 37 and the plans for the City’s implementation of the program as of December l997. The law represents a major shift in City policy. The city is determined to never take title as the City of New York. Local Law 37 allows the City to engineer the transfer of the title of the buildings from the current owner to a pre-determined third party.

They determined that the potential legal challenges to the taking should be overcome as long as the City treats owners of similar properties in the same manner. They reviewed the process of the taking in Tax Section 10 in the South Bronx. Once the judgment is signed by a judge, there is an 8 month process initiated. The first four months, the city must allow an owner to pay their taxes; during the next four months, the city must complete the transfer of the buildings to third parties.

The students raised a number of issues and suggested a number of recommendations to the program:

Ted Weinstein of HPD explained that the Local Law 37 is part of the City’s anti-abandonment program. The program has three aspects: the tax lien sales, where city liens are sold to a trust; the new In Rem process as part of Local Law 37; and new outreach to buildings that were in difficult situations.

The new In Rem process is being implemented in Tax Section 10 in the South Bronx. The taking includes properties previously identified in the Department of Finance’s In Rem listings 40-41 and 42. Tax Section 10 is a pilot; it was selected because it was felt that there was a manageable number of properties that would be taken in the vesting. There were initially 174 properties on the initial list. There are 91 still included in the current judgment as it has been submitted to the court for a judge’s signature. 42 of the properties are occupied buildings; 25 of those are over 4 units. 22 properties are vacant structures; 8 of those are vacant structures over 4. 27 properties are vacant lots.

The papers are waiting for the judge’s signature. As soon as the judge signs the order, the 4 month mandatory redemption period begins. An owner who comes in redeem their building will have to put at least 50% of the total open city charge down to enter an In Rem agreement. After the four month mandatory redemption period is concluded, the City cannot make an agreement with the old owner. The City has another 4 months to transfer the title to a third party. If the transfer does not take place in the second 4 months, the process has to start all over again.

As part of the new law, the City has to identify the ultimate third party recipient of the deed. The City must submit the names of the new third party owners to the City Council. The City Council has 45 days in which the Council can act to reject a specific third party.

The City is currently preparing a Request for Qualifications for the list of third party transferees. He urged anyone interested to apply to the RFQ when it is issued since the City will probably use the list for future vestings.

The City is anticipating grouping the buildings that are taken and matching them with qualified third party transferees. The City is estimating that the renovation cost per occupied unit will be $25,000.

The city is actively discussing utilizing an intermediary/holding company to take ownership prior to being transferred to the ultimate third party owner.

The City has targeted $30 million for the program.

William Frey was introduced. He noted that the key to the vesting taking place successfully and with minimum discomfort for tenants in occupied buildings is to secure operations quickly. Transferring ownership and lining up renovation money cannot happen in the tight time frame identified in the legislation. One way to address that is to transfer the property to a holding company with enough working capital money to maintain the occupied buildings and give the tenants a sense that there will be improvements in the building in the near future.

He also noted that the City will probably be looking at ways to use existing programs like the 8A loan program and the PLP program other existing programs for small buildings to work with the housing that is taken.

He felt strongly that there is a role for both non-profits, for-profits and joint ventures between both.

He also indicated that there are ways to be creative about finding the necessary equity to allow non-profits to meet any potential equity requirement.

Questions and Answers:

Q. Will occupied buildings have the option of going into TIL or if HDFC’s already, will there be an option to enter those buildings into TIL?

A. No since the buildings will not be city owned. At this moment, HPD believes that there are 5 HDFC buildings in the vesting. A non-profit can apply and propose doing something themselves with the building to involve the tenants.

Q. How will the City Council be involved in the decision making process on third party transferees?

A. The City Council will have 45 days in which they could affirmatively reject an entity that has been identified as the third party for a building or set of buildings in the vesting.

Q. Does the third party have the right to reject buildings that might be included in a package for which they have been selected?

A. The City will try to match the third parties with packages that they can handle.

Q. Will the RFQ include questions about the groups’ interest or capacity to handle different types of buildings and rehabilitation?

A. The City anticipates that such a question will be included.

Q. Will there be a condition on the transfer to ensure that the building is put into and maintained in good condition? Can the city take the building away if the work is not done or the conditions not met?

A. There would be language in the loan agreements that would require that work be done.

Q. Is there a plan for dealing with existing tenants in 1-4 family buildings?

A. HPD is trying to identify owner-occupied buildings and is trying to do outreach to those buildings.

Q. Has there been an estimate of building renovation costs yet?

A. The HPD Division of Architecture has been out to most of the buildings. The average cost of rehabilitation in an occupied building is $25,000 per apt. and $70,000 in a vacant building.

Q. Have the buildings been clustered and what is the range of units in each cluster?

A. The final list of buildings cannot be determined until the 4 month mandatory redemption period ends.

Q. Can a group recommend a cluster to the City?

A. Ted Weinstein said he would inquire.

Q. Is there any procedure to deal with rents rolls that may be questionably legal due to non-filings or otherwise with DHCR?

A. It is anticipated that the City will use its rent re-structuring authority as part of the renovation loan. The City might consider implementing the restructuring earlier than is currently done in the PLP program.

Q. Will the rents be raised on occupied apartments?

A. That would have to be reviewed on a case by case basis. Without Section 8,there is a need to determine other ways to deal with the financial needs of the buildings.

Q. Will there be a restraint against third parties that may manage buildings for the holding company and will there be an asset cap on applicants for the RFQ similar to the NEP program?

A. The intent of the City is to get the ultimate third parties identified as quickly as possible and if a holding company is used to have the third party assume management prior to the actual transfer of title to them.

Q. How frequently will these vestings take place?

A. The intent is to keep moving to new areas on a regular basis. The amended law allows the City to take areas smaller than a tax section.

Q. How will operations be subsidized during the period prior to renovation; will ERP funds be used?

A. The City intends to develop a separate source of funds to use as a working capital fund.

Joseph Muriana thanked the audience and panelists for a very informative morning. It was announced that UNHP will be sponsoring a second forum on "Filling the Gap" in affordable housing development on Friday, May 8th at Fordham’s Lincoln Center Campus. 

 

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