Painful Numbers at Island House

by Dick Lutz

Looking down the double barrels of a shotgun labeled "privatization," Island House residents can thank the spirit of youthful wanderlust for Geof Kerr.

A chartered accountant trained in his native England, Kerr (it's pronounced "car") discovered New York on a world tour he decided to take as a young man faced with career choices. A planet of options before him, he worked for a time in Japan, then landed in New York as Grolier's Vice President of Planning and Budget, where he retired - with a golden parachute - after serving as Chief Financial Officer. Eventually, on Roosevelt Island, he came to serve the community as its Scoutmaster, volunteer tax-preparer for seniors, and as auditor of questionable demands upon the Island's supply-short and demand-heavy market for Main Street parking. Those roles are undiminished, but now, he also serves his fellow tenants as the Island House Tenants Association's number-cruncher. Actually, he finds he's not so much a number-cruncher as he is the cruncher of a series of painful educated assumptions.

As Island House owners move the building away from the comfortable haven of New York State's Mitchell-Lama affordable-housing program, Kerr's educated assumptions have to do with the raw unknowns of several critically important numbers. Each, though only imprecisely known at this point, will inevitably be higher than any resident would like. When taken together in all the conceivable combinations that go into the formulas of Kerr's spreadsheets, they generate choices that will be difficult for many of Kerr's fellow tenants.

"We have a little bit of a problem here because residents obviously want numbers," Kerr says. "But then, we have our lawyer telling us, 'Don't give specific numbers. You'll get sued for it later.'" So every Kerr presentation starts with a disclaimer: "The numbers used in this presentation are estimates only and may change significantly before the final deal with the owner is reached... [etc.]."

Later this month, in a process likely to take about a week, Island House residents will be surveyed and asked to express their preferences in response to information energetically pushed out in a May meeting in the Chapel of the Good Shepherd, then in a series of more intimate sessions held in the Island House community room. In the survey, Kerr's assumptions about what the numbers could be are bound to be important guideposts, as necessarily out-of-focus as they must be. There are the educated assumptions about what final figure the Sheldrake Corporation, speaking for the ownership group, might accept as the price of the building in any tenant-ownership plan. There are assumptions about interest rates, about possible tax breaks, cost per square foot, and about the cost of repairs - and, unavoidably, guesstimates about what proportion of tenants will want to become owners and then be able to muster the financial resources to take that step.

In those assumptions lies the pain. Like a physician who senses and sympathizes with a patient's pain but must deal with what's workable in finding a cure, Kerr is able to step back and assess dispassionately what the worst-case and best-case and likely-case numbers will mean.

Amrah Cardozo, one of the co-chairs of the tenant group working on all this, says, "Because there are not yet any firm numbers, people are saying, 'Well, I want to buy, but...' But we have to start with some idea: Do we have about half of the people in the building interested in a tenant-sponsored buy-out? Do we have an idea if full equity is an option preferred over scaled equity?" This month's survey of preferences is intended to get at those answers. Cardozo continues: "Some people believe that 100% of the people living here can buy, which is not true. Some believe that only 50% can buy."

And Kerr says, "The experts tell us that until the final day of the offering period, we won't know how many are going to buy."

It doesn't make him happy, but his best educated assumptions lead to much higher cost-of-housing numbers. In any plan that fits the Sheldrake vision of profit from privatization of Island House, residents will be paying out at least 50% more than what they pay now, but one calculation puts the increase at as much as 134%.

The Possibilities

There are three feasible futures, according to the analysis by Kerr and the Island House tenant group that has been studying them and steering discussions with Sheldrake:

Owner-Sponsored

One possible future is an owner-sponsored tenant-ownership plan, in which the owner would call the shots: create the offering plan, set the prices, make the sales, and hang around for an indeterminate future of renting to those tenants who opt not to buy. One tenant characterizes that approach as "giving up" and letting the owner handle everything. Residents working on the matter perceive that Sheldrake isn't interested in that approach because Sheldrake, they believe, wants a quick turnaround and a quick profit.

Of course, "quick" in this case means more than a year. Although it could be "quick" as these things go, it would certainly not be "instant." Any plan will require State approvals and meticulous navigation of a step-by-step process. But to turn a possible long-term involvement into a shorter-term gain, the Sheldrake Organization, which has the building under contract, is believed to prefer a tenant-sponsored conversion.

More important, the tenants working on this know that at Ruppert-Yorkville, under an owner-sponsored plan, 80 percent of the residents were gone after three years. That's because many cashed out and took their profit from lower insider prices, while others who had continued as renters left in anticipation of the end of four years of rent protection. That's a rate of dislocation everybody wants to avoid because, by and large, Island House tenants seem to like living in Island House and in the Roosevelt Island community.

"People want to stay here," says Mario Naves, the other co-chair of the working group. "There are some who are interested in flipping and perhaps making a killing, but that's the minority. We've heard mostly from people that they like living here, they like the community, they like the quality of life, and they'd like to stay here."

Other Choices

For tenants wanting to have some control over their future, these facts lead to two other choices. Each involves tenant sponsorship of a conversion.

In one - full market price with payments in lieu of taxes (PILOTs) at full rate - Sheldrake has calculated that total housing cost would rise to as much as 234% of today's costs. That's for common charges (often called "maintenance") plus the cost of a 6.25% mortgage with a very low down-payment or none at all, and it assumes a purchase price of about $295 per square foot, presented by Sheldrake as a non-negotiable figure early this year. Says Kerr, "It struck me as a peculiar way to start negotiating, because they said, 'The price is $295 a square foot, non-negotiable. You want to debate it, we take it off the table.' So we have never debated the price per foot. We may discuss the price of the building, but not the price per foot. It just struck me as a peculiar way to start discussions."

The numbers would mean that, in a tenant-sponsored full-equity conversion, in place of every $1,000 in rent paid in May of 2005, a purchaser could be paying $2,340. Even if there were an unexpected gift of a tax abatement from government, the monthly outlay would still be more than double today's costs, according to Kerr's calculations.

That leads the tenant planners to the second tenant-sponsored approach, called "Affordable Scaled Equity."

The reasoning behind an Affordable Scaled Equity plan is that if buyers are willing to scale their acquisition of full equity in their apartments over a period of, say, ten years, government is more likely to give a break on ground rent and taxes. (Indeed, Kerr says, "If it proves totally impossible to get any kind of breaks out of RIOC, then it makes no sense to look at a scaled-equity plan.") Under such a plan, purchase of the building would involve two components in a split - the individual buyers of individual apartments with those mortgages, and separately, the tenant corporation carrying a major mortgage as part of the total package.

In effect, the underlying mortgage on the building as a whole would subsidize an insider price for each apartment, making it lower and within reach for more buyers. All of Kerr's carefully considered assumptions lead to an insider price of, perhaps, $160 to $175 per square foot. "It looks like a 70% increase in housing costs, using 'outside' numbers," Kerr says, "but my goal is to get it down to a 50% increase."

In exchange for such an arrangement, buyers would accept a "period of restraint" of a decade or so, during which their allowable resale price would rise something like 10% per year until, finally, they would be allowed to sell at a market price.

The appeal of such an approach is in the lower initial cost, the greater possibility of a tax break, and a lower temptation to "cash out" - and, in turn, greater stability, as buying residents gradually increase their stake over the ten-year period of restraint. Residents also might hope that the market value of their apartments would increase more rapidly than their investment in them, providing a kind of on-paper advance in equity that could only be realized after the ten years ended.

For those who would stay as renters, there would be a ten-year period of rent protection, probably based on (though not subject to) New York City's rent-stabilization guidelines. There might be help from City programs for seniors and low-income tenants (though little of such support seems to be available, says Kerr). And renters could become purchasers if their economic circumstances changed, as in the case of a significant bequest from the legendary "rich old Aunt Mildred." (The price they would pay would go up each year, rising in the same annual measure as the equity increases for those already in the purchase program.)

Consequences

As tenants express their preferences for one of these approaches to a privatized future, economic dividing lines could be drawn through the Island House tenancy, separating those whose personal or economic circumstances would lead them to stay as renters from those who would buy; and perhaps separating those whose incomes make tax breaks on mortgages appealing from those whose income is too low to produce any leverage in tax breaks. In addition, some are concerned that the large proportion of international tenants will see things very differently from residents who are U.S. citizens, and possibly skew a preference poll.

Immediate Future

Once a preference poll has been taken in the building, the Tenants Association will produce a memo of understanding to be sent to Sheldrake, "sort of a price and a plan," as Kerr characterizes it.

After that, negotiation and more steps will follow.

In fact, Kerr emphasizes the time scale: "One of the things we've been at pains to explain is that nothing's going to happen immediately. The best-case scenario is that it will take [at least] a year, just by virtue of the time frames involved. Assuming we come to an immediate agreement with Sheldrake on price and all the rest of it, then you've got to go through the process of making up an offering document, and that includes getting all kinds of consulting reports and so on, and then that has to go to the Attorney General as a red herring, and then he spends four to six months with it, and when you get his final approval, you put out the black book as an offering document. Then you've got 120 days to think about it. So it has to take at least a year - more likely, a year and a half, I would think - so people don't have to worry about being thrown out on the streets right now."