Rents Within Reach for 50 Years

Lower East Side’s Depression-Era Equivalent to Gateway Plaza Preserves Affordability Through 2069

Knickerbocker Village, in Two Bridges

City Council member Margaret Chin has brokered an agreement that will preserve affordability for rental tenants at Knickerbocker Village, a giant apartment complex in the Two Bridges neighborhood, which was built by a public-private partnership in the 1930s.

The complex bears striking similarities to Battery Park City’s largest residential development, Gateway Plaza. Both boast multiple buildings (12 on the Lower East Side and six in Battery Park City), surrounding a central garden. Each has a similar number of apartments: 1,590 for Knickerbocker Village and 1705 in Gateway Plaza. And the two projects were conceived as bulwarks of affordability.

Perhaps most crucially, they were each made possible by federal funds, administered through a New York State program, called the Private Housing Finance Law (PFHL), Article IV of which creates an unusual form of corporation, known as a Limited Dividend Housing Company. This law provides developers with low-interest loans, and other subsidies, in exchange for a promise that the apartments they build will remain affordable. The “limited dividend” provision refers to a cap on the amount of profit that developers are legally allowed to take out of such a project. Any funds above this threshold, rather than being disbursed to investors, were deposited in an escrow account, reserved for maintenance and capital repairs.

That law says, “no shareholder, partner or beneficiary of a trust having an interest vested in possession in any housing company formed hereunder shall receive any distribution on capital in any one year in excess of six per centum per annum,” meaning six percent each year. These terms were attractive to developers in the 1933, when the Fred F. French company broke ground on Knickerbocker Village, shortly after the onset of the Great Depression. They were alluring once again, in the late 1970s (as New York was experiencing the worst crash in real estate prices since the Depression), when the LeFrak Organization started building Gateway Plaza.

But conditions that seem reasonable in hard times can begin to appear onerous (at least to developers) when market conditions become favorable, and the return on capital rises to much more than six percent each year. The corporation founded by Mr. French (he died shortly after Knickerbocker Village was completed) sold the complex in the 1970s, after which it passed through a succession of owners. In 2004, when New York’s real estate market was reaching unprecedented valuations, Cherry Green properties (the current landlord at Knickerbocker Village) sought permission to exit the State’s Article IV program, which would have had the effect of annulling all affordability protections at Knickerbocker Village. The owners received approval from the commissioner of the State Division of Housing and Community Renewal (DHCR), the agency that oversees and regulates Limited Dividend Housing Companies. This prompted a lawsuit, in which the State Supreme Court ruled that DHCR and its commissioner have no legal authority to permit such an exit.

Gateway Plaza, in Battery Park City

This is the point at which the similarities between Knickerbocker Village and Gateway Plaza end. In 2009, Gateway Plaza’s landlord was negotiating with its own landlord, the Battery Park City Authority (BPCA), from which agency LeFrak rents the ground beneath the buildings, through the year 2069. The LeFrak Organization was seeking concessions on their ground lease, in exchange for extending affordability protections at Gateway, which were set to expire that year. One of LeFrak’s demands was consent from the State to withdraw from the Limited Dividend Housing Company program, which the New York Supreme Court had a few years earlier barred Knickerbocker Village from exiting.

But not all claimants are alike in the eyes of the law. The Private Housing Finance statutes were amended in 1962 and 2003. One of the changes enshrined in the new version of the law was that any Limited Dividend Housing Company organized after 1962 could, with the consent of the DHCR commissioner, exit the program. Local elected officials, who were scrambling to avoid an expiration of affordability protections at Gateway, arranged for this approval.

This meant that LeFrak was able to realize a benefit that the landlord at Knickerbocker Village could only dream of: The funds in the escrow account set aside for maintenance and capital repairs (which had been accumulating all profit above six percent, each year for decades) suddenly became liquid, and reverted to the owner. In LeFrak’s case, this windfall amounted to many tens of millions of dollars.

In another contrast, affordability protections were fully preserved at Knickerbocker Village, where a one-bedroom apartment today rents for $810 per month, and a three-bedroom units are priced at $1,250. In Gateway Plaza, under the 2009 agreement, rent stabilization was preserved only for then-current tenants. In the years since, attrition and churn have led to fewer than half of all Gateway households receiving any rent protection, and market-rate rents now price studios at more than $3,000 per month, while two-bedroom units go for more than $5,000 per month.

Since losing the 2004 court battle, Knickerbocker Village’s landlord has continued to search for a way to emulate LeFrak’s success in extracting cash from Gateway Plaza. In 2006, DHCR ordered the owners to stop holding meetings with tenants about a possible conversion of the complex to a condominium or cooperative structure.

And in 2014, Knickerbocker Village management applied to DHCR for permission to impose an across-the-board rent increase of 13 percent, arguing that the extra funds were needed for maintenance and repairs. This sparked fury among low-income tenants, who argued that the jump would create an insurmountable financial burden. Tenant leaders also claimed that the alleged financial hardship Cherry Green was using to justify the increase was self-inflicted, arguing that the landlord had deliberately “warehoused” an inventory of large apartments, by keeping them vacant (and thus off the rent rolls) for years at a time, rather than leasing them to new tenants at the legally required modest rates — possibly in hope of renting or selling these valuable units at much higher prices if a privatization plan were ever approved.

Councilmember Margaret Chin

Much of this uncertainty appears to have been rendered moot by the City Council legislation spearheaded by Ms. Chin. Under the terms of this measure, Cherry Green will receive a tax abatement of $3 million per year, for the next 50 years. This amount (which reduces the complex’s property tax to about $400,000 a year, a discount of slightly more than 88 percent) coincides almost exactly with the increased income that the landlord anticipated would be derived from the proposed rent increase.

In exchange, Knickerbocker Village’s landlord has agreed to abide by tighter limits on rent increases. The details of this cap are still being negotiated, and will be explored at a hearing hosted by DHCR this month. But the agreement appears to provide a framework for preserving affordability at Knickerbocker Village for the next half century.

“Combatting the housing crisis isn’t just about creating new affordable housing,” Ms. Chin said. “It’s also about protecting the precious affordable housing stock already in place. In neighborhoods like Two Bridges, we have seen the cost of this crisis as rising rents, gentrification, and a shrinking pool of affordable places to live threaten to fundamentally change the community and displace longtime residents.”

“To meet the challenge before us, we must pursue an all-in strategy to maximize every resource,” she continued, “including saving as many affordable units as possible. By preserving all 1,590 housing units, this resolution will help to ensure Knickerbocker Village remains a home for working New Yorkers and seniors on fixed incomes.”

And this is the point at which the similarities between Knickerbocker Village and Gateway Plaza may (or may not) resume. Current affordability provisions at Gateway are slated to expire in seven months, at which point even the minority of tenants who are protected against huge rent increases will see their leases revert to market rates. Whether elected officials and the BPCA, all of whom are aggressively working to preserve and extend Gateway affordability protections, will have success similar to Ms. Chin’s effort at Knickerbocker Village remains to be seen.