Written by attorney Benjamin Flavin

HDFC Co-ops: Current Regulation

Housing Development Fund Companies (“HDFC") cooperatives are housing co-ops created pursuant to Article XI of New York State’s Private Housing Finance Law (“PHFL"). According to PHFL Art XI section 573(3)(a) HDFCs are “organized exclusively to develop a housing project for persons of low income". This statement is a required element to the HDFCs certificate of incorporation.

In October 2010 the New York City Department of Housing Preservation and Development (“HPD") issued a letter* to HDFC shareholders to explain the often confusing regulations under which HDFCs are monitored and governed. Specifically HPD’s intent with the letter was to shed light on the selling of co-op shares, renting apartments, and the fiduciary responsibility of board members. The letter refers indirectly to several sections of the PHFL as authority for the recommendations and suggestions the agency makes in its letter.

Sales of Shares Must Maintain Affordability Standards

In an attempt to define the statutes requirement that HDFCs be exclusively organized “to develop a housing project for persons of low-income" HPD refers to the definition of low-income contained in the co-op’s deed or certificate of incorporation. Often this definition is taken from section 576(b) that states:

“Dwellings in any such project shall be available for persons or families whose probable aggregate annual income does not exceed six times the rental (including the value or cost to them of heat, light, water and cooking fuel) of the dwellings to be furnished such persons or families, except that in the case of persons or families with three or more dependents, such ratio shall not exceed seven to one. For purposes of this paragraph, tenants in a housing project of a housing development fund company organized under the provisions of the business corporations law and this article shall have added to their total annual carrying charges an amount equal to six per centum of the original investment of such person or family in the equity obligations of such housing company." N.Y. Priv. Hous. Fin. Law § 576 (McKinney).

Broken down this section of the statute states that co-op units are meant as homes for people whose income not exceed six times the yearly housing cost. The law also allows for the addition of 6% of the original investment made by the resident to the annual housing cost in co-ops formed pursuant to the Business Corporation Law (“BCL"). In other co-ops, the HPD explains that the definition of low-income is stated as either 120% or 165% of Area Median Income (“AMI"). According to HUD, and in turn HPD, housing is generally considered affordable when a family spends no more than 30% of its gross annual income on housing costs (mortgage, rent, utilities, etc.). AMI is the dollar amount where half the population of a particular area earns more and half the population earns less. The 2010 Area Median Income for New York City at 120% or 165% of AMI are below:

Family Size 120% of Area Median Income 165% of Area Median income 1 person $66,600 $91,600 2 person $76,100 $104,600 3 person $85,500 $117,650 4 person $95,050 $130,700 5 person $102,700 $141,250 6 person $110,300 $151,650 7 person $117,950 $162,500 8 person $125,500 $172,600

In many HDFC certificates of incorporation, it appears on the surface that the restrictions to provide housing to low-income people and specifically the corresponding standard for low-income, expires after a period of ten or fifteen years. HPD infers that though the terms of the definition may have expired, the provision that the co-op was organized to develop housing for low-income people stated in the co-op’s certificate of incorporation does not expire. In this case the co-op should adopt a new low-income standard, not to exceed 165% of AMI.

HDFC Co-ops Intended to be Owner-Occupied

Section 573(4) of the PHFL states the intended use of units in an HDFC co-op is for occupancy by the shareholders. The statute states:

“The certificate of incorporation of any such corporation organized pursuant to the business corporation law and this article shall, in addition, provide that each housing project of such corporation shall be operated exclusively for the benefit of the persons or families who are entitled to occupancy in such housing project by reason of ownership of shares in such corporation, and that such corporation may issue shares for home owners purchase notes if the purchase transaction has received the written endorsement of the commissioner in accordance with supplementary rules and regulations of the commissioner made therefor and if at least two hundred dollars in money or property is received by such corporation toward the issuance of such shares." N.Y. Priv. Hous. Fin. Law § 573 (McKinney) HPD addresses the issue of co-ops renting apartments in this letter by stating that all vacant HDFC owned apartments must be sold to new shareholders who have stated their intention to owner-occupy. Although the letter does not address currently rented apartments, HPD does take a clear stance on subletting. It states that generally the co-op should have a sublet policy that limits subletting to 18 months in a five year period, and that the subtenants should fall within the co-op’s income guidelines.

HDFC Directors are Legally Required to Act in the Best Interest of the Co-op

HDFC directors hold a fiduciary duty to act in the best interest of the co-op not unlike the duty imposed on the boards of for-profit and not-for-profit organization. Section 573(b) goes further to state that the corporation can not benefit any individual:

“[t]hat all income and earnings of the corporation shall be used exclusively for corporate purposes, and that no part of the net income or net earnings of the corporation shall inure to the benefit or profit of any private individual, firm, corporation or association…" N.Y. Priv. Hous. Fin. Law § 573 (McKinney)

HPD defines this to mean that board members that are not providing direct services to the co-op (i.e. accounting, legal, etc.) can not be compensated. The agency gives guidelines for Board of Directos in HDFC co-ops:

• A director should abstain from voting when the board is considering selling or contracting with that director’s friends or relatives, as it constitutes a conflict of interest • Directors should ensure the co-op’s taxes and water and sewer are paid • Boards should ensure shareholders receive an annual financial statement • Corporations should hold annual elections

HDFCs receive a substantial real property tax benefit for adhering to these regulations. Though it is unclear the steps HPD will take to enforce these provisions in the HDFC governing documents, the agency has made at the very least a statement of the best practices it expects HDFC co-ops to follow. Shareholders and Boards of Directors should contact UHAB, HPD or an attorney familiar with HDFCs with questions regarding their co-op, their board practices and the regulations governing the HDFC.

*all reference to the HPD letter are to a letter dated October 4, 2010, RE: Housing Development Fund Corporation (HDFC) Cooperatives.

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