BY FRANK MACKEN | In 1986, the owners of 37 Avenue B, Manufacturers Hanover Bank, occupied the ground floor and the (Hispanic and African-American) residents occupied six apartments above: five rent-stabilized and one rent-controlled. The bank decided to close, but the community rallied and the Lower East Side Peoples’ Federal Credit Union was proposed to take its place to keep local banking in the area.
Standard practice in the neighborhood then was to help low-income tenants set up an affordable housing residential co-op, or Housing Development Fund Corporation, under Article 11 of the Fair Housing Law. The residents would then became shareholders in their own building, with all of the clearly defined rights and responsibilities that ownership implies. Any commercial spaces would be rented (in this case to the credit union) to support the residential co-op.
The city’s Department of Housing Preservation and Development would figure out a stable budget for the building and, in turn, the H.D.F.C. would be approved by the state attorney general in Albany. This was happening all over the area. However, this was not what happened in the case of 37 Avenue B.
According to the residents, instead of involving the tenants in the process, the credit union’s founders negotiated directly with the bank — meanwhile, telling the tenants that they wanted to help them set up an H.D.F.C., as their neighbors were doing. The tenants were never allowed to meet with the bank until the deal was done and the credit union then said it had set up an H.D.F.C. for the building and called an initial organizational meeting.
When the usual co-op proprietary leases and shareholder certificates failed to arrive, one tenant began to make some inquiries. He went to a few agencies and was referred to the Urban Homesteading Assistance Board, or UHAB, which had been set up to support the new H.D.F.C.’s around the city. UHAB said they had no record of a 37 Avenue B H.D.F.C. co-op, but when they looked into it they found something new, a rental H.D.F.C.
Because the credit union could not own the commercial part of an H.D.F.C., what they had done was to set up a hybrid H.D.F.C. in which everyone remained a tenant, with the credit union now the commercial tenant, and nobody had any real ownership in or responsibility for the building. This backroom deal deprived the tenants of their right to ownership in order to protect the credit union’s claim on the building.
Thus disenfranchised, the tenants were trapped as tenants, but the credit union was now “protected” as the dominant party in a weak structure, and could control the building for its own purposes.
With nobody representing or advising them, the residents were divided among themselves and at a severe disadvantage.
The result was a disaster for them and for the building. By 1994 the credit union was having financial problems and wanted to contain the rising costs under its original H.P.D. lease.
The payments on the deferred mortgage formally transferring building ownership to the H.D.F.C. were due to start in October 1996.
The credit union now drew up an amendment to the original lease restricting any commercial rent increases to 4 percent every two years, just like the residents. Effectively, the credit union was now itself to become a rent-stabilized commercial tenant.
This amendment was presented to the residents in the guise of a “fairer” arrangement, with both sides paying the same and “sharing.” They were even told it was a new path to the promised land of co-op ownership and that all would be well in this best of all possible worlds. Blinded by financial jargon, the few tenants who remained on the board agreed. But what they did not realize was that this amendment also struck out all of the net lease provisions under which the credit union was liable for any payments for the new mortgage, any increased real estate taxes and any other costs relating to the commercial space. It was a classic bait and switch. This amended lease would cripple the financial health of the building, which was almost entirely based on the terms of the commercial lease.
Around 2000, I served on the credit union board for a few years with Rosie Mendez and other community reps. But the building’s finances were never mentioned and the history was hidden from the credit union board. When I asked who the tenants upstairs were, one of the current managers said, “just freeloaders.”
By the time I joined the 37 Avenue B board as the community member in 2003, the H.D.F.C.’s financial problems were becoming serious. Property taxes were rising fast. Fuel and utility costs and everything else were going up. But the commercial rental income had slowed to a crawl.
Every attempt the board made to persuade the credit union to restore the original lease was rebuffed. As the building slid toward default the credit union arrogantly offered to buy it out. Asked to scrap their 1996 amendment and return to their original lease payments, the credit union refused and demanded the tenants pay more instead. Their arrogance and “entitlement” has been astounding.
The People’s Mutual Housing Association management bookkeeper calculates the difference between the terms of the original lease and the amendment of 1996 at nearly $400,000 that the credit union has saved itself over 20 years, while gutting the building’s finances and running it into the ground.
The credit union’s rent in 1996 was $2,333 per month. Today they pay just $3,400 for 5,000 square feet. Meanwhile, the current market-rate rent for the space is $15,000.
The H.D.F.C. board then discovered that the credit union actually used only 4,000 square feet while renting the rest of the space at $2,800 per month, thus paying an effective rent of only $600 per month.
Confronted with this fact and asked at least to pay their own low rent and divert that extra sublet money into the H.D.F.C., they refused, and in a neat illustration of moral bankruptcy, they shuttered the sublet space. Today that 1,000 square feet still stands empty. Since last April, the loss of rent from that space is $33,600 — funds that the building desperately needed, and needs every year.
The credit union must now restore the lease, pay a fair rent, or vacate.
Simply put, the 37 Avenue B H.D.F.C. just needs a good commercial tenant.
The Lower East Side People’s Federal Credit Union, in the meantime, is doing very well. With an annual budget of $41 million, it garners many millions in grants every year. However, the executive salaries are no longer revealed to the members. The credit union’s net income from Sept. 9, 2013, to Sept. 9, 2014, was $1.41 million. Rent paid during that period: $40,000!
This is a success built on a history of exploitation and abuse of the actual residents, of the “rock” on which the credit union was founded.
It is time for a long-overdue change in management at the L.E.S.P.F.C.U.
At long last, have they no shame?
Macken is community representative, 37 Avenue B HDFC board
