Private Housing Finance Law: Mitchell-Lama, HDFCs, and Article 15

The New York Private Housing Finance Law is the state statute that pushes private capital into affordable housing by offering developers low-interest state loans, real property tax exemptions, and regulatory backing in exchange for hard caps on rents, profits, and tenant income. Several distinct programs sit under this one law, each aimed at a different income tier and property type: Article 2 Limited-Profit Housing Companies (the Mitchell-Lama program), Article 11 Housing Development Fund Companies, and Article 15 participation loans for rehabilitating existing multiple dwellings. The trade-off is the same across all of them. Cheap money and tax relief come in; a regulatory agreement locks the property into affordability obligations that can run for decades.

Mitchell-Lama Limited-Profit Housing Companies

Article 2 governs Limited-Profit Housing Companies, the legal entities behind Mitchell-Lama. The state makes low-interest mortgage loans to these companies, and the ceiling on those loans depends on what kind of entity is borrowing. Mutual (co-op) companies, urban rental companies, and certain non-profits serving colleges, hospitals, or child care institutions can borrow up to 95 percent of total project costs. Non-profits providing housing for low-income elderly or disabled residents, and low-income non-profit housing companies generally, can borrow up to 100 percent.¹ The state loan is secured by a first mortgage lien on the property.

In return, the law caps investor returns. Dividends on outstanding stock are limited to six percent per year, and interest on income debentures is capped at six percent as well. Companies whose loans closed after July 1, 1969 can pay above six percent with approval from the Commissioner or supervising agency, but never above the ceiling set by the Superintendent of Financial Services.² The obligation is cumulative: a shortfall in one year has to be made up out of future earnings or cash surplus before anything else can be distributed.

The corporate structure needs approval from the Commissioner of Housing or the local supervising agency, and bylaws are drafted to put housing stability ahead of financial return. Rents and carrying charges are state-regulated to stay affordable for middle-income households. Every tenant in a state-supervised Mitchell-Lama development has to file an income affidavit with the management office by April 30 each year.³ The state cross-checks the reported figures against Department of Taxation and Finance records. Tenants who don’t submit the paperwork face a 50 percent surcharge on rent or carrying charges after one month’s notice.

The Section 33 Tax Exemption

The most valuable piece of the Mitchell-Lama package is the real property tax exemption under Section 33. The exemption continues for as long as the company’s mortgage loans remain outstanding, including any additional mortgage approved by the Commissioner or supervising agency for the residential portion of the project.⁴ For projects with federally insured or federally held mortgages, the exemption runs from the date the federal mortgage attaches for as long as that mortgage is insured, held by the federal government, or has any residual debt outstanding.

Consent to reduce taxes under these provisions expires every ten years. If the authorization is not renewed, the tax rate reverts to what it was before the reduction. When the original exemption period ends, a project can receive an additional exemption of up to 50 years if it continues operating under Article 2’s affordability restrictions.⁴ Over the life of a project the exemption can be worth millions of dollars, which is why non-compliance is treated so seriously.

Leaving the Program: Dissolution and Buyout

Mitchell-Lama developments have a legal path out of the program. For companies that got their loan after May 1, 1959, dissolution can happen without the Commissioner’s or supervising agency’s consent 20 years after the occupancy date, so long as the company pays off all remaining principal and interest on its mortgage plus any dissolution expenses.⁵ Companies with older loans made before that date have to wait 35 years and also repay the municipality an amount equal to all the taxes exempted during the program period. That repayment is waived if the company dissolves after the original mortgage maturity date.

The buyout starts with a Notice of Intent filed with Homes and Community Renewal no earlier than 365 days before the anticipated dissolution date. Once HCR accepts the filing, the company has to serve a Notice of Public Meeting on every tenant by door delivery, and on HCR and local elected officials by certified or registered mail, no earlier than 90 days before dissolution. The public meeting has to fall between 10 and 20 days after the notice goes out, and at least 60 days before the planned dissolution date.⁵ None of the buyout costs can be passed to tenants through rent increases or assessments.

For Mitchell-Lama cooperatives, the vote to authorize dissolution needs approval from 80 percent of all dwelling units for which shares have been issued, whether or not those units are occupied.⁶ Vacant apartments count in the denominator, which sets the bar deliberately high. Once dissolution takes effect, the Section 33 exemption ends and the project is no longer bound by Article 2.

Housing Development Fund Companies

Article 11 sets up Housing Development Fund Companies, corporate entities focused exclusively on low-income housing. An HDFC has to be incorporated under either the Business Corporation Law or the Not-for-Profit Corporation Law, in combination with Article 11, and the corporate name must include “housing development fund corporation” or “housing development fund company.”⁷

The certificate of incorporation carries several mandatory provisions. It must state that the company is organized exclusively to develop housing for persons of low income. It must declare that all income and earnings will be used exclusively for corporate purposes, with no net income benefiting any private individual, firm, corporation, or association. If the company receives a loan from the housing development fund, the certificate must also authorize a regulatory agreement with the Commissioner of Housing and Community Renewal or the supervising agency covering rents, profits, dividends, and the disposition of property.⁷

The Commissioner or supervising agency can appoint enough new directors to control a majority of the board if the agency determines that a loan is at risk of non-repayment or that the housing project may not be built. The Secretary of State will not file the certificate of incorporation, or any amendment to it, without the Commissioner’s or supervising agency’s consent.⁷

When an HDFC sells property or dissolves, the proceeds don’t flow to shareholders or private parties. All income and earnings must be used exclusively for corporate purposes, which for an HDFC means proceeds from a sale of real property have to go toward developing housing for low-income persons. The Attorney General’s office has said that distributing proceeds to shareholders is prohibited by law, and that the board must obtain explicit written approval from its supervising agency on how proceeds will be applied to low-income housing purposes.⁸ Transferring real property requires approval for two amendments to the certificate of incorporation: one authorizing the sale, and a second for the post-disposition dissolution of the company.

Article 15 Participation Loans

Article 15 creates a way to blend public and private financing for rehabilitating existing apartment buildings. One or more private investors and a municipality, acting through its agency, jointly make loans to the owners of existing multiple dwellings for rehabilitation work.⁹ The private investors are typically commercial banks or insurance companies that would not ordinarily lend in the neighborhoods where these buildings sit.

The key feature is that the municipality’s mortgage interest can be subordinated to the private investor’s interest.⁹ If the borrower defaults, the private lender gets paid first. That subordination is what makes participation loans attractive to private capital: municipal money absorbs the risk, and public dollars stretch further. These are loans, not grants; they carry mortgages on the rehabilitated property, and their terms have to be approved by the supervising agency.

Applying for PHFL Financing

An application starts with a corporate, financial, and site-related documentation package. The foundation is a Certificate of Incorporation that explicitly references the relevant PHFL article. For an HDFC that means the Section 573 language on low-income purpose, the restriction on private benefit, and the regulatory agreement provisions. For a limited-profit housing company the certificate has to reflect Article 2’s dividend limitations and supervisory oversight.

The application also needs a project budget covering acquisition, construction, and professional fees; evidence of site control, usually a deed, long-term lease, or fully executed purchase option; a unit breakdown by income level; and projected operating expenses. Forms are available through the online portals of Homes and Community Renewal and, for New York City projects, the Department of Housing Preservation and Development.¹⁰ Income targets in the paperwork have to line up with the specific eligibility tiers in state guidelines. Inconsistencies among the budget, unit mix, and income projections are one of the most common reasons an application stalls.

Environmental Review

Any project needing a discretionary government approval in New York goes through review under the State Environmental Quality Review Act. It starts with an Environmental Assessment; projects with potential significant impacts proceed to a full Environmental Impact Statement. Projects with federal funding get an additional layer of review under the National Environmental Policy Act, and HUD-assisted projects must complete environmental review before any funds from any source are committed. A full EIS is required for projects involving 2,500 or more housing units.¹¹ Starting construction before environmental clearance can disqualify a project from funding.

Accessibility Requirements

Accessibility rules stack. Under the 2010 ADA Standards for Accessible Design, at least five percent of residential units (but not fewer than one) must include mobility features, and at least two percent (but not fewer than one) must provide communication features for residents with hearing or visual impairments.¹² Projects receiving federal financial assistance through HUD meet the same thresholds under Section 504 of the Rehabilitation Act.¹³

HCR adds visitability requirements for projects subject to its Design Guidelines: an accessible route to the unit without ramps unless existing conditions make that impractical, at least one 36-inch-wide entrance, a 36-inch-wide interior circulation path to all habitable rooms on the ground floor, and at least one half-bath with adequate clear floor space and reinforced walls for grab bars.¹³ Accessible units have to be distributed equitably across the various unit types in the project.

Review Timeline

Once the package is filed, agency staff run a formal evaluation of financial feasibility, the development team’s track record, and consistency of the unit mix with program rules. Follow-up questions on construction timeline, financing commitments, and operating assumptions are normal. The review generally runs six to twelve months depending on complexity and application volume. A project that meets all statutory and regulatory standards receives a commitment letter with financing terms, and the regulatory agreement signed at closing is the document that binds the developer to income restrictions, rent limits, and reporting duties for the length of the program.

Ongoing Compliance and Reporting

Finishing construction does not end the obligations. Properties financed under the PHFL are under ongoing regulatory oversight that can last decades. For Mitchell-Lama developments supervised by HCR, tenants file annual income affidavits, and management is responsible for collecting and verifying them. HCR compares reported income against state tax data, and households that refuse to cooperate are automatically treated as having excess income and charged the maximum surcharge.³ Any change in household composition has to be reported in writing to management within 90 days.

Properties with HUD assistance also go through periodic physical inspections. Inspectors evaluate the inside, outside, and individual units, and classify deficiencies as life-threatening, severe, moderate, or low.¹⁴ Annual financial reporting, budget review, and capital planning are standard across regulated affordable housing programs.

Enforcement and Penalties

The consequences for violating a regulatory agreement or dropping affordability standards are heavy. The supervising agency can declare a default, and the regulatory agreement typically authorizes the agency to seek specific performance in court, so a judge can order the owner to comply rather than simply award damages.¹⁵ For PHFL projects, losing the Section 33 exemption can cost millions over the remaining life of a project, and the state’s power under Section 573 to appoint new HDFC board members gives regulators direct operational control when a project is at risk.

Many PHFL projects also carry federal Low-Income Housing Tax Credits under 26 U.S.C. Section 42. The compliance period for those credits runs 15 taxable years starting with the first year of the credit period, and state housing agencies typically extend affordability requirements to 30 years or more as a condition of the allocation.¹⁶ If a building’s qualified basis drops during the compliance period, the IRS triggers recapture, and the owner has to repay a portion of previously claimed credits plus interest at the federal overpayment rate. Debarment from future government housing programs cuts off federal housing funding entirely, which effectively ends a developer’s ability to work in the affordable housing space. Because state and federal enforcement mechanisms overlap, a compliance failure in one area often triggers consequences in the others.

1
New York State Senate. New York Private Housing Finance Law PVH 22 – State Loans
2
New York State Senate. New York Private Housing Finance Law PVH 28 – Dividends and Interest
3
Homes and Community Renewal. Mitchell-Lama Tenant and Shareholder Information
4
New York State Senate. New York Private Housing Finance Law Section 33 – Tax Exemptions
5
Homes and Community Renewal. Mitchell-Lama Buy Out FAQs
6
NYC Housing Preservation and Development. FAQs on the Mitchell-Lama Reform Law
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New York State Senate. New York Private Housing Finance Law PVH 573 – Incorporation and Organization of Non-Profit Housing Corporations
8
New York State Office of the Attorney General. Guidance on Housing Development Fund Corporations Seeking to Transfer or Sell Property for, or Otherwise Convert Property to Market-Rate Use
9
New York State Senate. New York Private Housing Finance Law PVH 802 – Participation Loans to Owners
10
Homes and Community Renewal. Forms and Applications
11
HUD Exchange. Orientation to Environmental Reviews
12
ADA.gov. 2010 ADA Standards for Accessible Design
13
Homes and Community Renewal. Accessibility Requirements for Housing Financed by New York State
14
eCFR. 24 CFR 5.705 – Inspection Requirements
15
eCFR. 24 CFR 266.505 – Regulatory Agreement Requirements
16
Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit