Starrett City future still murky as second buyer steps up.

After the state and HUD rejected two sales proposals earlier this year, a third proposal never materialized before the Aug. 9 expiration of the $1.3 billion contract to purchase Brooklyn's Starrett City. And now the owner wants out of the affordable housing program.

"The current owners have filed a notice of intent to buyout of the Mitchell-Lama program," said Neff Coleman, a spokesperson for the city's department of housing preservation and development.

This is the latest move for Starrett City Associates, which wants to step away from ownership of the nation's largest federally subsidized housing property. The 150-acre site opened in Brooklyn's East New York neighborhood in 1974, spreading 5,881 units over 46 buildings. But with its federal subsidies comes oversight from the U.S. Department of Housing and Urban Development (HUD). And HUD - along with tenant association groups, the Association of Community Organizations for Reform Now (ACORN), Attorney General Andrew Cuomo and Mayor Bloomberg - have vehemently opposed sales proposals, thus far. According to Coleman, the City was concerned with a "vastly increased amount of subsidies" in the sales proposal to Clipper Equity. Tenants and the Bloomberg Administration feared the whopping $1.3 billion price tag would threaten affordable housing there.

Lisa Linden, a spokesperson for Clipper, said things have been quiet with Starrett negotiations and could not confirm whether talks of a buy were ongoing. But other parties are also interested.

The Provident Group, a Louisiana-based nonprofit developer, is vying for the property.

"We are still interested in the project and we're still working with our partners," said Steve Hicks, president of The Provident Group. "We're very interested. We have the financing, now we just need to reach an agreement with the seller."

Provident is working closely with the New York City Central Labor Council but the collaboration has no affiliation with Clipper Equity or Bistricer, says Hicks, who met with Council reps in New York last week. Hicks said his organization would bring a much different approach to the property.

"Our mission is such that it's our intent to maintain the property as low-moderate income housing," Hicks said.

Hicks said New York City has lost approximately 17-20,000 units of its affordable housing stock over the last five years. He wants to preserve Starrett City as a place where families struggling income-wise can make ends meet.

Coleman suggests Starrett's filing to remove itself from the affordable housing program is simply a negotiating tactic.

"The question is: What is Starrett City going to do next? They could put it back up for sale," Coleman said. "That's certainly conceivable."

Even if Starrett opts out of the program, Coleman says some units would be protected as affordable because of J-51 tax benefits provided by the City.

Starrett receives J-51 benefits for the developer's significant improvements to the property. Those benefits include an exemption from real estate tax increases, which typically has a 34-year term for affordable housing projects. This means the 4,300 Starrett units that fall under J-51 would have to go through a rent stabilization process, even if the owner opts out of Mitchell-Lama.

J-51 came under scrutiny earlier this year, when tenants at Stuyvesant Town and Peter Cooper Village filed a class action lawsuit against former owner, Met Life, and new owner, Tishman Speyer Properties, for allegedly charging market rate rent while still benefiting from J-51 tax perks. Met Life sold the 80-acre, 11,000-unit property for $5.4 billion last year.

But last month State Supreme Court Judge Richard Lowe dismissed the lawsuit because, though Stuy Town became rent stabilized in 1974, the landlords didn't begin collecting J-51 tax breaks until 1992.

Some politicians--led by Senator Schumer--are backing a bill that would require Starrett City to continue operating within the Mitchell-Lama program, despite expiration of the program's 20-year commitment agreement.

As an outsider looking in, Stanley Berman, an attorney at Bryan Cave LLP, says the situation presents a classic catch 22.

Affordable housing seldom appeals to developers, says Berman, but the Mitchell-Lama Housing Program provides some perks that may make the commitment worthwhile. Tax abatements are incentives to develop properties like Starrett City but owners do miss out on their investment when bound to below-market rents.

"They got some benefits--no question about it--but they could get more benefits if they were out of the program," said Berman, an expert in affordable housing litigation.

Starrett City Associates is credited with providing comfortable, secure housing for thousands of low-moderate income families in Brooklyn, and for maintaining the property to acceptable standards of living. Despite a strong need for below-market rate housing, the group abided by program regulations, completed their commitment and, some believe, should be allowed to bow out--reasons why Berman says the case is particularly tough to call.

"King Solomon would have a problem with this one," he said.

With the high volume of tenants--much like Stuy Town--and their ability to mobilize, Berman doesn't see a Starrett City solution in sight. Litigation could be the next likely route, if tenants and HUD continue to resist sales proposals.

"The elected people would love to see this remain the status quo because there are more tenants than there are investors," Berman said. "But it's really the almighty dollar that has a lot of say here."