FILED: NEW YORK COUNTY CLERK 02/23/ :08 PM INDEX NO /2017 NYSCEF DOC. NO. 1 RECEIVED NYSCEF: 02/23/2017

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1 SUPREME COURT OF THE STATE OF NEW YORK, NEW YORK COUNTY In the Matter of the Application of, X FOUNTAIN HOUSE HOUSING, INC., AND F.H. COMMUNITY LIVING PROGRAM, INC. VERIFIED PETITION for Leave to Sell, Lease, Exchange or Otherwise Dispose of All or Substantially All of Its Assets Under Section 511 of the Not-for-Profit Corporation Law X Index No.: Fountain House Housing, Inc. ("FHH Petitioner") and F.H. Community Living Program, Inc. ("FHCL Petitioner" and together with FHH Petitioner, the "Petitioners"), each a New York not-for-profit corporation and each having their principal office at 425 West 4?1h Street, New York, New York 10036, by its attorneys, Hirschen Singer & Epstein LLP, respectfully shows: 1. The Petitioners desire to transfer two (2) properties, which contain forty-one ( 41) residential units for low income individuals and families inclusive of two (2) non-income generating units for resident staff members located at 441 West 4?1h Street, New York, New York and designated as Block 1057 Lot 13 on the Tax Map of the City of New York, New York County as more particularly described in the legal description attached hereto as Ex.hjbit 1 ("441 Property") and Amsterdam Avenue and designated as Block 2129 Lot 46 on the Tax Map of the City of New York, New York County as more particularly described in the legal description attached hereto as Exhjbit 2 ("2264 Property" and together with 441 Property, the "Property") to FH Homes Housing Development Fund Corporation ('HDFC"), a New York notfor-profit corporation formed pursuant to Article XI of the Private Housing Finance Law of the State of New York (the "PHFL") and Section 402 of the Not-for-Profit Corporation Law of the State of New York (the "NPCL") in order to finance the rehabilitation of the Property and preserve 1 of 14

2 the Property as safe and affordable housing for individuals with mental illness. 2. FHH Petitioner is a New York not-for-profit corporation formed pursuant to Article 75 of the Mental Hygiene Law and Section 402 of the NPCL and is exempt from federal income taxation under Section 50l(c)(3) of the Code. FHH Petitioner was organized for the charitable purpose of developing and operating an affordable housing project for mentally ill and elderly persons. There are seven (7) members of the Board of Directors who also constitute all of the members of the FHH Petitioner. A copy of FHH Petitioner's certificate of incorporation and bylaws are attached hereto as Exhibit 3 and Exhibit 4, respectively. A copy of the determination letter from the Internal Revenue Service with respect to FHH Petitioner's 501(c)(3) exemption is attached hereto as Exhibit FHCL Petitioner is a New York not-for-profit corporation formed pursuant to A11icle 75 of the Mental Hygiene Law and Section 402 of the NPCL and is exempt from federal income taxation under Section 501 ( c )(3) of the Code. FHCL Petitioner was organized for the charitable purpose of developing and operating an affordable housing project for mentally ill and elderly persons. There are seven (7) members of the Board of Directors who also constitute all of the members of the FHCL Petitioner. The directors and members of FHCL Petitioner are the same as those of FHH Petitioner. A copy of FHCL Petitioner's certificate of incorporation and bylaws are attached hereto as Exhibit 6 and Exl1ibit 7, respectively. A copy of the determination letter from the Internal Revenue Service with respect to FHCL Petitioner's 501(c)(3) exemption is attached hereto as Exhibit The names, titles and address of directors and officers of FHH Petitioner and FHCL Petitioner are: Name Alexandra Herzan Title President Address 300 Central Park West, NY, NY of 14

3 Guy de Chazal Vice President 68 Wheatley Road, Brookville NY Charles Marsden Treasurer 880 Fifth Avenue, NY, NY George Beane Secretary 165 West 82nd Street, NY, NY Nancy Farrell Director 785 Park Avenue, NY, NY William Hilburn Director 1148 Fifth Avenue, NY, NY Arlene Salomon Director 975 Park Avenue, NY, NY The Petitioners were formed by Fountain House, Inc. ("Fountain House"), a notfor-profit corporation that is exempt from federal income taxation under Section 501 ( c )(3) of the Internal Revenue Code, as amended. Fountain House was established in 1948 in New York in order to address the needs of individuals living with mental illness. Fountain House provides services and advocacy for individuals living with mental illness. Its services range from the provision of affordable and supportive housing, employment support, education and other home and community based services. All of the members of the boards of directors of the Petitioners are on the Board of Directors of Fountain House. A copy of Fountain House's certificate of incorporation and bylaws are attached hereto as Exhibit 9 and Exhibit 10, respectively 6. The Petitioners were organized for the charitable purpose of providing services, programs, and housing for mentally ill and elderly persons, on a not-for-profit basis. 7. FHH Petitioner acquired the 441 Property from the City of New York in order to develop an affordable housing project for individuals with mental illness, pursuant to that certain indenture dated as ofnovember 19, 1981 ("441 Deed"). FHH Petitioner secured a loan from the United States Housing and Urban Development ("HUD") under Section 202 of the Housing Act of 1959 ("Section 202") with a mortgage on the 441 Property ("FHH 202 Loan"). In connection with the FHH 202 Loan from HUD, FHH Petitioner entered into a regulatory 3 3 of 14

4 agreement with HUD which restricts the use of the 441 Property to house the elderly or individuals with mental illness or disabilities and restricts the rents and income levels of such occupants ("441 Regulatory Agreement"). Copies of the 441 Deed and 441 Regulatory Agreement are attached hereto as Exhibit 11 and Exhibit 12, respectively. FHH Petitioner developed a twenty (20) unit housing project on the 441 Property which 1s occupied by individuals with mental illness who participate m the services and programs provided by Fountain House and one (1) resident staff member (the "441 Project"). 8. FHCL Petitioner acquired the 2264 Property from the City of New York in order to develop an affordable housing project for individual with mental illness, pursuant to that certain indenture dated as of September 21, 1987 ("2264 Deed").. FHCL Petitioner secured a Section 202 loan from HUD with a mortgage on the 2264 Property ("FHCL 202 Loan" and together with the FHH 202 Loan, the "202 Loans"). In connection with the FHCL 202 Loan from HUD, FHCL Petitioner entered into a regulatory agreement with HUD which restricts the use of the 2264 Property to house the elderly or individuals with mental illness or disabilities and restricts the rents and income levels of the occupants ("2264 Regulatory Agreement"). Copies of the 2264 Deed and 2264 Regulatory Agreement are attached hereto as Exhibit 13 and Exhibit 14, respectively. FHCL Petitioner developed a twenty one (21) unit housing project on the 2264 Property which is occupied by individuals with mental illness who participate in the services and programs provided by Fountain House and one (1) resident staff member (the "2264 Project" and together with 441 Projects, each a "Project" and together the "Projects"). 9. The Petitioners desire to transfer the Projects and the existing reserve funds pertaining to Property m the approximate amount of $212, to an affiliate of the Petitioners, FH Homes Housing Development Fund Corporation, a New York not-for-profit 4 4 of 14

5 corporation (the "HDFC"). The reasons for the sale of the Property are more specifically described in Paragraph 16. The HDFC's sole member is Fountain House. A copy of the HDFC's certificate of incorporation and by-laws are attached hereto as Exhibit 15 and 16, respectively. 10. Proposed Refinancing of the Property. The Petitioners intend to each repay their respective 202 Loans and transfer the Projects to the HDFC which will refinance the Projects with the proceeds of a mortgage loan insured by the Federal Housing Administration under Section 223(f) of the National Housing Act from Rockport Mortgage Corporation (the "Lender") in the approximate amount of $7,240, (the "Loan"). 11. The Petitioners submitted a request for approval to prepay the 202 Loans on September 28, 2016, a copy of which is attached hereto as Exhibit 17 and received HUD approval on November 1, Screenshots evidencing HUD approval are attached hereto as Exhibit 18 and formal letters will be issued prior to closing. 12. HUD requires an appraisal based on the market value of the Property assuming complete renovation and operations as a market rate rental apartment and no financing. And as such the appraised value of the Property is $11,900,000 as shown on page 2 of the appraisal, performed by Metropolitan Valuation Services and dated as of August 23, 2016 (the "Appraisal"). A copy of the Appraisal is attached hereto as Exhibit 19. However, the Projects are and will continue to be rent-restricted and regulated by both HUD and the City of New York acting by and through its Department of Housing Preservation and Development ("HPD") which the Appraisal does not contemplate. 13. Each Petitioner and the HDFC anticipate entering into a Contract of Sale (together, the "Contracts of Sale"), pursuant to which such Petitioner will sell its respective 5 5 of 14

6 Property to the HDFC. Copies of the Contracts of Sale are attached hereto as Exhibit 20. The Purchase Price may be modified as the outstanding debts of such Petitioner are calculated and based on the interest rates at the time of the rate lock. 14. The Purchase Price for the Property is established by allocating the proceeds from the Loan in proportion to the amount of operating revenue contributed by each Project and then deducting (i) the cost of planned capital repairs (to be performed by the HDFC), (ii) the soft costs to be paid at closing by the HDFC and (iii) the required replacement reserve deposits to be held by the Lender. The balance is remitted to each Petitioner as the purchase price. 15. FHH Petitioner will transfer the 441 Property for $3,608, (the "441 Purchase Price"). The 441 Purchase Price was derived from the amount of loan proceeds that the HDFC was able to obtain as more fully described in Paragraph 24 below. The portion of the Loan allocated to the 441 Property is $4,014,235 ("441 Loan Proceeds"). The 441 Loan Proceeds will be used to pay the following: (i) cost of repairs in the amount of $41,900.00, (ii) repair contingency in the amount of $4,190.00, (iii) soft costs in the amount of $298, and (iii) replacement reserves in the amount of $104, The balance of the 441 Loan Proceeds will constitute the 441 Purchase Price, which shall also include the transfer of replacement reserves in the amount of $42, Below is a chart depicting this calculation: Calculation of Purchase Price for 441 West 4ih Street SOURCES: Loan Proceeds $4,014, Replacement Reserve Balance (to be transferred to HDFC) $42, TOTAL SOURCES: $4,056, of 14

7 USES: Hard Costs: Repairs $41, Repajr ontingcncy $4, Total Hard Costs: $46, Soft Costs: Appraisal $12, Phase I ESA $2, Physical Needs Assessment $8, Lead and Asbestos Testing $11, Permits and Approvals $ HUD Mortgage Insurance $10, HUD Application Fee $12, HUD Inspection Fee $1, Legal Financing Fee $91, Borrower Legal $110, Survey $2, Title and Recording Fees $34, Total Soft Costs: $298, Replacement Reserves: $104, TOTAL COSTS: $448, PURCHASE PRICE: (TOT AL SOURCES LESS TOTAL COSTS) $3,608, FHCL Petitioner will transfer the 2264 Property for $2,614, (the "2264 Purchase Price" and together with 441 Purchase Price, the ("Purchase Price"). The 2264 Purchase Price was derived from the amount of loan proceeds that the HDFC was able to obtain as more fully described in Paragraph 24 below. The portion of the Loan allocated to the 2264 Property is $3,225, ("2264 Loan Proceeds"). The 2264 Loan Proceeds will be used to pay the following: (i) cost of repairs in the amount of $293,100.00, (ii) repair contingency in the amount of $29,310.00, (iii) soft costs in the amount of $239, and (iii) replacement 7 7 of 14

8 reserves in the amount of $219, The balance of the 2264 Loan Proceeds will constitute the 2264 Purchase Price which shall also include the transfer of replacement reserves in the amount of $169, Below is a chart depicting this calculation: Calculation of Purchase Price for 2264 Amsterdam Avenue SOURCES: Loan Proceeds $3,225, Replacement Reserve Balance (to be transferred to HDFC) $169, TOTAL SOURCES: $3,395, USES : Hard Costs: Repairs $293, Repair Contingency $29, Total Hard Costs: $322, Soft Costs: Appraisal $10, Phase I ESA $1, Physical Needs Assessment $6, Lead and Asbestos Testing $9, Permits and Approvals $ HUD Mortgage Insurance $8, HUD Application Fee $9, HUD Inspection Fee $1, Legal Financing Fee $73, Borrower Legal $89, Survey $2, Title and Recording Fees $27, Total Soft Costs: $239, Replacement Reserves: $219, TOT AL COSTS: $781, PURCHASE PRICE: (TOT AL SOURCES LESS TOT AL COSTS) $2,614, of 14

9 17. The Petitioners will use the sales proceeds to pay off the outstanding debt under the Section 202 Loans to HUD. 18. FHH Petitioner recently completed an emergency elevator modernization for which it did not have adequate reserves and as such Fountain House paid for the work. $164, of the purchase price to FHH Petitioner will be used to reimburse Fountain House for the cost of that work. The net proceeds derived by the Petitioners in connection with the sale of the Property will be used to further the not-for-profit charitable purposes of the Fountain House, including the provision of affordable housing and social services to individuals with mental illness. 19. Reason for Conveyance of the Property and Description of New Ownership Structure. The conveyance of the Property to the HDFC will enable the HDFC to defray transaction costs in connection with the Loan, maximize loan proceeds available to each project and provide greater efficiency in operating the Projects in the future. The HDFC will be able to perform certain capital improvements and reimburse Fountain House for costs of improvements which occurred previously for which the Petitioners did not have sufficient reserves while maintaining the long term affordability of the Projects to its residents. 20. Continued Use of the Property as Low-Income Housing for Senior Citizens. After the conveyance, the Property will continue to house low-income individuals with mental illness. Residents of the Projects will not be temporarily relocated nor displaced during or at the completion of the rehabilitation. The HDFC's obligation to maintain the affordability and current residents will be evidenced by (i) new Section 8 contracts that require that the apartment units at the Property be rented to low-income persons, (ii) a new use agreement recorded against the 2264 Property in the form provided by HUD which will 9 9 of 14

10 require the HDFC to continue to operate the 2264 Project on terms at least as advantageous to existing and future tenants on terms required by the original Section 202 loan and (iii) the Regulatory Agreement by and among the HDFC and HPD, which will be entered to upon conveyance of the Property and which will require that all of the apartment units at the Property be rented to low income tenants for a period of thirty-five years. A form use agreement is attached hereto as Exhibit Attached hereto as Exhibit 22 and Exhibit 23 are copies of Petitioners' audited financial statements for the years ending in December 31, 2013, December 31, 2014 and December 31, Without the conveyance and refinancing of the Prope11y, the Petitioners and their affiliated entities would not be able to undertake the rehabilitation work on the Property, increase the operating reserves nor obtain a real property tax exemption. 23. The dissolution of Petitioners is not currently contemplated after the transfer of the in Property. The sale proceeds from the transactions described herein will be used by the Petitioners to pay off any debts and transaction costs and the balance will be distributed to Fountain House to be used in furtherance of their not-for-profit charitable purposes, including the provision of affordable housing and social services to individuals with mental illness. 24. The consideration and the terms of the transfer of Petitioners' assets are fair and reasonable to Petitioners because the Petitioners are selling the Property for the highest amount possible based on HUD restrictions on the increase in debt service when refinancing certain 202 Loans. As fully described in Paragraphs 15 and 16 above, the Purchase Price is derived from the proceeds of the Loan.. The amount of the Loan is determined by the combined amount of debt service that the Projects can support. FHCL Petitioner is prohibited from paying any more debt of 14

11 service than it currently pays pursuant to the loan documents entered into in connection with the FHCL 202 Loan and thus the amount of the Loan is constrained by this restriction. In order to maximize the amount of proceeds available under the Loan while being restricted by this debt service constraint, the HDFC applied for the Loan which is insured by the Federal Home Administration under Section 223(f) of the National Housing Act since it offers the lowest interest rates and longest terms available in the market today. The maximum loan to value ("LTV") that is permitted under the applicable terms of the 223(f) loan program is eighty percent (80%). However, due to the HUD-imposed debt service restriction, as described above, the maximum LTV achievable for the Projects is approximately sixty percent (60%). Based on the limited LTV available, the debt service constraint and regulatory restrictions, the Purchase Price is fair and reasonable as it is the highest purchase price the Petitioners can obtain under the specific circumstances of this transaction. As shown in Paragraphs 15 and 16, the loan proceeds, less the soft costs and the costs of the financing and repairs to the Projects, are being directed to the Petitioners. The lower leverage ratio is also beneficial for the Projects as it maximizes financial cushions in the event that unanticipated operating expenses arise in the future. Additionally the Petitioners and HDFC are affiliates that share the same interests and charitable purpose. The Petitioners' charitable purposes are promoted by the transfer of the Property and the Projects because the transactions described herein will ensure long term safe and affordable housing for the community that the Petitioners serve. 25. The transaction herein proposed has been duly authorized and approved by the unanimous written consent of the Board of Directors of the Petitioners and by all the members of the Petitioners in accordance with Section 510(a)(l) of the N-PCL. Copies of the unanimous written consent adopted by the Board of Directors of the Petitioners are annexed hereto as of 14

12 Exhibit 24 and copies of the certified consents of the members of the Petitioners are annexed hereto as Exhibit Other than (i) the approval of HUD to prepay the existing 202 Loan for the 2264 Property which has been obtained, (ii) the approval of HUD to transfer 2264 Petitioner's ownership in the 2264 Property as discussed in Paragraph 11 hereof and (iii) the approval of the Commissioner of the New York State Office of Mental Health, which is attached hereto as Exhibit 26, there are no other governmental approvals required to effectuate the transactions contemplated herein. 27. No officer or director of the Petitioners has an interest, either direct or indirect, in any of the entities that are a party to this transaction, except as set forth herein. 28. No previous application for the relief requested herein has been made to this or any other Court. (Signature Page to Follow) of 14

13 WHEREFORE, Petitioners request an order granting leave to (i) transfer the Property consisting of two residential apartment buildings for individuals with mental illness located at 441 West 4?1h Street, New York, New York and designated as Block 1057 Lot 13 in the County of New York and Amsterdam Avenue and designated as Block 2129 Lot 46 in the County of New York on the terms set forth herein and (ii) use the proceeds of the sale to prepay the 202 Loans, reimburse Fountain House, rehabilitate the Property and distribute any remaining proceeds to Fountain House to use in furtherance of Fountain House's charitable purposes and granting the officers of the Petitioners authorization to execute and deliver on behalf of the -.,. Petitioners any and all documents that may be necessary or that the Petitioners may deem advisable, to effectuate the transactions contemplated herein, and deliver same, in the name of and on behalf of Petitioners, and that Petitioners have such other and further relief as may be just and proper. Hirschen Singer & Epstein LLP Attorneys for Petitioners, Fountain House Housing, Inc. and F.H. Community Living Program, Inc. q~ _ ~sell A.Ki~ 902 Broadway, 13th Floor New York, New York (212) of 14

14 VERIFICATION STATE OF NEW YORK ) ):ss.: COUNTY OF NEW YORK ) Alexandra Herzan, being duly sworn, deposes and says: she is the President of the Petitioners, Fountain House Housing, Inc. and F.H. Community Living Program, Inc.; that she has read the foregoing Petition and knows the contents thereof; and that the same is true to deponent' s own knowledge except as to the matters therein stated to be alleged upon information and belief, and as to those matters, deponent believes them to be true. This verification is made by deponent because Fountain House Housing, Inc. and F.H. Community Living Program, Inc. are not-for-profit corporations, and deponent is an officer thereof, to wit their President, Sworn to before me this lr!j_-t!t day of=~, 2017 ~-* P.~ 14 of 14