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Huge deficit in tax-exempt bonds suggests Atlantic Yards delay

Atlantic Yards may have been approved by the Empire State Development Corporation (ESDC) and the Public Authorities Control Board (PACB) last December, but the project faces a significant hurdle over which the agencies had no control. Nor did they apparently consider it in their deliberations.

The city and state agencies that fund affordable housing are drastically oversubscribed with developers seeking to draw on a limited pool of tax-exempt bonds. Testifying on May 24, city Housing Preservation and Development (HPD) Commissioner Shaun Donovan drew a stark picture before the House of Representatives’ Ways and Means Committee:
New York City is facing an immediate crisis in private activity bond volume cap, which we expect to deplete before the end of June. Without additional volume cap, 6,700 units of housing in our pipeline will not be built.

And those units precede the 2250 units promised for Atlantic Yards, involving $1.4 billion in bonds, a figure developer Forest City Ratner and government officials didn't reveal until after the project was approved.

Congress is considering proposals that would increase the “volume cap,” which limits the amount of bonds that can be authorized by state and city agencies around the country.

For now, a warning from Forest City Enterprises, parent of Atlantic Yards developer Forest City Ratner, grows in importance. In its latest annual report, the developer acknowledged several factors contributing to potential “increased costs and delays to the project,” including “our inability to obtain tax exempt financing or the availability of financing generally.”

Negotiations unfinished

Forest City Enterprises' annual report also acknowledged that “final documentation of the transactions are subject to the completion of negotiations with local and state governmental authorities.”

The ESDC's General Project Plan states:
Affordable housing is expected to be financed through tax-exempt bonds provided under existing and proposed City and State housing programs, such as the City’s 50-30-20 program.

Affordable housing in the city and state is furthered by low-cost mortgages, thanks to tax-free bonds issued by the New York City Housing Development Corporation (HDC) and the New York State Housing Finance Agency (HFA). In New York City, the state generally funds projects with 80% market-rate housing, while the city agency funds projects geared to a greater mix of incomes, such as that planned for Atlantic Yards.

About volume cap

Volume cap is allotted nationally on a per capita basis, $85 per person. The federal government limits the amount of bonds a city or state can authorize, because the tax-exemption represents foregone federal revenue.

In New York State, it adds up to about $1.6 billion a year, distributed by four agencies, two state and two city, two of which support economic development and two of which support housing. The issue was first raised by the New York Observer's Matthew Schuerman, who reported in March on the stress facing the HFA, which has an even deeper pipeline than the city's HDC.

The Observer reported last week:
The state and the city [housing] agencies say that, together, they are facing about $6 billion worth of requests for tax-exempt bonds over the coming years, and normally receive just $560 million to $900 million a year in bond cap.

In the city’s pipeline alone, there’s $1.8 billion in projects, which precede the yet-unrequested $1.4 billion for Atlantic Yards. Given the scarcity of city funding for such developments, some affordable housing supporters have begun to express dismay that Atlantic Yards would suck up a significant portion of the pool.

While HDC’s volume cap has ranged from $178 million to $708 million in recent years, this year the agency was assigned $195 million in volume cap, and expects it to be depleted by the end of June, according to HDC spokesman Aaron Donovan. (It’s possible some volume cap can be transferred from state agencies later in the year.)

Given that Forest City Ratner has not yet applied for financing, it could, for example, also take advantage of HDC's taxable financing, Donovan said. Such bonds would offer a break compared to the open market but likely would not be as attractive as tax-exempt financing.

Possible reform

Before Congress, HPD’s Shaun Donovan offered two proposals to increase funds available to the city; one would “allow for 'recycling' or 'refunding' of multi-family bonds after principal repayments or pre-payments of the bonds.” The second would involve “raising the allocation of volume cap for high cost areas” like New York. (As HPD commissioner, Donovan also serves as chairman of the HDC.)

The Ways and Means Committee seemed receptive to the technical fix involved in the first proposal, which could provide an additional $500 million immediately, according to The Bond Buyer's 6/4/07 report . (After that first year, Youssouf told the Observer, the fix could provide $200 million a year after that.)

Those additional sums could help the city and state housing agencies fulfill more of the pending requests, but not, apparently, all of them.

Raising the allocation, however, would be tougher, The Bond Buyer reported, because Congress would have to find new revenue to offset lower tax receipts. Then again, it costs more to develop housing in New York City than elsewhere, and not all states use up their volume cap, so there’s an argument for adjusting the volume cap.

This is a challenge for New York developers in general, so representatives of the city's real estate industry, along with city government officials, are already lobbying in Washington. Forest City Ratner, with so much at stake, may be especially watchful--and participatory.

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