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HPD head mildly criticizes 421-a subsidies, defends "targeted eminent domain"

On the Real Deal Weekly Interview podcast this week, the real estate magazine talks to Shaun Donovan, commissioner of the city's Department of Housing Preservation and Development (HPD), the nation's largest municipal developer of affordable housing. My transcript is below, but first, a few comments.

Mild criticism of subsidies

Perhaps it was because he was talking to a magazine catering to the real estate industry, but Donovan offered rather mild criticism of the 421-a tax incentive program, which provides a 10- to-15-year exemption from real estate taxes and only requires affordable housing with projects built in the "exclusion zone," mainly Manhattan between 14th Street and 96th Street.

In recent months, the 421-a program has been blasted in a report by ACORN, which blames the program for the plethora of market-rate development in Downtown Brooklyn and environs. In another report, the Pratt Center for Community Development and Habitat For Humanity-NYC charged that "421-a is subsidizing luxury housing in upscale neighborhoods, at a huge financial cost to the City. The program – which cost the City $320 million this year – is creating few of the affordable homes that average New Yorkers desperately need."

A citywide task force is studying the reform of 421-a, with a report expected by the fall. Donovan predicted reform in areas where the market is strong, to spur more affordable housing, but cited only Lower Manhattan, leaving open questions about reform in Brooklyn. Calling the program "a critical component," he emphatically declared that it would be sustained.

Harsher words from the Comptroller

Just yesterday Comptroller William C. Thompson released a report criticizing 421-a, suggesting that it "may have outlived its usefulness, as Manhattan luxury developers and apartment purchasers have reaped the bulk of the program’s benefits." The analysis "shows that most of the benefits have subsidized some of the most expensive housing in the City," Thompson said, with relatively little affordable housing financed compared with the value of the exemptions that have been taken.

The policy brief points out that, in 2005, Manhattan--home of the highest-priced real esteate--had 48% of the 421-a units by 78% of the exemption, in terms of total value. Subsidies are not capped, so at Trump World Tower, per-unit savings ranged as high as $160,000.

Even within the 421-a program, the developments that did produce affordable housing received subsidies of $50,000 per unit in 2005, or more than $520,000 per unit over the remaining years in the 421-a program. Thompson's report suggests further research on whether to extend the exclusion zone and whether to require more affordable housing, among other issues.

Targeted eminent domain?

Interestingly, Donovan brought up the imporance of using "eminent domain in a very targeted way in that community [Melrose Commons in the Bronx] to help revive it." He added that, in response to the Supreme Court's Kelo decision, Congress is considering legislation "that would limit our ability to use eminent domain for affordable housing and other economic development priorities. So we’re very concerned that the backlash from this may end up hurting New York and other cities in our efforts to revive struggling communities."

In this case, Donovan, seems to be conflating eminent domain used for affordable housing and eminent domain used for economic development. The former is much more clearly "public use," which would justify it constitutionally. The New York State Association for Affordable Housing points out that some projects include both affordable housing and other elements. But there's a big difference between Atlantic Yards, which would have a significant number of affordable units but remain mostly market-rate housing, and Melrose Commons, which includes "extensive affordable housing along with some commercial and non-profit uses."

Bloomberg, in a major speech, has conflated the two. A 5/3/06 New York Sun article headlined Mayor Ups the Ante On Eminent Domain, noted that Bloomberg has been distributing "a wallet card of priorities, including "Eminent Domain - Oppose legislation that would cripple affordable housing and responsible re-development (like Times Square)." But Rep. Carolyn Maloney (D-NY) offered a distinction: "If you're going to built a road or a highway or a subway for public purpose, but I do not support it for a private developer for a private purpose."

A 5/3/06 New York Times article, headlined Bloomberg Says Power to Seize Private Land Is Vital to Cities, reported:
"You would never build any big thing any place in any big city in this country if you didn't have the power of eminent domain," Mr. Bloomberg said, speaking at a ground-breaking ceremony in Times Square, which was redeveloped in part through government condemnation of private property. "You wouldn't have a job, neither would anybody else standing here today. None of us would."

The Times report allowed affordable housing to be cast under the rubric of economic development:
To the Bloomberg administration, however, the wheels of economic development would grind to a halt without the use of eminent domain. Low-cost housing developments like the Nehemiah homes in East New York, Brooklyn, and Melrose Commons in the Bronx would not have been built and Times Square would remain "the poster child for a seedy, dangerous, unattractive, porno-laced place," Mr. Bloomberg said.

The interview transcript

Q. Mayor Bloomberg announced a plan to build and preserve 165,000 homes in the city over the next ten years. How likely is this to happen, to reach that goal?

A. First of all, I would say, it’s a very aggressive plan, in fact it’s the largest municipal housing plan in the nation’s history. And it follows—early in his first term, the mayor announced a plan to build or preserve 65,000 units and, in fact, we were making such good progress on that and, frankly, the real estate market in New York as you know has been so strong that, if anything, affordability is a growing challenge that we face. So that’s why he expanded the plan dramatically to 165,000 units. It is an ambitious goal, but I feel pretty confident that, with the support of the mayor and the real estate community in New York , we are going to achieve it. Last year, we were able to start on over 18,000 units. And so, if you do the math, if we keep up that pace, we’ll make it to our 165,000 unit goal.

Q: Where were these 18,000 units going?

A: All over the city. One thing we try to do is make sure that every community in New York City has affordable housing. The primary areas where we’ve focused. We’ve done a lot of units in Harlem, in Manhattan. We’ve done a lot of units in Brooklyn. We’re building right now on the waterfront in Brooklyn, as part of a major rezoning, Williamsburg and Greenpoint, but also in Downtown Brooklyn and other areas. We’re doing a lot of work in the Bronx as well. If you go to Melrose Commons, it’s a community that has just been completely transformed by the work we’ve done there, thousands of units of new housing. I might add, one of the things we’re real concerned about: we’ve used eminent domain in a very targeted way in that community to help revive it. In fact, what we’ve done is bring the housing market back to that community, with a jumpstart through our programs. And with some of the things being considered in Washington around eminent domain--it may kill our ability to do the kind of affordable housing projects like we’ve done all over the city.

Eminent domain

Q: What do you mean by that, if eminent domain were rolled back?

A: I don’t if all your listeners will know about this, but there was a Supreme Court decision last year in a Connecticut case called Kelo that affirmed the right of cities to use eminent domain. As a result of that, there are bills now being considered in Congress and Washington that would limit our ability to use eminent domain for affordable housing and other economic development priorities. So we’re very concerned that the backlash from this may end up hurting New York and other cities in our efforts to revive struggling communities.

Q: What would the city do if it didn’t have the power of eminent domain, to that degree?

A: The irony is, we’ve figured out over many, many years the ways to use public-private partnerships to create affordable housing. It’s evolved from what was originally a public housing model, where government owned and developed the housing, and then managed it, to these public-private partnerships. The irony of these changes is it might force us to go back to a model where the public sector replaces the private market, which is not something we want to do. That would really be our alternative under a lot of these proposals.

New financing

Q: Can you describe the financing that goes into this plan?

A: One of the advantages of being in New York is we have one of the most sophisticated real estate finance community in the world. And so, we work with hundreds of different private developers but also different kinds of financial institutions. All the biggest banks in the country are involved in the work that we do in New York City and finance the range of projects that we do. A lot of it is working with my agency, HPD, but we also have the largest, most successful, multifamily, tax-exempt or bond issuing agency, the Housing Development Corporation, located in New York City. Last year they did over a billion and a half dollars of bonds to support our affordable housing efforts. That’s more than the entire states of California, Texas, and a number of others combined. That’s one of the real weapons that we have on our side in the work that we do is a very sophisticated finance community and a very strong local housing finance agency in HDC.

Q: Do you have ever find it difficult to entice private developers into helping build affordable housing?

A: One of the centerpieces of the mayor’s New Housing Marketplace plan that you talked about earlier is, we really evolved—if you think about where New York was 20, 25 years ago--the big challenge was abandonment. If you went to the South Bronx, if you remember Howard Cosell during the 1977 World Series, declaring “The Bronx is burning.” The challenge then was abandonment, we were trying to stop the abandonment. Today, if you go back to those very streets that were burning in the 1970s, houses are now selling for $500,000 on Charlotte Street and in that area. The challenge has really changed from abandonment to affordability. Now we have to figure out how to meet the challenge of keeping prices down. People are coming to New York, crime is down, schools are getting better. People want to be in New York. Because the population is growing, because the demand is increasing, we have this affordability challenge. And that’s really what our focus is, in trying to work against that. So one of the ways that we’re doing that in this new plan is trying to harness the strength of that market, to benefit affordable housing. Let me give you an example. Greenpoint-Williamsburg, on the waterfront, we looked at that area, a two-mile strip of waterfront, with not a single active industrial company left, on the waterfront. We’ve rezoned it so we can create we think about 11,000 apartments in that area. What we did was to say to developers, you can build 100 percent market rate housing and we’ll let you build 30 stories. But if you’re willing to incorporate between 20 and 30 percent of your square footage as affordable, we’ll let you build up to 40 stories. So we’ve given them, using the strength of the market, we’ve given them a big extra incentive to create affordable housing as part of their projects because they also get to do extra market-rate units as well.

New incentives

Q: So the market rate units pay for the difference?

A: What they get--not only do they get the extra market-rate units, but they also get tax benefits and other incentives for doing the affordable housing. All together, if you put them all together that means if they build the affordable housing and they build the extra units, their returns are substantially better than they would be byy doing a 30-story purely market-rate tower. We think any rational developer looking at it will look at it and say, you know what, it makes sense to do the affordable housing. In fact, we’re going to break down on the first two projects on the waterfront this summer, and they are going to include the affordable housing.

Q: When are they supposed to be done?

A: Typically--these are going to be multiphase projects, it’s a lot of units. So the first phases will start construction this summer; we expect them to be done in about 18 months.

Quality in workmanship

Q: How would the city ensure the quality of the homes? The New York Post about a month ago, maybe longer, had a report about, some families won lotteries to buy city-subsidized homes. They were complaining about “leaky roofs, cracked foundations, second story back doors leading to nowhere.” Suppose the city will build some of these houses--how do you ensure the upkeep, after the fact? Is that going to be left to the developers who built them, the owners? Or will the city?

A: Obviously, if we’re building home ownership, a significant piece of what we do, that the homeowners will have responsibility for upkeep of the buildings. There are really two different issues that you’re talking about. The first is, quality design up front. And that has been--the projects you’re talking about I think were done 20-25 years ago, so obviously there’s wear and tear and other things that happen over time. Mayor Bloomberg has taken a real interest in raising the quality of both construction as well as design in all the work that we do. He has a design excellence initiative, which is focused both on city-constructed buildings, whether it’s libraries or community centers or other kinds of buildings. And we’ve won awards for those kind of projects.. But we’re also doing that where we’re working with the private sector as well. Just in the next couple of months, we’re going to kick off a program with the American Institute of Architects, located here in New York, to get some of the best architects in the world to come in and do some model projects for us. Overall, we really have raised the quality of the design of the work we’re doing all over the city.

A new acquisition fund

Q: Can you explain about the acquisition fund behind the mayor’s housing initiative?

A: You asked earlier about some of the financing we’re using to create some of these 165,000 units. One of the real challenges we have in today’s market is, back when abandonment was our challenge, the city started taking over lots of abandoned properties and vacant lots through tax foreclosure. At the height of it, believe it or not, my agency owned over 100,000 apartments around the city. We owned 60 percent of the real estate in Harlem, for example, and thousands of vacant lots all over the city. We’ve been so successful at creating housing, using those in rem properties, that we’re now down to under 2000 apartments left, and we’ve had our last competition for the vacant lots, over the last few months. So, the real challenge we have to figure out now is: how do we work to capture privately owned land for affordable housing? So one of the things we’ve done is to work with the biggest banks and financial institutions, JP Morgan Chase, Citigroup, Fannie Mae, and a whole range of others, to put together a $200 million fund, that will almost be like equity for affordable housing developers to use in acquiring sites. If they find a site available out in the market, they can come to this fund, quickly get the equity they need to purchase that site, and then put together the plan they need to finance the construction and other things. But if they can’t lock up that site early on in the process, they’re never going to be able to create that affordable housing.

Q: How many have tapped in?

A: We’ve raised $200 million, about 160 from the financial institutions that I talked about. What’s really making this work, in a way that’s going to make it successful for affordable housing developers, we’ve also raised more than $32 million from some of the biggest foundations in the country: Ford Foundation, MacArthur Foundation, Rockefeller Foundation, and most importantly, the Starr Foundation has put in the largest contribution. All of that money is going to act as sort of an insurance policy and it’s going to allow us to make loans that aren’t available in the private market today. If you want to go to a traditional bank and raise money to buy a piece of land, you might get 50 cents on the dollar for the acquisition price. We can actually lend as much as a 100 percent or more of the acquisition price, using this fund, because we have this foundation money involved. So it’s a great resource--it’s really going to be a competitive advantage for developers that want to create affordable housing going forward. We’ve raised all the money, we’re on track to close late this month or early next month, and many of the lenders who expect to use this fund are already making acquisition loans in expectation of having this fund available for their use. It’s already beginning to have an impact in the market, and we’ll be closed next month.

Where it will be noticed

Q: Can you explain where some of those are, where this impact is going to be felt?

A: Just to give you a few examples, there’s pieces of land, in areas of the South Bronx, in East New York in Brooklyn, other neighborhoods where there’s still some vacant land is available, where developers have already acquired those parcels using loans that will be sold to this fund when it’s completed. So it’s already beginning to have an impact there. The other thing it’s doing is allowing developers to go in and purchase existing housing and keep it affordable using the fund. There are many buildings, whether they are rent stabilized, or maybe they’re Mitchell-Lamas, that have been protected for years, that are now under threat, because rents are rising all over the city, and there’s an increasing incentive for their owners to convert them to market rate.. What we’ve seen already is, using funding from this acquisition fund, developers are going out and purchasing these properties, to keep them affordable. So it’s an example where we really brought together cutting edge financial techniques, this really brings techniques that have been used in the most sophsiticated financial markets, Conduit and other lenders have used these kind of structured finance techniques, we’re using that, and bringing it to affordable housing, so that we can provide a competitive advantage for affordable housing developers in this strong market.

The future of 421-a

Q: Let’s turn to the 421-a tax incentive program. What is the future of 421-a right now?

A: 421-a is a program that’s going to be with us for a long time. It’s a program that started in the 1970s, has created over 100,000 units of housing. It’s an important piece of our overall efforts to make sure that we build as much housing to keep up with our growing population in New Yorl. So the 421-a program is going to continue. What the mayor announced recently was that we need to look at this program, in light of the way that the market has changed. This is one of the areas I talked earlier about: finding creative ways to harness the power of the real estate market to create affordable housing. When 421-a was created, there was almost no building in many parts of the market, and it was intended as a tool to jump-start the private market, building market-rate housing. And it’s worked. And so today--last year we had the highest number of housing starts that we’ve had in New York City since the 1970s, in over three decades. We really need to step back and take a look at the 421-a program and say: in certain areas, it’s no longer needed just to spur market-rate construction. So what we can do is to make some changes to the program so that we can maximize the amount of affordable housing that we’re getting through the use of the 421-a program, it’s a way of harnessing the strong market and directing that to creating affordable housing. We have a task force that started meeting in April. We’re going to make recommendations by the fall to the mayor and the city council. I think what you’ll see is we’ll make recommendations to harness the 421-a program, in areas where the market is strong, to create even more affordable housing.

Q: Can you speculate on what areas this might be?

A: Just to give you one example. Lower Manhattan has been one of the strongest areas in development the city has seen over the last few years, a huge growth in housing there. It’s an area where we think the market is probably strong enough to be able to sustain market-rate development without full 421-a benefits. That’s a perfect example of an area where we’ll be looking at potential changes.

Q: 421-a is not going to disappear?

A: Absolutely not. We think it’s a critical component of the overall set of tools that we have to create housing. Let’s be realistic here; New York City is growing. We’ve had a real success--the last thing we would want to do is, in the mist of a booming real estate market, to change the way that we do things in a way that would cut off that housing construction. So while we’ll make some changes, we don’t want to fundamentally undermine the strength of the construction boom that we have. We need those units to keep up with the growing population. If we cut off the real estate construction that we have, we’re only going to make our affordable housing problem worse, because demand will continue and supply will go down, and that’s a recipe for disaster.

Q: How closely is the task force working with private developers, real estate? I know there are some members on the task force itself, but are they getting input from the real estate community?

A: Absolutely, there’s been a lot of discussions within the real estate community. We have representatives from the Real Estate Board of New York on the task force, and I know they’ve been meeting extensively with their members. We have developers that are on the task force as well; we have representatives from affordable housing groups, so developers can specifically focus on affordable housing. We really did try to bring together the full range of the real estate community: for profit, nonprofit, government advocates, together with many city officials and the City Council. So we think we have great representation from across the board, and w’re certainly getting lots of ideas, which indicates to me that lots of different folks are weighing in.