The UDC Precedent, Including Battery Park City Authority and the Need for an Affordable Housing Authority

The UDC[1] and its progeny[2] in the late 1970s and through and including the early 1990s accomplished a number of significant projects, without public investment or guaranties. It did this by exploiting the public/ private partnership model. It provided certain benefits to private sector developer partners, who were then able to source the funds needed to develop the project from the private sector, without government guaranties or direct investment.

The UDC had enormous powers. It could acquire real estate,[3] borrow money and issue bonds[4] and it was exempt from real estate and other taxes.[5] It could then sell or lease the real estate to others, so that they could develop the projects. It could do all this on negotiated terms and conditions, without having to publically bid out the projects.[6]

It had the right to override zoning.[7] While rarely exercised, this provided the UDC with the political leverage to work with local zoning agencies in New York State to accomplish its mission. This permitted sites to be used to best effect, including as to the scale, uses and bulk of the development. There was even a right to override local building codes in favor of the New York State Building Code;[8] however, this proved less useful in practice.[9]

At the present time, the capital markets no longer need a governmental guarantee or bond wrapper to permit access to the markets for real estate projects that otherwise stand on their own financially. Nor, strictly speaking, is the kind of subsided interest rate (as low as one percent) that used to be available under federal affordable housing programs[10] needed, per se.

Instead, what is needed is a discrete, definable, appropriate, predictable, priority and secure stream of NOI, derived from appropriately located real estate, along the lines outlined above. As discussed above, the middle-income model yields such a source of this income, provided that the other parameters are respected. It is the virtually inelastic demand for housing at the below market rent that animates this kind of financing model. However, as noted above, the stream of rents must not only be secure and predictable, it must be high enough to cover all the operating costs (including reasonable reserves for replacements), debt service and a reasonable return on equity, as noted above. Real estate tax exemption is presumed in this model, along the lines of existing programs. Imposing full taxes would be an operating budget buster that would require a dollar for dollar increase in the rents, which would substantially and negatively impact affordability. Hence, there is a need for real estate tax exemption and abatement.

The structuring of a functional public/ private development project is somewhat of an art; although, in terms of the financing model, it is more science than art. This is because the capital markets have evolved since the time of the creation of Sty Town, Parkchester, Battery Park City, and other large-scale public/private developments.

Battery Park City is a good example, although there are many others such as the Albany Hilton Hotel and the Grand Hyatt Hotel. In those deals, as well as others like them, the government negotiated for a piece of the upside, in order to recompense it for the tax abatement and exemption, forgiveness of back real estate taxes, UDAG grant sourced soft second mortgage, buy down of purchase price or other benefits, as the case may be, required in order to incentivize the creation of the particular project. This is the kind of flexible approach needed so that the nature and extent of the benefits granted could be adjusted to the particular circumstances. Similarly, this structure could be utilized to provide for repayment of all or a portion of those benefits granted, as appropriate. These kinds of tools can be properly utilized by an Affordable Housing Authority, as a part of the public/private partnership model, to achieve the mission, as outlined above. This is particularly so when effectuating a large scale development, in partnership with a number of different private developers and multiple and various tiers of financing sources, involving disparate parcels of land, various zoning and use requirements (including a mix of housing styles, from low to mid to high-rise, incomes and uses,) all in accordance with a master plan. This was the case in Battery Park City and other large-scale governmental sponsored developments. It is also appropriate for the kind of phased development of NYCHA and other City owned or controlled properties suggested above.

It is, therefore, proposed that a new Affordable Housing Authority be formed. It should have the kind of powers that the UDC has to deal with property. It is not suggested that the Authority have bonding power. Rather the concept is to negotiate public/ private partnerships for the development of a site that is to be devoted to the mixed income and mixed use community model noted above, as appropriately adapted to the particular site. The powers necessary to effectuate these purposes should include the following:[11]

1. The power to acquire property from the City or other governmental bodies for no consideration.
2. The power to transfer or lease the property, to one or more private developers, without public bidding and for a negotiated price or rent (under an up to 99 year lease) that can be a grant for little or no consideration.
3. The power to condemn land or other rights as needed to effectuate the purposes of the Authority.
4. The right to be exempt from real estate taxes.
5. The power to override local zoning and other building restrictions.

The City could transfer land it owns, directly or indirectly, to the Authority. This could include the NYCHA sites noted above, such vacant tracts as the 90 acres of land where the Brooklyn Army Terminal is located or the nine blocks remaining in the Seward Park Urban Renewal Zone. It could also include a variety of underutilized properties, such as the public library site in Brooklyn Heights (adjoining an existing Mitchell-Lama complex), which is already slated for redevelopment, or 40th Street midtown library branch, located on an underdeveloped site between 39th and 40th Street along Fifth Avenue. Much like the successful school building program, the existing library site could be redeveloped with new facilities that are incorporated into a new development project on the site.

It is proposed that the extremely successful approach of the Battery Park City model be employed. The vision was based in part on the model of Park Avenue, which projected a sense of security to those residing on the Avenue that was incomparable to other locales in the city and most especially governmental funded projects. Thus unlike the so-called projects following the Le Corbusier model of towers in the park, buildings were to be built to the property line, like on Park Avenue. Similarly, the buildings were to be built right next to each other to form solid block-fronts, with no places to hide. Lighting was also very important. Park Avenue is very well lit and there are few places in the shadows for predators to hide. Park Avenue itself is also wide and well lit to further enhance this feeling of security.

There were also to be a mix of incomes and uses. One of the first sets of residential buildings developed at Battery Park City was a complex of high-rise middle-income buildings. In addition, there were many luxurious units created in a variety of high, mid and low-rise buildings. There were also office buildings (commonly known as the World Financial Center), retail spaces, hotels, public spaces (including a museum, parks and the Esplanade) and even a marina. This model has proven to work in practice over more than 30 years.

By combining a variety of incomes (low, middle and high) and uses (residential, retail, office, hotel, entertainment and civic, as appropriate,), a new, integrated and harmonious neighborhood can be established. Flexibility is a part of the formula for success. The free market is dynamic and tastes and preferences change over time. We cannot legislate the future. Yes, there can and should be guiding principles; but, then the concept must be allowed to evolve and develop its own successful destiny.

It time to start again. This time there are ample financial resources available to do most of the work. As noted above the glue is allowing the land to be used at a price commensurate with the intended use. When that use is potentially changed after 20 years, the full price will have to be paid. But for the long-term, the problem can be solved and that is all we can reasonably ask be done.

The public/private model, developed in the depths of the fiscal crisis, with some alterations to adapt it to the modern needs of the capital market, can do the job. Let’s allow it to do so. An Affordable Housing Authority of the sort outlined above can help accomplish the mission.

[1] Now the Empire State Development Corp.

[2] Battery Park City Authority, 42nd Street Redevelopment Corp. and the Roosevelt Island Operating Corp. of New York State, among others

[3] New York Urban Development Corporation Act, Chapter 174 of the Laws of 1968 and printed in McKinneys Unconsolidated Laws, Section 6251, et. seq. (UDC Act). The right to acquire property including by way of condemnation is set forth in Section 6263 of the UDC Act. It could also acquire state land under Section 6263-a of the UDC Act and property from municipalities under Section 6264 of the Act.

[4] Sections 6267-6269 of the UDC Act.

[5] Sections 6256-69 of the UDC Act.

[6] Section 6272 of the UDC Act.

[7] Section 6266, Subdivision (3) of the UDC Act. See Opinion of the Corporation Counsel of the City of New York (No. 22-79). See also Floyd v. New York State Urban Development Corp., 33 N.Y.2d 1, 347 N.Y.S.2d 161, 300 N.E.2d 704 (1973).

[8] Section 6266, Subdivision (3) of the UDC Act.

[9] Lenders, in practice, required the issuance of a local certificate of occupancy. However, local building authorities balked at issuing the same if the building was not built in accordance with the local building code and with inspections by local authorities (not the State or UDC).

[10] The Section 236 HUD program that was used to foster development of Starrett City, for example.

[11] There is ample precedent for this under the UDC Act, as noted above.

Tagged: Affordable Housing, New York City