The answer to the affordable middle-income housing crisis in New York City[1] and in other similar urban centers in the United States,[2] as well as, elsewhere in the world[3] is the creation of more middle-income housing. The capital markets can help solve the problem by financing the development of new middle income housing, as more fully discussed below.
On the other hand, the answer to low-income affordability is not more low-income housing; it is more income.[4] The distinction is cogent. The existing model for building low-income housing projects is structurally flawed. It just does not work financially because the rents that can be paid by low-income tenants are insufficient to cover all the expenditures required in order to properly operate, and otherwise carry the project. Hence, the financial problems facing NYCHA[5] low income housing projects in New York City.[6]
Instead of creating new low income projects that demonstrably do not work, we should be empowering households earning less income by providing them with the income needed to rent an apartment like others in the marketplace. There is a model for this kind of direct assistance; in the form of the Section 8 transferable rent voucher system.[7] Transferable or so called “sticky” vouchers awarded to a tenant enable the tenant to rent an apartment anywhere, so long as the rent charged does not exceed the prescribed market rent in the area. If the direct rent subsidy program is made compliant with capital markets requirements, as outlined below, then the solution to the affordable low income housing crisis can be dealt with as a part of the solution to the affordable housing crisis, generally, as discussed below.
Middle-income housing can be financed through the capital markets, without the kind of substantial public investment and guarantees required in order initially to create and then, over time, operate low-income housing projects.
Once upon a time[8] this could not readily be accomplished. There was a need for massive governmental intervention to enable the creation of affordable middle-income housing. This took the form of condemnation and slum clearance,[9] so called “buy-downs”[10] of purchase price, issuance of government bonds or other credit enhancements,[11] subsidies in the form of interest rate buy-downs,[12] real estate tax exemption and other relief.[13] As a result, over 100,000 affordable middle-income housing units were created[14] in New York under the so-called Mitchell-Lama program.
At the present time, though, the creation of needed affordable middle-income housing appears to be stalled.[15] This, at a time when other forms of housing continue to be produced, including luxury housing and some low-income housing. The reason sufficient quantities of affordable middle-income housing are not being produced is a complex matrix of interdependent factors. The solution is not obvious. Indeed, as one of Murphy’s laws states, the simple solution to a complex problem is usually wrong.
It is suggested that a dynamic approach is required. Whether it is issues of site selection, policy considerations, zoning, master planning, or other project specific concerns, a more nuanced approach can result not only in capital markets acceptance; but, also in genuine efficiencies.
With the advent of commercial mortgage backed securities (CMBS) and other forms of marketable securities, derived from what at its heart is a real estate mortgage loan structure, the capital markets have developed an institutional following that has embraced these financial products. What once required the issuance of government bonds or guaranties in order to be marketable can now be done without these wrappers and often at a lower overall cost.
The capital markets have been extraordinarily successful in providing financing for residential multi-family projects, at among the lowest interest rates in history.
A fundamental requirement for accessing the capital markets is conformity with its rules. The markets are extremely disciplined. If the requirements are met then a financing can be achieved on these favorable prevailing market terms and conditions. The penalty for non-conformity is usually denial of access. Although some exceptions are made, this often results in less favorable terms and conditions, including higher interest rates. This is understandable, because the efficiency of the marketplace is dependent, in no small measure, on delivering the conforming financial products that the broader institutional investor-side of the market requires.
To better understand what works (and what does not) is not just a study of history; although that is a good starting point. The marketplace is dynamic and has evolved over time. One requirement though has not changed and that is the need for predictability. This is a fundamental factor in determining whether a capital markets financing can be accomplished or not.
This article analyzes the problems and proposes a solution. As will be discussed below, a part of the solution suggested is to adapt existing public/private partnership structures and tools (including the very flexible financeable ground lease structure) that have proven to work in practice. This also includes the use of a public authority or public benefit corporation, which provides needed flexibility in terms of the effectuation of any such program. These proven structures and tools, if properly employed, can provide the means to access the capital markets, so as to facilitate the financing of new middle-income housing development.
It is suggested that an “Affordable Housing Authority” be created. This would not only provide an extremely flexible governmental vehicle, with appropriate staff, to focus on solving the problem, it would also provide a mandate and the powers necessary to accomplish the mission. Public benefit corporations and authorities, such as Battery Park City Authority and the 42nd Street Redevelopment Corp., with a precise focus and mandate, have been extraordinarily successful in accomplishing their missions. The results speak for themselves; a new, well functioning, mixed-income, mixed-use, city within a city, known a Battery Park City and a revitalized 42nd Street and Times Square.
While some form of real estate tax exemption is still a necessary component and the adjusted[16] cost of the land must be right, most of the other incentives noted above are no longer required. What that means in practice and how it can be accomplished are discussed below.
It is time to address the need for the creation of essential middle income and other affordable housing in New York City and other similar urban centers. Artificially preserving the existing affordable housing stock, as such, does not solve the problem. Indeed, it may exacerbate it. Consider the lengths families will go to in order to preserve the right to occupy an apartment that is rent regulated (including even from one generation to another).[17] People can and do hold on to bargain-rate apartments for years, even decades, depriving others of access to these rare prizes. Indeed, this kind of artificial rent regulation may be a root cause of the problem. Rather than artificially holding down rents to below market rates, we should build a new generation of housing for the middle class. We have financial models such as public-private-partnerships that have been proven to work. We have the land, as discussed below. Now we need only the political will to make it happen.
[1] The existence of the housing crisis is well documented in a number of governmental and non-governmental studies including those noted below. There are also many news articles reporting on the issue including those cited below. It would appear that the crisis has deepened in recent times. One indicator is the substantial rise in rents throughout New York City in the last few years despite the financial crisis of 2008 and the Great Recession that took hold during the same period. In this regard, the recent Harvard Study, noted below, describing how there has been a significant shift from home ownership to rental housing because of the spate of mortgage defaults and foreclosures during the relevant period, may help account in part for the acuity of the problem. See the excellent study commissioned by the Hon. Betsy Gotbaum, when she was the Public Advocate of New York City, entitled: “Affordable Housing in New York City-Definitions/ Options,” a publication of the Steven L. Newman Real Estate Institute, “Division of Applied Research & Public Planning” (October 2005), as well as studies by the City Council of the City of New York entitled “The Middle Class Squeeze-A report on the State of the City’s Middle Class” commissioned under the auspices of Christine C. Quinn, Speaker (February 2013); the Office of the State Comptroller, the Hon. H. Carl McCall, entitled: “No Room for Growth: Affordable Housing and Economic Development for the City of New York” (Report 8-2000); the Office of Comptroller of the City of New York, the Hon. William C. Thompson, Jr., entitled “Affordable No More: New York City’s Looming Crises in Mitchell-Lama and Limited Dividend Housing” (February 18, 2004) and the New School for Management and Urban Policy entitled: “Sustaining Affordable Housing in a Competitive Real Estate Market: A Case Study of Mitchell-Lama Rental Units,” (April 8, 2008). See also the recent study by the Joint Center for Housing Studies of Harvard University entitled: America’s Rental Housing-Evolving Markets and Needs (2013). Reference should also be made to the Study done by the Center for Urban Future entitled: “Reviving the City of Aspiration: A Study of the Challenges Facing New York City’s Middle Class” (February 2009). Relevant news articles include: “N.Y.C. so costly you need to earn six figures to make middle class” by Elizabeth Hays in the Daily News (February 6, 2009); “City faces middle- class exodus,” by Daniel Massey in Crain’s (February 5, 2009); “New York’s Funny Definition of ‘Moderate- and Middle-Income’ Housing,” by Stephen Smith in Forbes
(January 9, 2012); “In New York Having a Job or 2, Doesn’t Mean Having a Home,” by Mireya Navarro in The New York Times (September 18, 2013); “New York’s Affordable Housing Shortage,” an editorial in The New York Times (February 8, 2014); and “Affordable Housing Options for the Average NY’er,” by Lucy Cohen Blatter in AM New York (August 8, 2012).
[2]See “The Affordable Housing Shortage: Considering the Problem, Causes and Solutions” by Ron Feld- man of the Federal Reserve Bank of Minneapolis, Banking and Policy Working Paper 02-2 (August 2002). See also “America’s Emerging Housing Crises” by Joel Klein in Forbes (July 26,2013); “Why Middle Class Can’t Afford Rents” by Robert Hickey in CNN Opinion (April 23, 2014); and “In Many Cities, Rent is Rising Out of Reach of Middle Class” by Shaula Dewan in The New York Times (April 14, 2014).
[3] See “Four Ways to solve Britain’s housing crisis,” by the Editors of MSM Money UK (November 14, 2013); “Market failure and the London housing market” a study by the Greater London Authority (May 2003); and a study by the Reserve Bank of India entitled “Enabling Affordable Housing for All-Issues and Challenges” (April 1, 2012).
[4] See Harvard Institute of Economic Research Discussion Paper #1948 by Edward L. Glaeser of Harvard and Joseph Gromyko of Wharton (March 2002); and even more on point, “The Affordable Housing Shortage; Considering the Problem, Causes and Solutions,” by Ron Feldman in Banking and Policy Working Paper 02-2 (August 2002) of the Federal Reserve Bank of Minneapolis. A conclusion of that Paper is that a shortage of income is the root cause of the housing affordability crisis and that policymakers should recognize that government financing of new affordable housing units is unlikely to be cost effective response to the low household income problem.
[5] The New York City Housing Authority, which owns and operates housing projects in New York City, comprising more than 180,000 apartment units for occupancy by low-income households.
[6] See “New York’s Silent Infrastructure Challenge- Aging Public Buildings” by Adam Forman in City Limits (March 18, 2014), which notes that more than half of the NYCHA buildings are not in compliance with Local Law 11. The problems noted include leaky roofs, facades, ceiling collapses, holes in walls and even hazardous mold. Many are left vacant as a result of the serious deferred maintenance issues. See also “Re- skin Public Housing” by Fred Harris, the Executive Vice President of Development at NYCHA in the Forum for Urban Design (an estimated $17.8 billion project). He notes that there is a backlog of $6 Billion of required capital expenditures. Rent from NYCHA residents is reported to cover, at most, 50% of operating costs. He reports that the habitability of buildings is threatened if the capital expenditures are not made. The $6 Billion of so-called deferred capital maintenance was the subject of the Bloomberg plan to lease land with excess development rights in Manhattan NYCHA projects for luxury development. See “Funding of Plan for Public Housing” by Robbie Whelan and Josh Dawsey in The Wall Street Journal (August 20, 2013); and “City Announce New Goal for Public Housing Repairs, but with Big Caveat” by Mireya Navarro in The New York Times (March 11, 2013). See also “Good Place to Work Hard Place to Live” by Tom Waters and Victor Bach of the Community Service Society (April 2013).
[7] Code of Federal Regulations Title 24, Chapter 8, Parts 887–888. This is unlike project-based vouchers (under Parts 880–886, dealing with Housing Assistance Payments (HAP) Contracts for non-governmental and governmental projects) which tie benefits to a particular low-income project that, in effect, warehouses low-income households.
[8] For example, in the period between the passage of the Redevelopment Companies Act in 1942 and the passage of the 1960 Amendment to the so-called Mitchell-Lama Act of 1955, which set the initial buy-out period at 20 years; but, more on this below.
[9] Private Housing Finance Law (PHFL) Article V, Section 119. All references to PHFL are to the McKinney’s Consolidated Laws of New York (2002, as amended) Books 41–42.
[10] PHFL Article V, Section 116.
[11] PHFL, Article V, Section 111.
[12] Section 236 Interest Reduction Payment Program (which was terminated in 1973), under 24 CFR part 236 (12 USC 1715z-1; Section 236 of the National Housing Act).
[13] PHFL Article V, Section 125.
[14] See statistics reported on Rent Guidelines Board Web site, which notes that as of January 2006, there were 132 City sponsored Mitchell-Lama developments, comprising approximately 54,000 units. In addition there were approximately 100 State sponsored Mitchell-Lama developments, comprising approximately another 64,000 units. Although the so-called Mitchell-Lama Law (PHFL, Article II) was first enacted in 1955, it was not until the Amendments of 1959 (which permit- ted a buyout after a period of 15 years) and 1960 (which increased the period to 20 years) that construction of middle-income projects under the program began in earnest. This includes large-scale development projects such as Coop City in the Bronx, Starrett City in Brooklyn, Rochdale Village in Queens, as well as Waterside Towers, Rupert Towers, and numerous other large and small developments in Manhattan and the other Boroughs of New York City.
[15] See “Will Affordable Housing Plan Leave Middle Class New Yorkers Out in the Cold?” by Lindsay Arm- strong in Metrofocus at Thirteen.org (July 20,2012), which notes that a recent report from the Independent Budget Office suggests that the number of moderate and middle income units created under Mayor Bloomberg’s New Housing Marketplace plan was far behind the original goal. In this regard it is important to note that there is a genuine difference between creating new affordable housing and preserving existing housing as more fully discussed in this article. The author’s own anecdotal experience in the area of Mitchell-Lama and other middle-income regulated programs indicates that little middle-income housing has been created. And the efforts to preserve middle- income housing have only been marginally effective when compared to the exodus of units from rent- regulated status, whether under Mitchell-Lama, federal programs or rent control and stabilization. See also “Mayor Mike’s Legacy: What *Really* Happened To Affordable Housing In New York City by Choire Sicha in the AWL (August 19th, 2013), which describes how there was little housing created in New York City relative to prior periods, let alone affordable middle class housing. Preservation is not creation of needed new affordable housing in addition to the existing housing stock. The article also notes that formerly rent regulated units continue to diminish as well. It would appear that the City itself acknowledges many of these shortcomings, as outlined in the New York City Economic Development Corp. report on the need for the development of Hunters Point in Queens (NYCED.com). In that report the EDC notes that the last large-scale development effort to create middle income or workforce housing was through the Mitchell-Lama program in the 1970s. It goes on to say that most of the 27,000 new affordable housing units created since 2002 under Mayor Bloomberg’s New Housing Marketplace Plan focused on low-income households. Although it reports 21,000 Mitchell-Lama units were preserved, it goes on to say that 11,000 have left the program. It also notes that vacancy decontrol provisions covering rent- stabilized buildings have resulted in a further erosion of the middle class housing stock in New York City. The Hunters Point project plan includes 5,000 units of housing targeted at middle-income households, defined as earning incomes of between 80% and 165% of AMI.
[16] Zoning bonuses and rights to develop other higher end uses, such as retail, offices and luxury housing units, within the overall development project can, in effect, help reduce the cost of the land apportioned to the affordable middle income component of the project to a level that is financeable. However, it is suggested that more is needed, as discussed below.
[17] See “The Truly Affordable Apartment” by Rhonda Kaysen featured in The New York Times on January 31, 2014.
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Tagged: Affordable Housing, New York City
Leonard Grunstein 
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