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Analyzing the Mayor's Housing Plan - Part 5

June 26, 2014

The Mayor’s historic and ambitious housing plan comes with a big price tag. The final section of the de Blasio Housing Plan makes a clear financial commitment to find and spend the required money, but also to stop spending unnecessary or inefficient money. The administration appears serious in its promise to drive the best deals possible, with several much needed reforms on the agenda.

Financing Commitment, Financing Reform.   

This is the last of five blog posts analyzing Housing New York, the Mayor’s new ten-year plan for affordable housing development, chapter-by-chapter. This week focuses on Chapter Five: Refining City Financing Tools and Expanding Funding Sources for Affordable Housing.

The Mayor’s historic and ambitious housing plan comes with a big price tag. The final section of the de Blasio Housing Plan makes a clear financial commitment to find and spend the required money, but also to stop spending unnecessary or inefficient money. The administration appears serious in its promise to drive the best deals possible, with several much needed reforms on the agenda. In order to maximize the amount of affordable housing, the City is looking to spend that money wisely.

The biggest and most meaningful financing reform is of the  421a tax abatement program.  Many cities incentivize new development because it brings an extra benefit for the city – new developments generate crucial property tax revenue.  But in NewYork City’s historically jumbled tax incentive system,  far too many market-driven new developments avoid paying their share of taxes, making 421a no longer justifiable. In the 1970s, when the city was in very different condition – population was declining and new development had ceased – we instituted the 421a program to encourage development which gave a huge tax abatement to market-rate developments. While the 421a program has been reformed over the years, most notably by sometimes requiring 20% affordable housing, it simply has not kept pace with the market conditions of the city, and acts as an overly generous, taxpayer-backed subsidy to many luxury developments.

Specifics on the reforms will be formulated by the Mayor’s team later, but the focus, as it should be, is on dialing back this overly-rich subsidy.  Under the last administration, 421a was often combined with other city subsidies for a double-dip, or even with Inclusionary Housing bonuses also for a triple-dip. The new administration is committing to examining more closely how 421a fits together with its other programs, and reforming it so that either more affordable housing or deeper affordable housing will required when using it with other subsidies or the Inclusionary Housing program. The details will have to be nuanced to respond to local market conditions, and it should also be noted that State legislation will be needed to enact much of the reforms, but this focus is a huge step forward.

One thing the administration does not mention is extending the length of affordability in the 421a program, from the current 35 years. As we’ve learned so often, our affordable housing comes with an expiration date. Getting more years of affordability is one of the most cost-effective ways to get added value for the public from these affordable housing developments. The administration should consider an extension of the affordability length, as well as some other adjustments to keep the housing more deeply affordable during its term.

In the 421a reforms is a proposal for examining an off-site option for cooperative and condominium development. Considering that condos and coops, as well as rentals, currently have the same affordability requirements in the 421a program, this is a proposal that deserves very careful oversight and monitoring. Offsite and payment-in-lieu options have been abused or manipulated to ill effect before,  most notably with the former 421a certificate program, the current “poor door” developments, and midtown luxury towers benefiting from full tax exemptions with questions over just what affordable housing was provided in return. Any offsite or payments-in-lieu option must be equitable, transparent, and structured to build significantly more affordable housing than would be gained from constructing affordable housing onsite.

There are two other tax programs the city proposes revamping – the J-51 program, and 420c program. J-51 is designed to incentivize building renovations, and the city is proposing some tweaks, including incentivizing things like environmental sustainability.

420c was developed in order to provide a tax abatement for low-income housing developed with Tax Credits by an entity with a non-profit component. While the reforms of the 420c program are not spelled out, it is imperative these reforms strengthen the not-for-profit component involved. Already, for-profit developers have been cashing out of low-income housing projects in gentrifying areas like Prospect Heights, which they are only able to do because they initially utilized tax-abatement programs that did not require a not-for-profit component, whose incentive is protecting community benefit, not getting the most profits. The stronger the not-for-profit component in a development, the more likely they are to keep the development affordable for the long term, while requiring only the subsidy needed to keep the building stable and sound. This both protects affordable housing and saves the city money in preservation financing. Currently, the not-for-profit requirements usually provide some level of involvement, but are still fairly weak. Strengthening them should be the first order of business in any 420c reform.

As far as finding new financing tools, the Plan mostly focuses on keeping and expanding some recent innovations, such as with bifurcated 80/20 financing, which is a terrific idea that saves valuable tax-exempt bonds by only allocating the financing to the affordable portion of the development; use of recycled tax-exempt bonds; continuing to find creative ways to lower interest rates on financing tools; and furthering leveraging things like New Markets tax credits, Social Impact Bonds, City pension fund investments, and CDFI Bond Guarantees. EDC is also charged with developing a financing “toolbox” for mixed-income developments, which will help to bring some more clarity to what can be very complex developments to finance.

Better use of Battery Park City funds is also mentioned. But one thing the plan does not mention, which would truly be a game-changer, is exercising its option to buy Battery Park City back from the State for $1, a provision that was written into the original agreement with the State. Doing so would provide a steady and reliable influx of funds for affordable housing. And Battery Park City funds come with much fewer strings than other sources of city capital, making them extremely valuable in getting deals over the finish line.  Buying Battery Park City back from the State is one of the biggest things the city can do to expand its funding for affordable housing.

Finally, the administration proposes studying systematic program changes in order to make sure we’re spending our money wisely and achieve three specific goals – better leveraging of private financing, building housing for a wider variety of incomes, and ensuring the city doesn’t overspend on deals.

All of these are good and necessary goals, and it is important that the administration focus on these. However, a fourth goal needs to be added to this focus as well – the administration should encourage more competition in the marketplace, which can be achieve through developer fee reform.  Right now, bigger deals don’t just pay more – they pay exponentially more. This is because addition to more money for bigger deals, larger developments are able to access programs that pay a much greater percentage overall.  A developer who does a 60 unit deal through the programs available doesn’t make 3 times the money of one who does a 20 unit deal – they actually make about 10 – 15 times the money.  The result is small and mid-size developers are treading water and unable to grow, while the few larger developers at the top of the market grow ever bigger and crowd out competitors. This means less competition for large, lucrative developments, and less competition means worse deals for the city.

Many small developers, especially non-profit developers, have decades of experience building affordable housing. And small deals are often actually more complicated than larger ones. But in addition to experience and expertise, banks want to see a large balance sheet that can provide sufficient collateral in order to do large, costly projects.

The City can solve this by evening out the playing field, paying better developer fees for smaller deals and making it up by paying a little less for larger deals, through a fee pooling arrangement. This would allow these small- and mid-size developers to build up the balance sheet needed to do larger deals, and create more competition at the top end of the market.

A robust development environment, at all levels, benefits everyone, the City most of all. And we’re going to need as much expertise, passion and capacity in the development community we can get, if we’re going to build 200,000 units of affordable housing, and start to truly realize a more equitable city.

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