Friday, April 20, 2018

Tag Archives: housing development

Why Is a Private Developer Trying to Walk Away with This Affordable Building?

Why Is a Private Developer Trying to Walk Away with This Affordable Building?

A lawsuit currently being heard in State Supreme Court tells a troubling story for the tenants of a small affordable building in the Morrisania neighborhood of the Bronx, and a troubling story for local housing policy.

In 2002, a mission-driven non-profit affordable housing developer named MBD Community Housing and for-profit affordable housing developer Don Capoccia of BFC Partners teamed up to build a 67 unit building at 1238 Simpson Avenue. MBD Community Housing brought development experience to the deal along with a 100% tax exemption because of their non-profit status, an essential part of the affordable housing formula. Don Capoccia/BFC Partners also brought development experience in addition to financial resources. A third party to the deal – a tax credit syndicator named WNC Holdings – facilitated the Low Income Housing Tax Credit (LIHTC) financing.

So far, so good.

Partnerships between for-profit and non-profit developers have been one of the foundations of New York’s affordable housing production formula, and we have led the nation in productivity, setting the pace for municipally-backed affordable housing programs.

In June of 2017, MBD Community Housing received a letter that put the affordability at risk and sparked the court case.

There is a hidden problem in New York’s housing formula: regulatory agreements that enforce the affordability expire. In the case of the 67 units at 1238 Simpson Avenue, when the affordability requirement ends, whoever controls the building can choose to renew the affordability or take steps to increase the rents and even decide to make a windfall profit by opting-out of the affordability requirements. Because of this, MBD Community Housing made sure to include a “right of first refusal” in the development agreement for 1238 Simpson Street. In the event that either of the for-profit partners made a move that would put the affordability of the building at risk, the right of first refusal gave MBD Community Housing the right to step in and take control of the building.

In fact, the court papers show that the local community board requested perpetual non-profit oversight of the building as a condition of their support for the project, and the New York State housing agency gave the partnership extra credit in their LIHTC funding application specifically because the non-profit partner had a right of first refusal.

Here is the story laid out in MBD Community Housing Corp. –vs- WNC Holding, etc. (Index # 28810/2017):

According to the court papers, WNC Holdings sent a letter requiring MBD Community Housing to either exercise or relinquish their right of first refusal. WNC Holdings had a new party lined up to buy their interest share in the development and wanted MBD Community Housing to give up their oversight of the building. MBD Community Housing understood that a new for-profit party could circumvent the non-profit’s perpetual oversight and put the long-term affordability of the building at risk, exactly the reason MBD Community Housing had insisted on the right of first refusal in the first place.

MBD Community Housing exercised their right of first refusal, but according to the court papers, WNC Holdings insisted on an unusually high price. The non-profit was clear that the legal agreement, the tax code, as well as general precedent and custom gave them the right to buy the building for the price fully assuming the outstanding mortgage debt. WNC Holdings made the unusual argument that the non-profit would have to assume all the outstanding debt and also pay that same amount in cash to WNC Holdings, which would have made it difficult to keep the building affordable and, according to the court papers, been a profit “double dip” by WNC Holdings.

But who was the unnamed new party forcing MBD Community Housing to fight for the mission-driven oversight that guaranteed the affordability? The court case revealed that it was Don Capoccia/BFC Partners, the original co-developer.

The legal case will be fought on technicalities, but for people who care about the Morrisania neighborhood and affordable housing, the issue is clear. Don Capoccia/BFC Partners appears to be actively seeking to remove the oversight of the mission-driven non-profit from the deal and with it the guarantee of long-term affordability that MBD Community Housing brings.

That’s not a surprising move by a developer like Don Capoccia/BFC Partners. As a for-profit, it is his right to maximize his bottom-line opportunities. The building was largely paid for by government-backed financing and tax exemption, and the residents of the Morrisania neighborhood desperately need affordable housing. So, the government has a responsibility to ensure that the community gets the maximum possible benefit from the public investment, which means keeping city-backed affordable housing permanently affordable.

The details of this case are troubling, and they are increasingly common.

As market-rate rents rise in every neighborhood across the city to prices that would have seemed unlikely only decades ago, for-profit affordable housing developers are increasingly looking to slip their affordable buildings into the market-rate column the moment a regulatory agreement allows. This article in Crain’s New York on the sale of a portfolio of affordable buildings in Crown Heights makes clear that the problem of for-profit owners selling their affordable developments and undermining the affordability is not hypothetical, and it may soon be a crisis.

According to an analysis by the Association for Neighborhood & Housing Development (ANHD) the early rounds of local government-backed affordable housing that began under Mayor Koch are just now beginning to reach their “year 30 opt-out” moment, which will put about 10,000 units of affordable housing across all five boroughs of the City at risk each and every year. The affordable buildings that are controlled by for-profit developers are likely to be at risk, while the buildings that are controlled by mission-driven non-profit developers are likely to voluntarily renew their affordability. The scale of this potential crisis is made worse by the fact that local government policy since the Giuliani and Bloomberg years has been increasingly tilted towards for-profit developers, as ANHD laid out in our recent For-Profitization of Affordable Housing Development and the de Blasio Housing Plan report.

The lesson of this court case for the community is clear; critically needed affordable housing built with local tax dollars is at risk. The lesson for mission-driven non-profit developers is clear; be very careful not to let a for-profit partner undermine your right of first refusal.

There are also important lessons for City and State housing policy.

In existing affordable housing, City and State officials must do everything they can to make sure that for-profit developers are actively discouraged from taking advantage of any opportunity to opt-out of affordability. One important step that the City and State can take is to deny future development opportunities to for-profit developers who have a track record of undermining long-term affordability.

For new affordable housing developments, City and State officials must do more to protect long-term affordability by strengthening the control of mission-driven non-profits in each deal. The City and State can make this happen by awarding more development opportunities to non-profit developers and requiring that joint-venture agreements between for-profit and non-profit developers give actual long-term control of the building to the mission-driven partner.

The City and State can also make this happen by changing policy to only allowing deals that give actual, long-term control to a mission-driven partner to be legally eligible for the essential 420c or Article XI real estate tax exemption that underlies most affordable housing development.

 

Benjamin Dulchin, ANHD’s Executive Director

New ANHD White Paper: The For-Profitization of Affordable Housing Development and the de Blasio Plan

New ANHD White Paper: The For-Profitization of Affordable Housing Development and the de Blasio Plan

Non-profit affordable housing developers have played a key role in New York City housing plans since the beginning of the modern, city-backed affordable housing model. The role of for-profit developers has grown over the years, leaving community development practitioners to question whether affordable housing development has become overly reliant on for-profit developers and whether the level of public benefit created by these projects has diminished.

ANHD uses newly available data to evaluate these questions in our latest white paper, The For-Profitization of Affordable Housing Development and the de Blasio Plan. Using information from the recent implementation of New York City Local Law 44, which requires developers to report certain project details, ANHD analyzes the for-profitization of affordable housing and compares some aspects of the relative role and the public benefit of non-profit and for-profit developers in Mayor de Blasio’s Housing New York Plan.

The new data provides an essential window to understanding the “for-profitization” of affordable housing development. Summary findings include:

  • 74% of new-construction deals were by for-profit developers, while non-profit developers accounted for just 26% of new-construction deals. For-profit developers produced 80% of the new-construction units, while non-profit developers produced 20% of the new-construction units.
  • Non-profit developers accounted for 54% of preservation deals, and for-profit developers accounted for 46% of preservation deals. Despite closing more deals, mission-driven developers produced 43% of the preservation deals, creating a discrepancy between the scale of projects between for-profit and non-profit developers.
  • Between January 2014 and June 2016, 9 out of 10 RFP-selected new construction projects went to for-profit developers. Of those deals, non-profits developed low-income units at a rate of 15 percentage points higher than for-profits, with non-profits developing 100% of their units for low-income households.
  • From January 1, 2014 to June 30, 2016, non-profits built 94% of the total number of deeply affordable new construction units, compared to 84% built by for-profits.
  • 80% of the new construction subsidy was allocated to for-profits and 20% allocated to nonprofit developers. 57% of the total preservation subsidy went to non-profits and for-profit developers received 43% of the preservation subsidy.

Download your copy of the white paper here.*

And listen to the in-depth coverage of the paper on The Brian Lehrer Show Tuesday morning.

 

 

*An earlier version of the report had the incorrect version of Table 4B on page 15. It has since been corrected. This is the correct version of the report.

Stephanie Sosa, ANHD’s Senior Associate for Housing Development Policy

Albany Agrees to Resurrect the 421-a Tax Exemption

Albany Agrees to Resurrect the 421-a Tax Exemption

Taxpayers and Tenants Should be Disgusted

Albany has come to an agreement on that includes resurrecting the 421-a real estate tax exemption, with a vote on the full State budget expected today. There is no acceptable reason that everyone except luxury real estate developers should be expected to pay their taxes. Taxpayers and tenants should be disgusted.

We will need the $1.4 billion – and growing – that we spend each and every year on 421-a to fill the holes that will be left in the local budget by Trump’s federal budget cuts for essential services. 421-a does little to actually create affordable housing, with 79 cents of every 421-a dollar spent going to luxury development, and only 11 cents going to support affordability. A growing body of evidence suggests that the 421-a exemption doesn’t even accomplish the most minimal public purpose of incentivizing new market-rate development.

Resurrecting 421-a is also a body blow to tenants because changes in the law, for the first time, include the interests of the construction trade unions, which severely limit the ability of tenant-friendly legislators to use the program as leverage to defend or strengthen rent regulation against and anti-tenant legislators. Rent regulation is New York City’s most effective affordable housing and community-stability preservation program, which is now left far more vulnerable. This is especially true because under the new agreement, 421-a expires in 2022 and rent regulation expires in 2019, stripping tenants of essential leverage.

What is the New 421-a Program?

The new 421-a program, now titled “The Affordable New York Housing Program,” is essentially an expanded and amended version of the expired June 2015 421-a exemption that passed the legislature, but with modifications intended to resolve the conflict created from a trade union wage provision that was inserted at the last minute. This subsequently led to legal complications and suspension of the exemption.

The new 421-a program does not improve the affordable housing requirements passed by the legislature in June 2015, but it does add significant cost to the taxpayer.

The June 2015 version was citywide and would have been used by almost all new residential development projects over 6 units, allowing developers affordability Options A, B, C, and D. (See image below for an explanation of the options) The new program adds Options E, F, and G and requires developers to pay higher construction wage levels. The new Options E, F, and G also extend the length of the tax exemption to an unprecedented 35-year, 100% exemption. This is a major increase in the lifetime value of the exemption to the developer and a major increase in the cost to the New York City taxpayer.

The program currently costs taxpayers $1.4 billion a year – and growing – and the NYC Independent Budget Office have estimated that the changes to the new program will add significant additional cost.

The proposed new REBNY program is citywide, and would widely be used across most neighborhoods. Development of new buildings with 300+ rental units will be required to participate in the program in some areas and eligible to participate in all other areas of the City. The new program is exceptionally generous to the developer, and most will take advantage of this financially generous opportunity.

And the increase in cost won’t just come after year two of the extended tax exemption; it will come immediately. Developers will find the enhanced benefit irresistible since it allows them to not pay taxes for an additional ten years. We will see a rush of developers applying for the new 421-a program and see developments from the last 1.5 years retroactively being granted 421-a, at a great cost to taxpayers.

No additional affordable units, or deeper level of affordability will be generated by the REBNY proposal, and the increase in the length of affordability is minor. The primary beneficiaries will be market-rate and luxury real estate developers, who will have their already substantial public subsidy increased by an estimated 22.5% in each new building. A fraction of the increased value given to the developer will be passed along in the form of higher wages for the short-term construction labor.

How Do the New “Options” Work?

  • Option E is allowed within any of the Enhanced Affordability Areas, and requires 10% of the apartments be affordable at 40% of Area Median Income (AMI), 10% at 60% of AMI, and 5% at 120% AMI. The average hourly construction wage must be $60. Additional public subsidy is not allowed.
  • Option F is allowed within any of the Enhanced Affordability Areas, and requires 10% of the apartments be available at 60% of AMI, and 20% at 130% AMI. The average hourly construction wage must be $60 an hour. Additional public subsidy is allowed.
  • Option G is allowed only within the Brooklyn and Queens Enhanced Affordability Areas, and requires that 30% of the new housing is affordable at 130% of AMI. The average hourly construction wage must be $45 an hour. Additional public subsidy is not allowed.
  • Any building with 300+ rental units outside of the Enhanced Affordability Areas can opt-into Option G, which, given the extraordinary value of the 35-year 100% abatement to the developer, is the most likely outcome.

Understanding REBNY’s New 421-a Tax Exemption Proposal

Understanding REBNY’s New 421-a Tax Exemption Proposal

What does it do? What does it cost?

In January 2017, a revised 421-a Tax Exemption, rebranded and given the title “The Affordable New York Housing Program,” was introduced and inserted into the proposed FY18 New York State budget. This version of the 421-a Tax Exemption is essentially an expanded and amended version of the expired June 2015 exemption that passed the legislature but with modifications intended to resolve the conflict created from a trade union wage provision that was inserted at the last minute, which subsequently led to legal complications and suspension of the exemption.

 

What is REBNY’s Proposal?   

REBNY’s proposed 421-a program does not improve or change any of the affordable housing requirements passed by the legislature in June 2015.

The June 2015 version was citywide and would have been used by almost all new residential development projects over 6 units, allowing developers affordability Options A, B, C, and D. (See image below for an explanation of the Options) The new REBNY proposal adds Options E, F, and G and requires developers to pay higher construction wage levels. The new Options E, F, and G also extend the length of the tax exemption to an unprecedented 35-year, 100% exemption. This is a major increase in the lifetime value of the exemption to the developer and a major increase in the cost to the New York City taxpayer.

The proposed new REBNY program is citywide, and would be widely used across most neighborhoods. Development of new buildings with 300+ rental units will be required to participate in the program in some areas, and eligible to participate in all other areas of the City. The new program is exceptionally generous to the developer, and most will take advantage of this financially generous opportunity.

What is the Cost of the REBNY Proposal?

The NYC Independent Budget Office recently reported that the current “421-a remains the city’s largest tax expenditure at $1.4 billion this fiscal year.”

New York City’s Department of Housing Preservation and Development (HPD) has stated that the REBNY’s proposed changes will increase the overall cost of the program by yet another 22% on top of the billion-plus dollars we are already spending on the program every year.

And the increase in cost won’t just come after year two of the extended tax exemption; it will come immediately. Developers will find the enhanced benefit irresistible since it allows them to not pay taxes for an additional ten years. We will see a rush of developers applying for REBNY’s 421-a program and see developments from the last 1.5 years retroactively being granted 421-a, costing tax payers an estimated additional $820 million in the first ten years, according to HPD.

 

Is 421-a an Affordable Housing Program?

Although the current 421-a Tax Exemption includes some requirements for affordable housing, it cannot be accurately described as an affordable housing program. It was designed in the 1970s to incentivize the creation of private, market-rate, and luxury housing at a time when the City economy was stagnant. The affordability benefits were a minor, late add-on the program. In fact, a 2014 analysis of the annual cost by ANHD shows that the exemption cost the City over $1.1 billion in lost tax revenue and covered 152,402 residential units, but only 12,700 of those units were affordable. That’s $11 of affordable housing benefit taken for every $100 given away to subsidize luxury development. That’s not an affordable housing program.

 

Who Will Benefit from the REBNY Proposal?

No additional affordable units, or deeper level of affordability will be generated by the REBNY proposal, and the increase in the length of affordability is minor. The primary beneficiaries will be market-rate and luxury real estate developers, who will have their already substantial public subsidy increased by an estimated 22.5% in each new building. A fraction of the increased value that is given to the developer will be passed along in the form of higher wages for the short-term construction labor, but this will be a minor amount.

Additional beneficiaries of the REBNY proposal will be landlords and politicians who oppose rent stabilization laws. The New York State Assembly, which tends to support rent stabilization laws, has often used the threat of not renewing 421-a as leverage to prevent the weakening of rent stabilization laws by the New York State Senate, which tends to support the 421-a Exemption. Since this version of 421-a included a higher construction wage for the first time, the Assembly – which tends to also be pro-organized labor –will find it far more difficult to use the threat of not renewing 421-a as leverage.

 

How Do the New “Options” Work?

  • Option E is allowed within any of the Enhanced Affordability Areas, and requires 10% of the apartments be affordable at 40% of Area Median Income (AMI), 10% at 60% of AMI, and 5% at 120% AMI. The average hourly construction wage must be $60. Additional public subsidy is not allowed.
  • Option F is allowed within any of the Enhanced Affordability Areas, and requires 10% of the apartments be available at 60% of AMI, and 20% at 130% AMI. The average hourly construction wage must be $60 an hour. Additional public subsidy is allowed.
  • Option G is allowed only within the Brooklyn and Queens Enhanced Affordability Areas, and requires that 30% of the new housing is affordable at 130% of AMI. The average hourly construction wage must be $45 an hour. Additional public subsidy is not allowed.
  • Any building with 300+ rental units outside of the Enhanced Affordability Areas can opt-into Option G, which, given the extraordinary value of the 35-year 100% abatement to the developer, is the most likely outcome.