The room closing in: Part 3, Once they’re out the door

February 23, 2017 | Adulthood, Aging, Apartments, Assisted living, charity, Elderly, Housing, independence, Innovation, Nursing homes, Regulation, Technology, US News | No comments 5 views


By: David A. Smith


[Continued from yesterday’s Part 2 and the preceding Part 1.]


A society of robots for humanity’s physical needs, dogs for our emotional ones


He stayed close to the wall to keep out of people’s way, headed for a chair in one corner. He sat down and huddled back, forcing his body deep into the cushions, watching the milling humanity.  Strangers-every one of them. Not a face he knew. People going places. Heading out. Anxious to be off. Worried about last details. Rushing here and there.

– Clifford D. Simak, Huddling Place, 1952


As we’ve seen in the preceding two parts, the older one gets, the less one wants to travel physically, and the more one wants to remain alert and active mentally, but safe and secure and in a familiar environment – a place, in fact, envisioned at least in spirit by Clifford D. Simak, whose haunting novel City imagines a future in which humanity has ceded control over its physical environment to perfectly protective robots, and of its emotional environment to the faithful dogs.


The doctor’s simulacrum will see you now


As technology revolutionizes how we age and how we live the extra decades technology is giving us, it is time to reinvent what we mistakenly call the nursing home around five core elements that arise as themes within these updated regulations: freedom, choice, security, quality, and redress. 

Sources used in this post


New York Times, January 27, 2017

The history of nursing homes, Foundation Aiding the Elderly, pdf, brick red font)



1. Freedom


Even if a person is impaired, dependency in one aspect of daily living shouldn’t invalidate the resident’s right to freedom and independence in other things, such as who she sees:


1.A. Residents deserve freedom to host whom they want, when they want


Those of us who live independently take for granted that we can admit into our home anyone we choose, at any time of day or night, for any purpose that doesn’t violate the law or ruin the neighbors’ quiet enjoyment.  In a hospital, that notion of privacy is one of the first rights we lose, as people come and go at all hours, with lights and sounds and traffic in the corridor.


It’s out there, it’s loud, and I’m afraid of it


The regulations strengthen residents’ control over certain decisions important to their daily lives. For example, the rules allow people to receive any visitor they choose (not just relatives) whenever they choose, without restricted hours, as long as visitors don’t disturb other residents.


That change is also important because twenty-first century relationships come in many more varieties than they did a quarter-century ago.  Even as gay relationships have normalized, the nuclear family has undergone household fission.


Nuclear era, nuclear family


Just having family members around in the evening, when homes have fewer staff members, might improve attention and care, Dr. Castle pointed out.


We’re all so cool our kids fold their arms to show their self-satisfaction


Likewise, with ubiquitous cell phones, broadband, and increasingly cheap and high-quality videoconferencing, strong and meaningful friendships can be formed between people who live far away from each other – and with Facebook and similar social-media networks, people can find good friends they lost decades earlier. 


2. Choice


A toast to the choice of power relationships


Choice is an illusion, created between those with power and those without.

The Merovingian, The Matrix Reloaded


When you take away my choice, I lose some of my humanity, so as long as I can choose, I should be able to choose – and among the most fundamental rights of being at home is choosing with whom one is at home.


2.A Choice of roommate


The requirements also allow residents to choose their roommates when both parties agree, making it easier for friends, siblings or same-sex couples to share living quarters.


It’s a measure of my naivete that I didn’t know nursing home residents could have a roommate foisted upon them without their consent.  Thank goodness this was added.



2.B Choice of schedule


I choose to like olives … what do you choose?


Adults choose when and what they eat; those whose meals are chosen for them, we call children.


You’re violating my autonomy!


The regulations require facilities to make meals and snacks available when residents want to eat, not only at predetermined mealtimes.


Again my ignorance is showing; I’d never given thought to when and how residents in a nursing home should be able to eat, but certainly few thing are more frustrating, even humiliating, than being hungry or thirsty while unable to provide for oneself. 


3. Security


Among the core benefits of home (whether ownership or rental) is physical security, for ourselves, our possessions, and our loved ones.  Patients don’t have such rights; residents do.

AHI multi-part posts on unusual emerging housing tenures


April 16, 2007: Mobile homes: how they got here (5 parts)

May 18, 2009: Outlaw in-laws (accessory dwelling units, 2 parts)

June 27, 2013: NORCs like us (mobile home parks as elderly housing; 6 parts)

January 6, 2016: Sprouting innovation (co-living; 3 parts)

February 9, 2016: The hipster’s mobile home (tiny houses; 6 parts)

September 28, 2016: Ask after me tomorrow (funeral homes; 8 parts)


Indeed, unless the regulatory changes merely codify what has already become standard in the industry, then nursing homes must be dismal places where residents have little security over the most basic decencies of life.


3.A. Security from contagion through carelessness


The rule requires a nursing home to designate an infection-control officer and to establish a system to monitor antibiotic use.


3.B. Security of personal possessions


For the first time, nursing homes must take “reasonable care” of residents’ personal belongings and can’t shrug off responsibility for theft or loss by requiring residents to sign waivers. “That’s been a big complaint,” Ms. Grant said.


That such basics of proper accommodation weren’t required is further evidence nursing home regulations were horribly out of date.


I mean, horribly out of date


Times author Mr. Span adds this poignant note:


Moving into a nursing home already requires giving up so many possessions that “losing something can be devastating” — especially when eyeglasses, hearing aids or dentures go missing.


While some people in a nursing home will have all their faculties intact, some – perhaps many – will not, and I’ve experienced at first hand that when someone’s mind goes, he or she can no longer distinguish one door from another, one pair of glasses, one hearing aid. 


3.C. Security from abuse


Worse, demented patients are emotionally fragile, and for those who take care of them, few things are more upsetting than being shrieked at by an incoherent, undersized, and yet furiously aggressive oldster. 


The regulations call for expanded staff training in preventing elder abuse and in caring for patients with dementia. Dr. Phillips calls the latter critically important; most residents have moderate or severe dementia, Medicare statistics show.


Just as parents lose patience with their children, it’s easy enough to understand staff losing patients with their residents – but it’s still wrong, and it’s still elder abuse.


There’s one more bit of insecurity:


I mean, the worst


3.D. Security of tenure


This last element of insecurity is the worst:


Long-term-care ombudsmen report frequent complaints of “dumping”.


Too bad about Mildred, but somebody’s got to go


The existing regulations provide a lot of protection against being bounced from nursing homes.


But there is a loophole:


A nursing home sends a resident, often someone whose dementia causes problematic behavior, to a hospital. 


The ‘health care system’ (a misnomer as triply wrong as the Holy Roman Empire) functions as an assembly line operating in the dark, staffed by workers with attention deficit disorder and neuromuscular decay, and overseen by an addled bureaucracy.


After she is discharged, the home won’t readmit her.


Yes, you’re located somewhere in the system


“Once they’re out the door, it’s a lot easier to just evict someone,” Ms. Grant said.


It certainly is, and it has all the earmarks of corner-cutting shenanigans.


The new rule extends those protections to someone who’s been hospitalized but intends to return.


“That resident has all the rights that go with discharge and can appeal the decision.”  Nor can the facility transfer the resident while she is appealing.


Thank goodness – though of course, residents whose faculties are dimming will need their relatives to defend them as energetically as if in a case of mistaken identity, grandma had been taken into protective custody by the inept constabulary of Information Retrieval.


Whoever she is, she’s never getting out


[Continued tomorrow in Part 4.]

The room closing in: Part 2, Halfway between society and the cemetery

February 22, 2017 | Adulthood, Aging, Apartments, Assisted living, charity, Elderly, Housing, independence, Innovation, Nursing homes, Regulation, Technology, US News | No comments 21 views

By: David A. Smith


[Continued from yesterday’s Part 1.]


Slowly he turned away from the railing and headed for the administration building. And for one brain-wrenching moment he felt a sudden fear-an unreasonable and embarrassing fear of that stretch of concrete that formed the ramp. A fear that left him shaking mentally as he drove his feet towards the waiting door.

– Clifford D. Simak, Huddling Place, 1952


In yesterday’s Part 1 of what has expanded into a five-part post (that has taken me a couple of weeks to read enough to fill in the chasm of my ignorance on the topic), we discovered that new regulations covering Medicare/ Medicaid-reimbursed nursing homes (nearly all of them) are the first updates in a quarter of a century.


It was so long ago he wasn’t married to a Czech


Sources used in this post


New York Times, January 27, 2017

The history of nursing homes, Foundation Aiding the Elderly, pdf, brick red font)


And that fact sent me back into the Google-archives to discover that like funeral homes, about which I posted at length, nursing homes are a residential modality from a time before – pioneered in Post-WW2 urban diaspora where the automobile enabled substantially greater inter-generational mobility, and as the Boomers’ parents fled the city for the suburbs, they left their elderly behind, giving rise in 1946 to the enactment of the Hill-Burton Medical Facilities Survey and Construction Act.



AHI multi-part posts on unusual emerging housing tenures


April 16, 2007: Mobile homes: how they got here (5 parts)

May 18, 2009: Outlaw in-laws (accessory dwelling units, 2 parts)

June 27, 2013: NORCs like us (mobile home parks as elderly housing; 6 parts)

January 6, 2016: Sprouting innovation (co-living; 3 parts)

February 9, 2016: The hipster’s mobile home (tiny houses; 6 parts)

September 28, 2016: Ask after me tomorrow (funeral homes; 8 parts)


“The most comprehensive hospital and public health construction program ever undertaken,” Hill-Burton authorized the creation of ‘health centers and mandated that states develop plans for creating enough beds to provide a continuum of care (I am paraphrasing into modern terminology). 


The impetus for Hill-Burton


By 1954 the regulated nursing home had emerged as an asset class, one that got a huge boost with the next game-changer, a part of LBJ’s Great Society:


Bringing America up from rural poverty, one handshake at a time: Appalachia, 1964


In 1965, the passage of Medicare and Medicaid provided additional impetus to the growth of the nursing-home industry, which, while it had been increasingly steadily since the passage of Social Security, grew dramatically. Between 1960 and 1976, the number of nursing homes grew by 140%, nursing-home beds increased by 302%, and the revenues received by the industry rose 2,000%.


Twenty-fold revenue growth is an explosion.  Medicare/ Medicaid, created the nursing home business out of nothing, and that business needed new facilities that were neither hospital nor apartment (as evidenced by the curious concatenation of calling the place a ‘home’ but its residents ‘patients’), and the results was a building boom:


To a great extent, this growth was stimulated by private industry. By 1979, despite the ability of government homes to provide care, 79% of all institutionalized elderly persons resided in commercially run homes.


Booms often lead to excess – especially when, as here, the customers lack either choice (shortage of nursing home beds) or the capacity to make better choices (because they’re failing and the government is paying):


What you could look forward to: Foothill Acres Nursing Home, Neshanic, NJ, 1965


According to investigations of the industry in the 1970s, many of these institutions provided substandard care. Lacking the required medical care, food, and attendants, they were labeled “warehouses” for the old and “junkyards” for the dying by numerous critics. The majority of them, proclaimed Representative David Pryor in his attempt to initiate legislative reform in 1970, were “halfway houses between society and the cemetery” (Butler, p. 263). 


Note desk plate: Arkansas Comes First


And, like the almshouses of old, people feared ending their days in the wards of these institutions and relatives felt guilty for abandoning their elders to nursing-home care.


Though the full history of nursing homes is a topic for another future investigative post when I find the right starting material (which might be this, but first I have to read it), in the 1980s nursing homes went through a consolidation (likely paralleling the consolidation of hospitals) as they became vassals of Medicare and Medicaid, and shortly thereafter, HHS issued the regulations that now, a quarter of a century later, have finally been updated.


The regulatory update was absurdly overdue.


In the last quarter century alone, American life expectancy has lengthened two or three years.  Hundreds of new life-extending pharmaceuticals have been invented.  The Web has revolutionized remote monitoring:


Cybex-Humac, 1981: it looked cool at the time


Microsurgery has become commonplace.  And I’m sure that I’m overlooking scores more innovations.


What the heck are those buttons, anyhow?


Medicare/ Medicaid have continued to expand, now consuming 23% of the Federal budget versus roughly 12% in 1992.



An ever-bigger bite


Along the way, nursing homes have become a $155 billion industry, housing over 1,400,000 very elderly people whose arc of independence has fallen and continues to decline. 


[The revised rules] emerged from a four-year process involving many meetings and almost 10,000 comments from interested parties.


Amending Federal regulations is a process that itself is governed by a statute – the Administrative Procedures Act – and its regulations, and as you might expect the APA emphasizes public hearing, public comment (both verbal and written), and structured written responses to comments.  Further, when Medicare/ Medicaid pay a nursing home owner/ operator, the regulations have to protect two constituency who are not present to protect themselves:


1.     The nursing home residents (whom the industry insists on calling “patients,” a term that is itself demeaning with its overtones of dependency and illness).

2.     Taxpayers, who are ultimately writing the checks.


In view of the billions at stake and the helplessness of both nursing home residents and taxpayers to [protect themselves against nursing home abuse, four years from initial overhaul notice to their new effective date seems if not speedy then at least reasonable.


Will the new requirements help improve care for the country’s 1.4 million nursing home residents? 


Age is not an illness, though the medical system treats it like one.


“Overall, we are really pleased with the focus on person-centered care, trying to transform the nursing home environment,” said Dr. Cheryl Phillips, head of public policy for LeadingAge.


Nursing homes should be homes before they are anything else, including nursing stations, and there should be oriented around five great principles of effective markets: freedom, choice, security, quality, and redress. 


[Continued tomorrow in Part 3.]

The room closing in: Part 1, The first updates since 1991

February 21, 2017 | Adulthood, Aging, Apartments, Assisted living, charity, Elderly, Housing, independence, Innovation, Nursing homes, Regulation, Technology, US News | No comments 23 views


By: David A. Smith


We say we fear death, but really we fear not death itself but its harbingers: pain of course, but even more than pain we fear helplessness, because in losing our independence we lose our adulthood.


Webster stiffened, felt chill fear gripping at his heart. Hands groping for the edge of the desk, he sat down in the chair, sensed the walls of the room closing in about him, a trap that would never let him go.

– Clifford D. Simak, Huddling Place, 1952


The worst of both ends: infantilized and decrepit


The independence of our lives is a broad arc with adulthood at its apex.  Born small, clueless, and helpless, we depend on our parents, and our childhood, adolescence, and young adulthood are all about prying ourselves free of parental dictation (if not from parental financial largesse).  Before us stretches adulthood, a heady time indeed, and as the years roll into decades and we accumulate partners, homes, children, careers we see our life as a purely upward path, an arc without a downward bend no matter what the optometrist, scales, and unforgiving mirrors say.



Sources used in this post


New York Times, January 27, 2017

The history of nursing homes, Foundation Aiding the Elderly, pdf, brick red font)


As we age, we unwillingly and randomly give back the faculties that we so proudly gained in growing up, and as we do, we lose the capacity for independence.  That loss is reflected in our shifting housing accommodations: from the homestead house (shovel your own parking space and sidewalk) to the condo (call the superintendent), to live with our children (in accessory dwelling units or customized tech-centric wings), to congregate living (dine together, socialize together), to assisted living (help with activities of daily life), to a nursing home. 



AHI multi-part posts on unusual emerging housing tenures


April 16, 2007: Mobile homes: how they got here (5 parts)

May 18, 2009: Outlaw in-laws (accessory dwelling units, 2 parts)

June 27, 2013: NORCs like us (mobile home parks as elderly housing; 6 parts)

January 6, 2016: Sprouting innovation (co-living; 3 parts)

February 9, 2016: The hipster’s mobile home (tiny houses; 6 parts)

September 28, 2016: Ask after me tomorrow (funeral homes; 8 parts)



Few of us take all these steps. Some of us tarry longer on some of them.  Some of us skip a step or two.  Many of us step off the staircase before we reach that a bottom riser.  And each step we take with great reluctance, but each step down costs us a bit of our autonomy – a little or a lot – which we trade for more service – a little or a lot – being provided to us by others, using the money we have accumulated in our lives to buy the services that we no longer wish to do ourselves or no longer can do for ourselves.


Just as our physical and spiritual independence is an arc that flattens and then declines, so too is our financial independence another arc, and depending on how much we made and how we age, it becomes a race to between them.  As our independence withers away, we would like to be protected by our spouse or our children – but many of us will lose a spouse, not all of us have children, and some of us cannot rely on our children. 


And will my teeth be serpent-sharp?


Where the family does not provide, the market will – but the market’s motivations are seldom those of the family.  When we’re adult consumers we can navigate the market, because we have choice and capacity to choose, but as we age, our capacity diminishes, and with that diminishes our choice and our vigilance.  We become vulnerable to exploitation – what is worse, by those whom we previously entrusted to care for us, and in what we have chosen as our home, a place from which we cannot escape.


For that among many reasons, most of us think about nursing homes as places we wish not to have to go, and we wish our relatives not to have to go – and, as reported in the New York Times (27 January 2017) by Paula Span, who has been writing about ‘the new old age’ (as she calls it) for years, our instinctive and under-informed impression is probably just, possibly even generous:


Ms. Span and her father in 2011


If you had to give the nation’s nursing homes a letter grade for quality, what would it be?


Experts tend to sigh at this question –


Bloggers sigh at badly-opened newspaper articles


– and point out, correctly, that the country’s 15,600 facilities are vastly different — rural and urban, for-profit and nonprofit and government-run, home to the reasonably healthy and the extremely sick, high-quality operations and appalling ones. 


Assigning grades can be folly.


Sorry, Ms. Span, that last sentence is utter nonsense. 


Let’s not give nonsense a bad name, shall we?


We assign grades to everything, from school child performance to Airbnb accommodations.  Of course nursing homes should be graded, possibly on multiple dimensions.


When prodded, they come up with decidedly middling assessments.


Not surprisingly, everyone talking to a reporter wants to hedge.


Dr. Cheryl Phillips, head of public policy for LeadingAge, which represents 2,200 nonprofit nursing homes: C-minus.


Offering the entire class a tepid C.


That C-minus is as revealing as a poker tell – Dr. Phillips thinks that nursing homes as a cohort are terrible, but she doesn’t want to be vilified for saying so.


Nicholas Castle, a health policy researcher at the University of Pittsburgh: B-minus.


Though Mr. Castle’s kinder, not so the next judge:


Robyn Grant, public policy director at the National Consumer Voice for Quality Long-Term Care [Not to be confused with Robyn Stone, SVP of Research at LeadingAge – Ed.], a leading advocacy group: No grade. 


In my long-ago school days, Incomplete was the most dread grade of all – it branded your failure so appallingly bad that your very attempt would be expunged from memory.  That is clearly how Ms. Grant intends her ‘no grade’:


“Far too many have a long way to go to give residents the quality of care and quality of life they deserve.”


Loss of capacity and loss of choice leads to loss of quality.  Who then protects us when we cannot protect ourselves? 

Enter the government, properly exercising its role as defender of those who need defense:


The Centers for Medicare and Medicaid Services [Confusingly, the acronym is CMS – Ed.] last fall issued a broad revision of nursing home regulations; the first batch took effect in late November, with the rest to be phased in this year and in 2019.


Readers may wonder where the Federal government gains statutory authority to regulate nursing homes, and the answer is simple: Medicare and Medicaid.  The regulations don’t cover every nursing home in America, it covers only those nursing homes that receive Medicare or Medicaid payments because they chose to admit Medicare or Medicaid residents – and that is by far the lion’s share of them:


Spending for freestanding nursing care facilities and continuing care retirement communities (CCRC’s) increased 2.7% in 2015 to $156.8 billion.


Yes, you read that correctly: between CCRC’s and nursing homes, housing the frail elderly consumes a sixth of a trillion dollars a year.


The slightly faster growth in 2015 (from 2.3% growth in 2014) was mainly due to the faster growth in Medicare spending of 5.6% versus 2.5% in 2014.


This seldom ends well


Medicare is rising because we Boomers are living longer (taking our gerontological revenge on every generation to follow us)


Financially, that is


They were long, long overdue:


“These are the first comprehensive updates to long-term care requirements since 1991,” said Dr. Kate Goodrich, the centers’ chief medical officer.


[Continued tomorrow in Part 2.]

What is efficiency? said jesting Pilate: Part 3, The judgment

February 8, 2017 | Affordability, Apartments, Condominiums, Development, Housing, Incentives, New York City, Real estate taxes, Section 421-a, Speculation, Subsidy, Tax abatement, US News | No comments 38 views


By: David A. Smith


[Continued from yesterday’s Part 2 and the preceding Part 1.]


As we’ve seen in Parts 1 and 2 of this surprisingly long post, seeking to reach a conclusion on the public-policy merits of New York’s section 421a tax abatement program, when applied to large condominium developments, Section 421a produces roughly 53-67% as much boost in development value as it gives up in foregone real estate tax revenue.



One side goes down by 100%, the other side goes up by 53% to 67%



Sources used in this post


Crain’s New York (30 January 2017)

NYC Independent Budget Office report dated January 30, 2017 (pdf; green Georgia font),


 Though not the best statistic to confront, having the public benefit be a 33-47% less than the subsidy cost isn’t by itself conclusive – there’s outsourcing of the activity (hence much lower administrative costs), risk transfer, and potential additionality. 



4. Does the program favor one form of tenure over another?


The focus of this study is strictly on the retail market for condos. In contrast, questions about land use and developer bidding behavior are related to the market for land and can only be answered using a different research strategy and data than IBO employs for this analysis.


Just as every drug has side effects, every subsidy, be it charity or incentive, distorts the ‘natural economic’ market to some degree.  (That is, after all, its purpose.)  Some of these are beneficial, some harmful.


That’s what happens when you give a market steroids


The program may also change the incentive to build one form of housing over another—rentals rather than condos, for instance. 


For what it’s worth, there’s no evidence presented to suggest the market is being deflected toward rentals, and in any case New York City has too little rental, too much ownership. 


Property tax subsidies are a solution when the policy goal is to encourage development of one form of housing over another (such as making rental housing a more attractive investment than condo development) even if the subsidy contributes to a general price increase for all real estate.


Like San Francisco, New York City can thank rent control for much of that.  The potential tenure deflection we can safely ignore –




– but there’s another feature we need to consider more closely.



5. Does 421a as applied to condominiums benefit the whole city? 

The answer is clear – so clear, in fact, that IBO author Geoffrey Propheter puts it in a complete throwaway line:


So cool I can make big points in small words


Manhattan condo sales comprise almost three-quarters of the sample.


At 1.6 million people, Manhattan is the third most populous borough (behind Brooklyn and Queens), home to a little over 19% of all New Yorkers – yet it consumes nearly 75% of the 421a abatements, which means that the rate of 421a abatement utilization in Manhattan is nearly thirteen times higher than the other boroughs [ (75%/ 19%) ¸ (25%/81%) = 12.75 ].


Forget everything else about the quantitative analysis – this figure alone is damning, for it reveals so much. Section 421a condo abatements are being successfully pursued predominantly in the most expensive borough, and the new condos going up are (by the laws of new supply) generally coming in at the highest end of the range.  Nor is the abatement needed to stimulate a lagging Manhattan condo market:


With the exception of mid-2014 through 2015, the market for Manhattan condos tended to clear more rapidly than other markets for residential properties.


Queens (in green) generally takes longest to clear)


Aside from the impressive fact that condos in all three boroughs clear fairly quickly, averaging 4-6 months – so much for the woe-is-me stories of a few years ago about softness in New York City’s condo market – Manhattan is the strongest market of the three.



6. Is the converted-cash reconverted back into additional affordability?


Here’s the big weakness in the IBO report – not what it investigated and found but what it did not investigate and did not remember to explain as important.


Remember, boosting the value of developers’ market condos doesn’t by itself create any affordability – affordability happens only if that boost in development value is converted into a commensurate amount of below-market prices or rents.  Further, Section 421a is a developer-driven program, meaning the developers decide when they buy a property and when they pursue a new development, condo or otherwise. That gives them control over the timing, and they would be fools to do development when the decreased affordable-housing sale price or value exactly equals the market value increase. 


More likely, developers are trading increased condo sales price into decreased affordable housing price at a ratio of (say) 80%, which means the effective discount is higher, as follows:



Section 421a’s multiplicative entropy

Converting density into affordability


+ 100% of lost revenue to the city

x 53-67% increased condo price to developers

x 80% of that increased price converted into

= 42-53% actual realized affordability



I just made up the 80% number, so readers shouldn’t rely on it (though I do have those four decades of experience with developers that I carry so lightly) – but if it’s even halfway close to being right (that is, a 20% discount), the subsidy entropy loss is significantly higher than even the IBO estimated.  Converting non-monetary foregone future taxes into present cash, the reconverting them back into potential foregone future rental or sales revenue from the resulting affordable apartments, puts the government’s efficiency in the hands of two external counterparties: the people who buy the condos, who care not a white about affordability, and the condo developer, who cares about profitability first and foremost.


“I don’t fare what you think about me.  I don’t think about you at all.” – Coco Chanel



7. What is waste, and who decides?


As New York policy makers look to revive 421a (or a similar variant), giving greater attention to the program’s benefit levels so as not to oversupply tax subsidies would help make better use of scarce public resources.


Any use of government incentives to privatize a socially beneficial function entails a balancing act:


It all depends on how the incentives are balanced


The government wants efficiency (high conversion of its resources into benefits) and it wants targeting/ impact (high value for the resources so converted).  It is never possible to do this perfectly so it’s essential to allow oneself some margin of error – which the subsequent analysts, from the safety of their desks and the convenience of retrospective certainty, may choose to call ‘waste’:


Based on this study, over the last 11 years a third to a half of the 421a tax expenditure committed to condos in Manhattan and about two-thirds awarded in the rest of the city is waste, or a total of $2.5 billion to $2.8 billion depending on the discount rate assumed. 


I chafe at the word ‘waste’, which connotes inattention at best and profligacy at worst – and having thrown down the W word the IBO then backpedals and explains that the word doesn’t mean what you think it means:


It represents wasted dollars because buyers are receiving more in benefits than they pay for


The issue isn’t that the buyers get some net positive, but how much net positive.


and the excess does not incentivize development, which is the program’s policy goal. 


Sorry, this is an invisible goalpost-move.  The assertion of no development incentivization is a hypothesis not grounded in any evidence in the report.  And this is a tautology:


The program’s inefficiency stems from its benefits being too generous.


Yes, if a program is too generous it is inefficient, and if it is inefficient it is too generous, but to reach that conclusion you make a subjective judgment: namely, that monetizing the benefit at roughly 55-65% of notional government NPV cost is more than is either good value for government or justified to make the market move.


While I happen to agree with the IBO’s conclusion, its logic is weak, so allow me to conclude this post with some stronger logic.


Your logic is so so weak you’ve lost your N



8. On balance, is this a good use of taxpayers’ money?


As I’ve previously posted, I’m not offended by the cleverly labeled ‘poor door’ discrimination (because that concession increases the number of affordable apartments built with the same quantum of 421a).  My evaluation of 421a for large high-end condominiums rests on the numbers and their impact:


A. Its monetization-reconversion loses a lot of value along the way.  Section 421a turns $1.00 of net-present-value foregone real estate tax revenue into roughly $0.60 of boosted condo price, and we presume it then reconverts that into perhaps $0.45 of reduced-rent/ sale price on the affordable apartments.  To me that’s a terrible conversion ratio – the Low Income Housing Tax Credit, by contrast, loses perhaps 10-15% of value along the way, in part because the market is national and LIHTC has additionality in that it monetizes the CRA investment-test benefit.


B. It stimulates production only in one submarket – Manhattan.  As I previously showed, Section 421a is 75-80% used in Manhattan, meaning it’s used about 13x as much per-capita as the other four boroughs.  And the Manhattan properties on which it is used are high-end.  To the extent the program is seeking to generate more housing supply, putting it into Manhattan will do little for spillover affordability, whereas market housing produced in Brooklyn or Queens would be inherently more ‘affordable’ (because less expensive) than Manhattan Upper East or West Sides.


C. Some of the higher value may be flowing back into higher land prices (in Manhattan), which would be pure deadweight.  If raising the price of Manhattan land is indeed a side effect of the program, that’s really bad additionality, because it’s contributing to the unaffordability that the subsidy was intended to address.


Advocates argue the program is necessary to make housing more affordable but the program itself likely contributes to higher land prices, therefore making housing more expensive.


From what I know of developer and land seller behavior, especially in supply-restricted environments, supply-side incentives absolutely monetize into land value at warp speed.  I’ve seen this directly with LIHTC properties in targeted census tracts, where developers would bid against each other for the vacant parcel that happened to be in the state allocating agency’s erogenous zone.


The tax incentive is thus contributing to its own existence.


This is really bad, and it’s an inherent weakness in the program, one that cannot be remedied because that would require suspending the law of economic pressure.



Section 421a’s multiplicative entropy

Converting density into affordability


+ 100% of lost revenue to the city

x 53-67% increased condo price to developers

x 80% of that increased price converted into

= 42-53% actual realized affordability



D. On balance, Section 421a isn’t good enough, better uses for that money can be devised.  Thus, if called upon to adjudicate the two key questions, I decide as follows:


1.     Was the subsidy converted into cash at a good rate?  No.  Not well enough.

2.     Was the extra cash realized from the subsidy converted back into additional housing affordability?  Not covered by the IBO study but on inference, only at some further leakage of efficiency.


When 421a expired, I thought to myself that the development community, advocacy community and organized-labor community had combined to do the worst thing possible for all three of them, because ponce a program is dead its revival is difficult.


Section 421a is mostly dead


Gov. Andrew Cuomo is working to revive the 421a tax break in Albany. While the current vision for the program only applies to developers of rental buildings and very small condo projects, a handful of Albany legislators are pushing for larger condo buildings to be eligible for the tax break.


Section 421a for condominiums is too expensive, too diffuse in its benefits.  That $1.4 billion could be better and more efficiently spent, even as a foregone-tax-revenue non-cash expenditure. 


I doubt it will come back, and at this point I hope it doesn’t. 


What is efficiency? said jesting Pilate: Part 2, The analysis

February 7, 2017 | Affordability, Apartments, Condominiums, Development, Housing, Incentives, New York City, Real estate taxes, Section 421-a, Speculation, Subsidy, Tax abatement, US News | No comments 36 views


By: David A. Smith


[Continued from yesterday’s Part 1.]


After all the paired comparisons and the careful quantitative analysis, is Section 421a for condominiums a good program for New York City?


We’re actually twins by different parents


Yesterday’s Part 1, scrutinizing paired-comparison of condo sales throughout New York City over the last decade, established that (as would be expected) the favorable tax abatement under section 421a capitalizes into a higher price for condominiums.



Sources used in this post


Crain’s New York (30 January 2017)

NYC Independent Budget Office report dated January 30, 2017 (pdf; green Georgia font),



To what purpose?  And with what effect?  With the factual data in hand, we can do what the IBO quite properly declined to do – evaluate the numbers and reach a judgment.


1. What was Section 421a designed to do?


Section 421a was designed to incentivize developers of high-value high-density properties to include some affordable housing within the development by spreading the abatement across the whole property and then concentrating its benefits in a subset of apartments.  If the cumulative net present value of the tax savings was (say) $50,000 per apartment, and the capital cost buydown needed to make an apartment affordable was (say) $400,000, then for every eight market apartments the City would have one apartment made affordable.


Now, once the apartments are in fact produced as affordable, new issues arise:


1.     Who gets these apartments?

2.     Must they be identical to the market apartments?

3.     Must they be sprinkled in with the market apartments?


What an outrage


These issues have little to do with economics and everything to do with politics and perception, and thus it is inevitable that they generated millions of pixels in the blame-developers vein (about which I posted my own analytical and unsympathetic views two and a half years ago) –


Summer is when GAIA stories most commonly bloom


– whereas the crucial issues of cost-effectiveness get relegated to the financial press and are greeted with ho-hum.


God, numbers, how boring


Likewise, as I reported in the previous part of this post, the City’s investment in 421a has an annual cost equal to its (failing) investment in anti-homelessness initiatives ($1.6 billion to $1.4 billion for 421a), so Mr. Propheter and his colleagues at the IBO deserve much greater recognition than they have.  Instead they are reduced initially to explaining the ABC’s of incentives to conclusion-jumpers:


Ignore that ‘warthog-faced baboon” part, all right?


When economic incidence diverges further from statutory incidence, development tax incentives increasingly stray from their stated purposes.  



Or, to put it in the language of Prince Humperdinck, When the condo buyer is visibly receiving the savings but the condo developer is gaining the subsidy benefit, elected officials can easily lose sight of the over-subsidy. 


The faster the divergence occurs, the more quickly policymakers must respond to modify program eligibility criteria and benefit levels to ensure the program is achieving its goal at the lowest cost.


For Prince Humperdinck, that previous sentence means The quicker developers figure out the game, the more important it is to recalibrate the benefits to reduce over-subsidy.  And this is hard:


Identifying the level at which benefits must be set so that a subsidy accrues entirely to the intended beneficiaries is challenging because developer behavior changes faster than policymakers’ adjustments of program benefits and eligibility criteria.


Not the last time I’ll have to use small words

2. Is the cash conversion rate reasonable?


Unlike many government programs, which give out cash up front in anticipation of benefits to be received over time, Section 421a reverses the time sequence: It collects cash (from condo buyers via the intermediary of condo developers), and it pays out benefits (in the form of foregone real estate tax revenues) over the ensuing 25 years.  Equating the stream of payments (revenue losses) with the up-front cash requires assessing (a) the time value of money and (b) the value of risk transfer. 


The IBO addressed that:


It is common to assume a discount rate between 4.0% and 7.0% in residential real estate research.


I am sure Mr. Propheter and his colleagues are right in this, but if I were discounting future streams from real estate, I’d use a higher discount rate (less present value from future benefits) because I’d regard the cash flows as risky. 


In certain extreme instances we may also find that property owners discount the future less than 3.0%. Therefore, we estimate future tax savings using three rates—2.5%, 4.0%, and 7.0%to gauge how sensitive our estimates and conclusions are to the discount rate assumed.


Today’s twenty-year Treasury is 2.80%, and no plausible discount rate could be lower than that.  Hence I would discard the 2.5%.  Further, any political benefit faces ‘discontinuous tail risk’, which is my own portmanteau construction: Tail risk meaning low-probability events (say, the election of Donald Trump as President) that occur beyond our perception horizon, and discontinuous meaning that the change could be abrupt (say, a Trump executive order with unexpected wording and consequences), and it’s a fundamental principle with me that discontinuous tail risk should be costly to take, because it cannot be hedged and it can seldom be anticipated early enough to avoid it.


Still, let’s ride along with the IBO analysis a little further:


You seeing the same statistics I’m seeing?


At all three rates we find that the 421a benefit is partially capitalized into sales prices on average, but the estimated degree of capitalization displays some sensitivity to the assumed discount rate. At a discount rate of 2.5%, condo buyers in Manhattan on average pay 53% of their 421a benefit to the seller upfront. At the 7.0% rate, the upfront payment for Manhattan averages 61%.  Based on these two extremes, it is reasonable to conclude that in Manhattan the average condo buyer pays anywhere from 53% to 61% of their future 421a tax benefits up front through the greater selling price.


Although as I said I’d disregard 2.5% as unrealistic, the relatively narrow band of value – 8% increase in ratio for a change of 4.5% in interest rate – suggests that even if we were to use a higher discount rate that I might choose, say 10%, the effective monetization rate would rise no higher than 65-67%, meaning that 33-35% of the NPV benefit. 



3. Does 421a contribute to higher New York City land prices?


Just as every drug has side effects, every subsidy, be it charity or incentive, distorts the ‘natural economic’ market to some degree.  (That is, after all, its purpose.)  Some of these are beneficial, some harmful.


That’s what happens when you give a market steroids


The side effects of reducing real estate taxation for certain post-development uses are easy to foresee:


While this study is not an analysis of 421a’s effect on land prices, the findings of partial capitalization in condo sales prices suggests that condo developers pay more for the land than they would if the tax exemption did not exist.


We know that the value of urban land is a residual – the leftover value of new development after subtracting the cost and risk of that development – and we know that in general (though New York City, with its anti-development mania, may be a counterexample) housing is less valuable than other forms of urban land use – so the attempt to push a subsidy into a supply-side intervention (boosting the number and affordability of actual homes, rather than increasing the home-buying power of targeted customers as would be done on a demand-side intervention) must inevitably spill over into pushing up land values.


A 421a benefit that increases condo prices would encourage developers to pay more for land, possibly leading to a general increase in land prices.


While not a statistician, I’ve had four decades’ experience with developers.  With my eyes shut I can tell you that absolutely, the residual benefit of the tax abatement will be priced into land values at some conversion factor.


Yes … yes, it is priced in


For this reason, owners of potential sites for 421a condo developments could be major beneficiaries of the 421a program.


They are.  Indeed, the biggest beneficiaries of all of New York City’s neck-tourniquet development policies are people and entities that own land in New York, particularly in Manhattan.


The tax incentive is thus contributing to its own existence.  It can be viewed as a problem or a solution, and depending on the policy question it can be both.


That leads to the idea New York City should raise its real estate tax rates, or have a significant property rate surcharge to be dedicated into a fund for affordable housing.



[Continued tomorrow in Part 3.]