Affordable Housing Institute : US

[Continued from yesterday's Part 4. Previous Stuy Town posts here: Part 1, Part 2, Part 3.]

 

In yesterday’s Part 4 we heard both the city and Stuy Town’s city councilor expressing strong verbal support for finding a resident-oriented co-operative purchase. Now … how much public money will it take to translate those hopeful statements into a transaction?

 

Money makes the world — go around!

 

Ms. Youssouf correctly deduced that, to talk MetLife into selling to an affordability-oriented buyer, the price must match — or at least, plausibly approach — the market price MetLife could command from a converter. Assuming further that Councilor Garodnick’s is likewise sound in his supposition that this will be achieved only through a conversion to occupant ownership (condo or co-op), what will that take?

 

‘Oh, my paws and whiskers, my bid is overdue.”

Follow the White Rabbit down the rabbit hole into the arithmetic factory.

 

From what we know of New York real estate (basically, what I read in the newspaper), and what we can deduce about the apartment mix (see Part 2), we can project retail sales prices at somewhere between $800 and $1,000 per square foot.

 

 

(Yes, yes, ordinary mortals may gasp. Gasping is an entirely human reaction. New Yorkers may argue that the prices quoted are for snazzy modern buildings in Midtown and Uptown locations, to which the answers are, 1. That’s what a capital improvements budget is for, and 2. Many people live Uptown only because there’s no high-quality downtown! Finally, remember that all AHI blog posts are guaranteed satisfactory, or your money back. Oh, wait …)

That yields the prices shown in Table 1:

At $800 per square foot, the average will be $657,000 apiece, with the larger Peter Cooper apartments going for more and the Stuyvesant apartments going for less. At $1,000 per square foot, the average retail sellout price will be $822,000.

 

Hear carefully that phrase: “Retail Sellout Price.” That’s the top line number, the number from which all subtractions are made. (For more on those deductions, see Part 3.) Insiders — that is, current residents — invariably can buy their apartments for a discount from Retail Sellout Price, for three reasons:

 

If I were still mayor, I’d make these three deductions

 

1. Pre-conversion sales are “as is” so the owner does little or no renovation inside the apartment. (Common areas and major systems like plumbing and heating are always improved, so even the current residents gain considerably.)
2. A pre-conversion sale is efficient, eliminates risk, and generates immediate cash.
3. New York City’s rent stabilization and condo/ co-op conversion ordinances have mandated some levels of resident protection and incumbency discounts.

Naturally, everyone involved is aware of the potential for insider discounts:

 

He knew the terrible secret … but would he talk?

 

James J. Roth, 57, a retired F.B.I. agent and a [Stuyvesant Town] board member, said that if the tenants could present a unified front, they might have some leverage over which bidder bought the complex. For example, under the co-op and condominium conversion law, an owner would need 15% of the tenants to buy their units for a so-called non-eviction conversion. A unified tenant body could presumably veto a buyer, Mr. Roth said.

It won’t be hard to persuade 15% of the residents to buy, not when roughly 25% of Stuy Town is already at market rents, but there’s certainly a benefit in securing their support early after a prospective buyer is designated.

 

Sufficient for our purposes is that there will be insider discounts, and purchasing tenants will need a down payment, in the range shown in Table 2:

 

 

Even making allowance for insider discounts of up to 30%, current residents seeking to buy should start assembling somewhere between $52,000 and $148,000 apiece — a considerable sum, scarcely what most of America would consider low-income.

 

You mean, we can buy a house with only half a pajama pair?

And the resulting mortgage payments are likewise significant, as shown in Table 3:

 

 

For simplicity, I’ve assumed a 6.5% interest rate, 35-year term. That’s a little bit better than today’s conventional marketplace, which we can put down to general goodwill likely to be summoned up for whoever’s going to be making these loans.

We are talking, lest anyone forget, somewhere between $5 billion and $7½ billion in new lending, enough to make salivate most New York financial institutions seeking to burnish their civic reputations — such as the AFL-CIO:

 

One group interested in working with Mr. Garodnick is the New York City Central Labor Council of the A.F.L.-C.I.O. Kevin P. Gallagher, the council’s director of housing, said the A.F.L.-C.I.O.’s $5 billion housing investment trust has been used over the past four years to finance 12,000 units of low-priced housing in New York City alone.

 

“The trust sees this as an opportunity to double their work in one project,” Mr. Gallagher said. “The trust would be a financing source for the transaction. What we’re looking to do is to provide tools for them, and the money, so that the tenants can become homeowners and not worry about a middleman coming in and driving up the value.”

 

Fair enough — which tenants can become homeowners? Who can afford to pay that debt service?

Rental is considered affordable at 30% of income. Ownership is more expensive than rental — to debt service, add real estate taxes and one’s share of maintenance fees (for the condo or co-op) — but people will also pay a larger share of income for ownership than they will pay for rental. So again for simplicity, let’s ignore non-mortgage costs of occupancy and assume that the mortgage reflects 30% of income. Who then can afford what?

 

Table 4 displays the results:

 

Yes, folks, you’re seeing that correctly. If we start from $900 per square foot, at the largest discount (30%) and the largest down payment (20%, meaning 80% is financed), the income levels required to afford the loan you need to buy the apartment are in six figures. The full range is:

$100,100 to $160,900

Income required to make buying at Stuy Town affordable

(before adding public financial resources)

Let’s bring all the components together in one cheerful summary:

 

Table 5 shows that, assuming a 30% insider’s discount, and only a 10% down payment, the affordable customer will need to have $51,800 in cash, take on $2,817 per month in new loan payments, and have an income of $106,400 or more.

That’s a far cry from the $1,750 — all in — that many residents are now paying. It’s a pretty gloomy choice:

1. Double your payments, or
2. Comprehensively remake your resident mix

 

It was such a cheap apartment …

Said another way, without government resources, Stuy Town will change fundamentally. The current affordability configuration is economically unsustainable without (massive) help.

In future posts, I’ll lay out how the Forces Of Good might assemble the resources to improve on this gloomy forecast.

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