Affordable Housing Institute : US

 [Continued from Part 1.]

 

Pilot programs are useful for another reason: they bring out the enterprising.  Ms. Gwinn isn’t the only self-taught entrepreneur who was attracted:

 

Edward Kostyra, a sportswear manufacturer who also dabbles in real estate, bought the house through HomeWorks for about $515,000 in 2002, at a time, he said, when half the brownstones on the block were abandoned.

 

Yep, looks really promising

 

Now, Mr. Kostyra said, he wants to sell the house and use the proceeds to buy another brownstone in the neighborhood, one that was never gutted and rebuilt. “I was something of a pioneer, and I am being rewarded for that,” he said.

 

With all thy appreciation, whither the state’s involvement?  And what about that subsidy I mentioned above?

 

Owners who resell HomeWorks houses usually have to pay back a part of the city subsidy at the time of the closing, depending on how long they have owned the house. After six years, they owe nothing.  

 

This sounds to me like an effective form of interim-term soft debt: cash up front, lent, repayable upon participant breach (or resale) but gradually forgiven.  Maybe six years was too short, maybe a dropoff to zero is too generous, but the principle is perfectly sound.

 

But typically the repayment obligation is a fraction of the profit that can be realized in the sale.

 

Well, duh. 

 

 

That’s why they call it debt and not equity.

 

(In the UK, schemes like HomeWorks would in fact use a ’shared equity’ approach, and that would be an improvement over here, which however does nothing to undermine the policy validity of using soft debt.)

 

The HomeWorks program was created in 1995 as a way to encourage home ownership and to restore vacant buildings that had been taken over by the city after their owners abandoned them and failed to pay the taxes.

 

If the city wanted to own the houses, it needn’t have sold them.  But then Ms. Gwinn, Mr. Kostyra, and others wouldn’t have been owners, they’d have been renters — and who would pay the taxes, and do the maintenance, then?  The city consciously chose to encourage homeownership and entrepreneurial reinvestment and in so doing:

 

1. Transferred risk to the private sector.
2. Increased its own chances for recovery by creating self-motivated allies in neighborhood revitalization.

 Those are things worth paying for.  (People value only what they pay for.)

 

At the time, there were the first stirrings of revival in the market for town houses in Harlem.

 

Oh, there were?  Your evidence, please?

 

Sorry, it’s all factory sealed

 

The city’s Department of Housing Preservation and Development offered packages of houses to developers who would completely renovate them, usually creating an apartment for the owner and a few rental apartments to help cover the mortgage. Although some houses were offered only to buyers with limited incomes and neighborhood residents were given preference, most were offered to qualified buyers selected through a lottery. Sale prices were established through negotiations between developers selected by the city and the city government, not through a market appraisal.

 

At first, HomeWorks was a difficult sell.

 

The observant herd was standing stock-still. 

 

Why would I take a chance when I could just chew my cud?

 

Willie Kathryn Suggs, the sales agent for Ms. Gwinn’s house and for the first group of HomeWorks houses in West Harlem, said buyers were reluctant to take a chance on troubled blocks until Dumpsters began appearing on the streets [Revitalization’s crocus, the dumpster! — Ed.] and renovation work began. Then, there was a stampede to buy.  [Observant herd! — Ed.]

 

“We kept telling them that this is going to change, and nobody believed me,” Ms. Suggs said. “I was begging people.”

 

Nobody was moving.  And the city needed some people to move.  Hence the core principle:

 

First movers should receive extra incentives.

 

Because when the smart animals move, the herd follows. 

 

Within a few years, as news media account celebrated some of the program’s successes, 1,000 to 2,000 people signed up for lotteries for a chance to buy one of a few dozen houses being offered at a time, with Harlem properties typically attracting more prospects than those in Brooklyn, city officials say.

 

When the herd moves, the whole neighborhood rises.

 

Today, Ms. Suggs believes that the city program transformed the neighborhood.

 

Calls into question the Times‘ earlier unsupported claim that the neighborhood was already changing.

 

Journalism is a pain when the arguments are unsupported!

 

“There would not be a Harlem renaissance without HomeWorks,” she said.

 

Thus, by urging the herd into motion, Ms. Gwinn and Mr. Kostyra and their handful of fellows raised the value of all of the remaining city property.

 

Wendell Walters, an assistant commissioner for housing production at the Department of Housing Preservation and Development, said that when the program was created, it required significant subsidies because the city was trying to build a market.

 

As they did that, they raised the real estate taxes the City can assess all those people.

 

Maybe Ms. Gwinn and Mr. Kostyra should now charge the City an incentive investment banking fee?

 

Who should pay whom?

 

Recall the Times’s critique that the city should have changed the program risk-reward ratio?  It did!

 

Since then, Mr. Walters said, the program rules were tightened, subsidies reduced and prices were raised, with some recently renovated houses selling for close to $1 million.

 

Who benefits from those higher sale prices?  The city does.  So rather than costing the city money, the city made money via HomeWorks. 

 

It primed the pump.

 

You start by injecting money into the economic and neighborhood foundation …

 

He said the earliest buyers deserved to reap the rewards for taking a risk. He added that the program was continued even after market prices doubled and tripled because it was “in the public interest” to return the entire stock of houses owned by the city over to individual homeowners.

“There has been some wealth created,” he said, “and hopefully it has been able to help people who deserved to be helped.’’

 

Here in Harlem is Hernando De Soto’s Mystery of Capital crystallized. 

 

Hernando de Soto

 

Wealth was created — not lost, not confiscated, not simply transferred from A to B, just plain created.  No wonder De Soto calls it a miracle.

 

So far about 215 properties have been redeveloped in Manhattan and more than 200 in Brooklyn, including a few that were turned into condominiums. (Buyers for all of the city-owned houses in Harlem have been selected, though a small number of federally owned brownstones may be put on the market in a similar program. Houses are still available in Brooklyn.)

 

To recap, roughly ten properties have sold and 415+ have been redeveloped, simulated in part by the first movers.  Not bad leverage at all. 

 

The first movers are a band of brothers, and they are entitled to their profits because it is they who actualized the hopes and dreams of city planners.  As Henry V said, when rousing his fellow investors to take the plunge, in a speech that should be read to every urban pioneer who plunges money-first into the wasting field:

 

We few, we happy few, we band of brothers;
For he to-day that sheds his blood with me
Shall be my brother; be he ne’er so vile,
This day shall gentle his condition:
And gentlemen in England now a-bed
Shall think themselves accursed they were not here,
And hold their manhoods cheap whiles any speaks
That fought with us upon Saint Crispin’s day.

 

 

Happy limited partners cheering their general partner

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