Public housing’s Gordian knot
In 333 BC, Alexander of Macedonia arrived at Gordium in Phrygia (now central Turkey), outside whose gates was the chariot of the city’s ancient founder, its yoke lashed to a pole with an intricate knot whose rope had no end and no beginning. Legend held that he who untied the knot would rule
If the public housing delivery system is breaking down, as the Ghost of Christmas Yet To Come grimly foretold (see also Web Update 55), and if the public housing inventory is facing an $18-20 billion capital backlog, as GAO has estimated, what can be done? Or is slow collapse inescapable?
Drain out the money, and this happens
A month back, NAHRO’s first-rate bimonthly Journal of Housing and Community Development (JoHCD) published my article, The Gordian Knot, reprinted with additional commentary in Recap’s Web Update 60. It describes the current tangle, why it cannot be resolved using current premises, and what it will take to change the rules.
In behavioral terms, what defines property ownership?
For one thing, ability to sell
Four things:
· Economically, choice of resident and the ability to charge rent sufficient to cover costs including capital costs.
· Operationally, control over the physical envelope; the ability to renovate, modify, expand, or demolish one’s property.
· Managerially, choice over who else may occupy or sell the property, and on what basis.
· Financially, control over debt and equity; the ability to sell, finance, refinance, or encumber.
The fundamental principle is choice, meaning control over decisions.
What might one call a putative owner who must rent to people whose rent fails to cover operating costs, who cannot put any financing on a property (and hence cannot raise long-term capital), who cannot rebuild or demolish the property, and who cannot sell such a negative-equity property? Is such a person an ‘owner’ in an economic sense?
“HUD!” “Housing authority!”
“HUD!” “Housing authority!”
“HUD!” “Housing authority!”
The impossibility of operating in today’s funding schema is vividly illustrated by a recent lawsuit of three agencies (Boston, Brookline, and Cambridge) against the state, posted about earlier this month in Public Housing’s Dependency Trap, Part 1 and Part 2.
While
In
Subsidy has been unilaterally cut. Capital improvements budgets have been scrimped. More recently, in the last several years running, the under-funding has become severe, almost as if Congress and HUD wish to hasten public housing’s demise, or simply refuse to believe it is imminent.
Today’s public housing operates under a legacy regulatory schema that assures the owner:
· Must lose money
· Cannot finance long-term
· Depends on an increasingly unreliable Federal government to cover the deficits
How can the local authority escape a dependency trap when economically and financially bound hand and foot?
“HUD is sure you’ll think of something”
We advocate cutting the ties, exiting from the system via subsidy reconfiguration:
Subsidy reconfiguration
Give up Obtain
Operating subsidy (authority level) Section 8 (property-based)
Modernization funds Sustainable rent
Swap the current encumbering deed of trust for an affordability-oriented use agreement. Swap operating subsidy and the modernization funds for Section 8 and sustainable rent. In short, get out of dependency and become an independently owned and operated portfolio accountable to local government.
What if the property in question, though well-located, is very, very old, and rehab is more costly than building new? Remarkably, one can structure a subsidy portage from the current bricks to a new-construction property.
Subsidy portage: a definition
Subsidy portage encompasses three parts:
1. Build a new better property nearby.
2. Transfer all its non-physical assets (permits, financing, and residents) to the new property.
3. Reconfigure subsidy and use the resulting NOI to pay debt service on the new loan.
Subsidy reconfiguration may seem drastic — it means abandoning a sixty-year-old delivery system in favor of what many housing authorities will see as the unknown. And subsidy portage is an even greater leap. Is it really necessary?
When a whole delivery system creaks and collapses, as I believe is occurring here, the only solution is root-and-branch change. Mere tweaking will not suffice. The systemic elements are interdependent: removing or dramatically modifying one part compels compensatory changes in other parts.
Confronted with the endless Gordian knot, Alexander slashed through it with a stroke of his sword.
“That’s for your operating subsidy!”
Problems are insoluble only if you accept unstated conditions. For too long, public housing has meekly accepted an intellectual servitude whereby housing authorities are presumed unable to manage their own financial and operational decisions — unworthy, in HUD’s eyes, to be treated like owners.
It’s time for housing authorities to think like owners, to act like owners, and to be given the powers and responsibilities of owners.
AHI blog posts wake you up.
