Affordable Housing Institute : US

You wouldn’t think that delays in financing a downtown luxury tower would stop in its tracks an affordable property in the Bronx, but such is the nature of sophisticated financial ecosystems that everything can influence everything else.  [As my friend Shekar Narasimhan has pointed out, when Lehman went under, it filed bankruptcy in 56 countries, and the next day a mixed-use development in Shanghai stopped dead. – Ed.]

 

I’m counting on you to know what the other hand is doing

 

While as a general principle I love market-oriented mechanisms for affordable housing – investment tax credits sold for soft equity, inclusionary zoning calibrated to deliver affordability in exchange for increasing density – it’s undeniable that they have one vulnerability: when the market seizes up, every link in the value chain can snap.  (This problem is currently hitting the LIHTC, as we’ve chronicled.)  The result of a credit crunch is a financial pileup in slow motion that hits everybody, including those who thought their financing immune, as illustrated by an intra-developer litigation highlighted in The New York Observer:

 

It worked great when we were all zooming along

 

Peter Fine’s Atlantic Development is suing two major New York landlords, Larry Silverstein and Joseph Moinian, over funds the developer planned to use to fund below-market rate housing.

 

Not content with holes in the ground: Peter Fine of Atlantic Development

 

In court complaints filed against subsidiaries controlled by Messrs. Silverstein and Moinian, Atlantic claims the two landlords owe him millions—$3 million on the part of Mr. Moinian and unspecified “millions” on the part of Mr. Silverstein—for breaching contracts to buy development rights or certificates from Atlantic.

 

Although it’s unimportant to us who is or might be right in the litigation, understanding it will take us into not just the capital markets but also the intricacies of New York City’s innovative approach to inclusionary zoning linkage (connecting market development with incremental affordable housing) via the Section 421-a program.

 

Section 421-a is a beautifully simple concept akin to Mumbai’s Transferable Development Rights.  A form of inclusionary zoning, it requires that:

 

[D]evelopers roughly between 14th and 96th Streets (the “exclusion zone”) would have to contribute to affordable housing in order to receive a tax break.

 

Where the affordable housing has to be built

 

It provides developers with a 10 or 15 year property tax exemption for developing new housing.  

 

In response to the calls for change, the Bloomberg Administration established a task force that explored potential reforms. The recommendations of that task force prompted the City Council in late 2006 to extend the zone where affordable housing is required in order to get a tax break, eliminate the inefficient off-site program, and make other crucial reforms to the program. Today, the exclusion zone covers only 96th streets to 14th/Houston Streets in Manhattan; elsewhere, builders receive the benefit but have no obligation to produce any units below market rate.

 

Under the new measure, which [went] into effect in July 2008, 20% of the new units produced in buildings within the broader exclusion zone must be affordable to households earning less than 60% of New York’s area median income, or $42,540 for a family of four (lowered from $56,000 in the City’s proposal).  The housing must remain affordable for 40 years (up from the current 20).

 

Recapitulating it into more structural terms:

 

What structure connects this to affordable housing?

 

1. High-value land enables strong inclusionary zoning.  Every new development within the Geographical Exclusion Area (GEA) is obligated to deliver 20% of the apartments as highly affordable apartments.  That’s a very strong form – a high percentage and deep affordability.  In exchange, the developer can substantially upzone (increase density), giving the land an immediate substantial boost in value. 

 

2. Certificates translate into operating savings.  The inclusionary zoning obligation isn’t an unfunded mandate; rather, it entitles the owner to a long-term real estate tax abatement.  That’s a quantifiable savings in the operating expense budget, which boosts NOI, and therefore can be capitalized into the property’s post-development value.  The real estate tax savings and density boost combine to make Section 421-a, unlike the UK’s Section 106, which is a zero-sum game, into a positive-sum game.

 

The darker the color, the better the location, and the more affordability can be economically extracted

 

3. Certificates have transferable economic value.  Developers that do not wish to fulfill the inclusionary zoning requirement on-site can fulfill it elsewhere, by buying Section 421-a certificates from others (like, in this case, Atlantic) who are developing additional affordable housing elsewhere in the city.  In this, it’s a mirror of Mumbai’s Transferable Development Rights (TDRs), which allow upzoning as-of-right by a certain amount to those who have developed affordable housing elsewhere in the city. 

 

Here the Section 421-a certificates allow a real estate tax abatement

 

4. The secondary market in the certificates creates soft equity.  Developers who accumulate Section 421-a certificates can sell them for current cash, just like tax credits such as the LIHTC are sold to economically motivated investors.  This transferability and sale creates a dynamic whereby the City, without expending its own cash, can generate value from some developments (by upzoning) which is then reconverted back into affordability elsewhere.

 

Look how I make affordable housing with no government hands!

 

All this is, in a word, neat. 

 

When we need more affordable housing to be created, if we’re to have the economically and socially variegated and integrated cities that are the more robust long-term, the rising land markets themselves create the additional soft equity that will spur more affordable housing development.

 

Something like that

 

Under the pre-reform version of 421-a, developers within the GEA (the hot market area) who did not want to provide the affordable housing on-site could buy certificates representing new affordable housing built elsewhere in the city.  At least, that was how the program worked until 2008:

 

Since December 28, 2007, no new written agreements for negotiable certificates projects have been issued.  Any property within the GEA must provide on-site affordable housing in order to receive any 421-a tax benefits.  Existing certificates will not expire, and can still be used, with some limitations (see FAQ below).

 

[Editorial note: allowing transferability of the affordability requirement changes the city's demographic and tenure mix, and is not an unalloyed good, since it facilitates economic exclusion of the poor from some areas, such as the dark red zones on the GEA map.  Perhaps that's why New York City recently eliminated the transferability feature for Section 421-a requirements, although previously issued certificates are grandfathered.  This is a topic for a future post. – Ed.]

 

In cities with strong economies, a shortage of development land, and a sophisticated development community – and by the way, these three things correlate – the program ordinarily works like gangbusters.  The city grants approvals (”steer not row”) and doesn’t spend its own money (”government is a factory that produces two things, money and laws”).  Developers set the market price between themselves, and money flows from profitable commercial development toward affordable housing, covering a portion of the cost-value gap.

 

Keep stretching for sources until they meet uses

 

For the affordable housing developer, sale of Section 421-a certificates is a source of funds in a complex and shifting financing quilt, but by itself it’s not enough, so the City becomes involved via another of its resources – contribution of land at below-market prices:

 

According to a spokesman for Atlantic, one of the largest developers of affordable housing in the city, the breakdown of the two deals in the lawsuit has delayed at least one of its affordable developments: Harborview, a project planned on city Housing Authority land in Hell’s Kitchen.

 

I’ve previously chronicled how New York City, like Chicago, is recycling city-owned land into affordability by providing the land at cost, much below its post-zoning value.

 

The lawsuits speak to the problems affordable housing developers face amid the financial crisis, as they often finance their projects with funding from other luxury residential developers. Through tools set up by the city, affordable housing developers can sell development rights to luxury developers who want to build with greater density. Done through two programs—the now-altered [See above – Ed.] 421-a program and the inclusionary housing program—affordable developers like Mr. Fine have used these tools as a main source of revenue to finance their affordable developments.

 

Let’s cue up the lawsuit, with reference to the plaintiff’s filing. 

 

Start the litigation without me!

 

From the suit:

 

2. Under a City program designed to promote and subsidize the development of affordable housing, developers such as Atlantic are issued negotiable tax certificates t hat can be sold to market rate developers such as Mr. Silverstein, who, in turn, apply the certificates to reduce their real estate tax burden on new construction of market-rate apartments.  In this case, Atlantic entered into two agreements to sell certificates to promote and fund Atlantic’s construction of low income housing on Crotona Parkway and Jessup Avenue in the South Bronx, to an affiliate of Mr. Silverstein, who agreed to purchase the certificate to offset [real estate – Ed.] taxes from his planned development of an 80-story hotel/ condominium tower in lower Manhattan, known as 99 Church Street.

 

Notice the effective and incredibly efficient linkage.  To build a huge tower adjacent to the World Trade Center complex in Lower Manhattan, some of the most valuable real estate on earth, the developer needs to trade with another developer rebuilding the South Bronx on the far side of the Cross Bronx Expressway, which might for all practical purposes be to him the far side of the universe.

 

Building affordable housing here ….

 

Requires selling 421-a certificates here

 

Yet by building the luxury high-rise in ultra-downtown, Mr. Silverstein will (or would) be creating new jobs, meaning new service workers, and they could live in the South Bronx, being connected by New York City’s extensive and efficient subway system.  Housing, economic development, and public transit all connected together.

 

In policy terms, nifty.

 

But now that some of the planned luxury developments around the city have been stalled or scrapped, any affordable developments expecting payments as a result are hit with a shortfall.

The suit involving Mr. Silverstein relates to Mr. Silverstein’s planned luxury high-rise at 99 Church Street. Atlantic was expecting payments as a result of the development, related to the old 421-a program, to fund affordable housing in the Bronx.  But the tower is stalled, and in the suit, Atlantic claims that Mr. Silverstein intentionally delayed the closing of the deal to let the tentative agreement expire, freeing Mr. Silverstein from paying damages.

 

How can delay of an downtown luxury tower stop a Bronx affordable property?  Sounds like a conundrum, doesn’t it?

 

My completion is stalled

 

[Continued tomorrow in Part 2.]

 

Send post as PDF to