Mission-Driven Affordable Housing: City Council Land Use Bills and NYC’s Recovery

 
Capalino: Mission-Driven Affordable Housing: City Council Land Use Bills and NYC’s Recovery

Written by Susan Hinkson-Carling, Woody Victor, and Richard Barth from Capalino

In 2020, when the economy languished and many left New York City because of the Covid-19 pandemic, the cost to real estate stakeholders was incalculable. Protecting affordable residential real estate as well as providing for housing equity – always a challenge in robust markets – has become even more difficult in the downturn due to lack of investor participation. Accordingly, some have maintained that mission-driven affordable housing is a key factor in NYC’s recovery.

The real estate industry is crucial to New York City’s future: property taxes contribute approximately 50% to the City’s overall revenue.  While New York City’s overall tax revenue from March through August fell by $1.2 billion, or 3.5%, from a year earlier, this was a smaller decline than expected, because property tax growth helped offset a sharp decline in sales-tax receipts because of the coronavirus pandemic. Property taxes, the city’s largest single revenue source, rose 3.9% to $16.3 billion. However, the city’s property tax revenues are projected to decline by $2.5 billion next year, largely driven by a sharp decline in the value of office buildings and hotel properties, many of which have all but emptied out since the pandemic began.

Given the current risk-averse real estate market, there has been increasing interest in affordable housing investments from a range of market players. Affordable housing presents a great deal of stability and security for owners. While affordable housing may not have the prospect of outsized returns that unregulated market rate housing can sometimes provide, they offer more stability in times of great market volatility. According to Mayor de Blasio, 2020 marked the second-highest one-year total for the creation of affordable units in the city. Thus, it is no surprise that legislation impacting the real estate sector—and specifically affordable housing–is generating strong debate.

As New York City plans its post-pandemic recovery, political leaders, business leaders and others have weighed in with different ideas to drive a more equitable recovery. Changes in thinking about land use and real estate have taken root in New York City, because of real or perceived inequities in the real estate financial market which have been amplified by COVID-19. There are several strategies and proposals centered around re-thinking market ownership, in an urban context, that respond to the economic and social imbalances exacerbated by forces outside of the real estate market.

New York City Councilmember Brad Lander (39th District) recently introduced two important land use bills, Int 2197-2021 and Int 0118-2018, which would have implications on real estate in New York. Lander,  who has been at the forefront of housing policy in New York, has been a robust voice in re-thinking how New York City should approach land use. He is pursuing two measures designed to promote affordability by regulating the disposition of public land and creating a land bank.

The idea of who should or should not be permitted to participate in transactions concerning the disposition of public land is generating a robust debate in the real estate community and the halls of government. This continues to raise important questions about the future of affordability and land ownership in the city.

Lander’s more controversial bill would mandate that City-owned property, slated to be developed as affordable housing, could only be awarded to non-profit developers with an exception only if no qualified non-profit applied or if the land was being sold under state law.  The legislative intent of the bill is ostensibly to keep such properties affordable in perpetuity; assuming non-profits would naturally hold rather than flip the property when the city purchase agreements expire.  Currently, city agreements for both non-profits and for-profit developers, sunset after 20 or 30 years.

The concept of disposing of city property only to non-profit developers has raised eyebrows and the hackles of many for-profit developers who provide both stand-alone affordable housing as well as affordable units alongside market rate units.  Typically, for-profit developers have teamed up with non-profits to co-develop property each relying on the other’s strengths and capacity to acquire land, build the project and finance the enterprise.

Opponents of the measure have major concerns over whether it would indeed serve future communities and the tenants of these projects as intended. For-profit entities typically have more financial capacity and operating experience to efficiently develop and manage complex affordable and supportive housing projects. Management companies need economies of scale in terms of number of apartments in order to thrive and have a profitable operation.

Arguably, very few nonprofits have the capacity, balance sheet and cash equity to meet pre-development and construction underwriting requirements.  Therefore, by necessity the non-profit would have to team up with a for profit entity who would drive the process in order to increase the likelihood of success and protect their investment. Every project is a multi-year undertaking. The ULURP process to convey public land alone takes, on average, about 15 to 24 months and several hundred thousand dollars in expense. If other entitlements are needed the cost goes up and the entire process could take longer. So, development of city owned land as well as housing supply would presumably be impacted and constrained by the expense.

Some have argued that the legislation will hurt minority and women owned for-profit developers who have historically been squeezed out of development and real estate opportunities.

Many minority- lead firms feel the odds are stacked against them, for a variety of historical reasons, and something like this legislation would serve to unilaterally exclude them from the equation seen by many as all-ready imbalanced.  A letter written to Councilmember Lander signed by over 20+ Black and Brown developers, specifically requests the council to either “withdraw or significantly modify the legislation to make it consistent with the new HPD Equitable Ownership Requirement” announced in November 2020.  The requirement requires that an M/WBE or non-profit partner holds a minimum 25 percent ownership stake in any affordable housing project awarded on public land. The letter continues, “during a time where issues of racial equity and justice have grabbed a national spotlight pursuing legislation that cuts Black and Brown developers out in the fashion proposed seems tone deaf and regressive”. The consortium of developers feels the goalposts continue to move and that “rules seem to change once we get our opportunity.” 

However, many non-profits, such as the Bowery Residents’ Committee (BRC), question why we should create wealth for private developers when you could house and shelter many more via mission-driven development.   Serving more than 10,000 individuals each year, BRC is among New York City’s leading nonprofit organizations providing caring and effective services and housing to vulnerable New Yorkers. Several nonprofits feel the housing crisis can only be solved by mission-driven developers who are not motivated by profit. There are efficiencies that enhance a project’s likelihood of success that are created with a nonprofit operator who also has housing experience. There are other issues that are inextricably linked to the need to find affordable housing, including mental illness, healthcare and poverty, which create a huge demand for purpose-built supportive housing that also accommodates the additional services needed.

There is already a 15% homeless set aside requirement for any project receiving City funded financial assistance and/or public capital subsidies. Conveyance into private hands of publicly owned land falls under the umbrella of public financial assistance and subsidies, thereby triggering a 15% homeless housing set-a-side.  To better serve formerly homeless or vulnerable populations, nonprofits are better equipped to efficiently provide wrap around services and design holistic supportive housing that targets priority issues such as chronic substance abuse and/or mental and physical impairments. 

Lander’s other bill intended to address affordability introduces the concept of land banking—the process of aggregating land to be preserved for future use. Lander said he is proposing this new legislation, in order to avoid an alleged “feeding frenzy” among private equity firms and others regarding distressed properties in the wake of the pandemic. This bill would conceivably prevent a land rush by private developers and speculators purchasing and hoarding distressed properties and thereby driving up costs and impeding housing affordability. Lander’s bill would have the city take over distressed properties holding those properties for controlled disposition.  

In a September 2, 2020 Op-Ed in the New York Times, Lander stated:

“We could acquire and hold these properties temporarily through a city-controlled land bank based on legislation I’ve introduced, and then transfer them to a growing network of community land trusts, nonprofit entities that hold land in perpetuity for publicly beneficial uses.”

The fear being a replay of the 1970s fiscal crisis when steeply declining land values was the catalyst for market sell offs to speculatory developers and where small businesses, middle class, working families and immigrants got priced out of the marketplace as rents began to rise over time. Additionally, during the recession in 2008, tax-breaks prompted investors to convert foreclosed properties into market-rate rentals which were well out of reach for most consumers.       

Regardless of which side of these issues you are on, one of the fundamental questions that must be answered is, how does the city measure its success in providing and maintaining cost- effective permanent affordable housing?  Beneficial to measuring the success of any legislation, in a more fulsome manner, would be to initiate an in-depth performance study to identify the relationship, if any, between the type of developers and positive and negative housing outcomes.  There are a number of academic and policy organizations that could produce such an in-depth examination.  Such a study may better inform legislators of how the type of developer involved in a project influences outcomes, as well as providing guidance on how to address any shortcomings in the system.

In order for NYC to grow its economy, invest in infrastructure, build more equity and continue to reap the rewards of a solid real estate tax base, the City should increase and maintain a variety of housing options that are affordable, provide supportive services, including mental health, as well as opportunities for workforce development. These housing options should support multiple stakeholders. Ultimately, further definition of the city’s priorities should inform housing stakeholders how to better incentivize both for-profit and nonprofit developers to provide housing solutions that offer the most impact and long-term benefits, while providing equitable and substantive use of public lands. 

The Capalino team is closely following these bills. To discuss implications for your business or project, or to learn how we can help you with your business goals, contact Susan Hinkson-Carling at susan@nullcapalino.com.

About the Authors

Susan Hinkson-Carling

Susan Hinkson-Carling

Susan Hinkson-Carling, AIA, LLM has a distinguished background in both the public and private sectors and specializes in housing, land use and real estate at Capalino.

Richard Barth

Richard Barth

As the former Executive Director of the New York City Planning Department, Richard has more than 30 years of experience in land use planning, public policy, and community development.

Woody Victor

Woody Victor

Woody Victor has significant experience in real estate, private equity and management consulting and has advised on equity, debt and public financing for over $275 million in real estate and private equity transactions.

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