Market Urbanism

Liberalizing cities | From the bottom up

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Downtown Brooklyn’s $2 million affordable apartments (correction)

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Inclusionary zoning is a bad enough idea, but at least it doesn’t cost taxpayers anything directly. But New York State’s Housing Finance Agency is taking the worst of both worlds – affordable housing mandates and public subsidies – and plopping them down in new luxury construction in the heart of Downtown Brooklyn. Behold, some of the most expensive “affordable housing” in all five boroughs (at least, let’s hope it’s the most expensive!):

Brooklyn's idea of "affordable housing"

• 388 Bridge Street Apartments, between Willoughby and Fulton streets in Downtown Brooklyn, a 234-unit, brand new 49-story multifamily rental apartment building controlled by the estate of Stanley Stahl, which received $94.6 million in financing. Forty-seven of the units will be set aside for tenants with household incomes up to $39,600 for a family of four.

• 25 Washington St., between Plymouth and Water streets in DUMBO, a 106-unit, eight-story multifamily rental apartment being converted by Two Trees Management Co., which received $22.2 million in financing. Twenty-one of the units will be set aside for tenants with household incomes up to $39,600 for a family of four.

• 29 Flatbush Ave., at Nevins Street in Downtown Brooklyn, a 333-unit, brand new 44-story multifamily apartment building controlled by The Dermot Company, which received $99 million in financing. Sixty-seven of the units will be set aside for tenants with household incomes up to $39,600 for a family of four.

That comes out to a little over $2 million per subsidized apartment in the first tower, $1 million in the second, and almost $1.5 million in the third. And that’s not even counting the rent that the future impoverished (because, let’s face it, if you earn less than $40k for a family of four in NYC, you’re impoverished) tenants will have to pay. That’s $215 million spent (see correction) so that New York can fulfill its social engineering wet dream of moving more 136 families into gleaming glass-and-steel luxury skyscrapers in an area that’s in the running for the Curbed Cup neighborhood of the year. Just imagine how far that money could have gone if it were given to families to choose their own housing, in, I dunno, say, a building where their neighbors don’t have an income an order of magnitude larger than theirs?

Correction: It looks like I overstated the benefit. Adam explains in the comments:

It’s not a grant, its tax-free, low-interest financing. Also, just to be clear, the “94.6m” is for the financing of the whole building because it conforms with affordable housing requirements. Some ratio must be affordable, like 70/30, etc. To calculate the “subsidy” per affordable unit, you’d have to calculate the present value of the interest savings over the lifetime of the lower-interest loans and divide that by the number of affordable units. Its still a number in the hundreds of thousands per unit, but not quite in the millions.

In other words, the benefit really depends and is very hard to calculate. I found the exact program, though – it’s called the 80/20 program, and here are the terms, which I don’t totally understand:

Under the 80/20 program, for specific periods of time 20% of a project’s units must remain affordable to low-income households and these units will be subject to a Regulatory Agreement between the owner and HFA. HFA’s Regulatory Agreement assures that the maximum rent on these affordable units cannot exceed 30% of the applicable income limits. The remaining units in an 80/20 project can be rented at market rates.

The tax-exempt bond financing generates 4% “as of right” Low Income Housing Tax Credits, which can either be syndicated to generate part of the required equity a borrower must contribute to the financing or be utilized to offset the borrower’s tax payments. All bonds or bond financed mortgages, including those financed under the 80/20 Program, must be credit enhanced.

Credit enhancement provides security for bondholders and ensures a higher rating on the bonds issued, which in turn produces a lower mortgage rate. Click here for more information on credit enhancement options.

Maybe someone with more knowledge of development financing can interpret that for us and give a rough estimate of the NPV of the benefit.

Comments

  2. Just so I’m clear, what does it mean when they say “received $94.6 million in financing”? Does that mean direct grant, or just some kind of low-interest loan or something? Based on the conclusions you’re reaching, I’m assuming the former, but I just wanted to make sure I wasn’t misinterpreting somehow.

    Either way, it’s a really stupid idea (obviously much worse if the public is subsidizing the stupid idea), especially since people probably couldn’t realistically live in that area with a <40k income even if their rent was pretty much free.

  3. It’s not a grant, its tax-free, low-interest financing. Also, just to be clear, the “94.6m” is for the financing of the whole building because it conforms with affordable housing requirements. Some radio must be affordable, like 70/30, etc. To calculate the “subsidy” per affordable unit, you’d have to calculate the present value of the interest savings over the lifetime of the lower-interest loans and divide that by the number of affordable units. Its still a number in the hundreds of thousands per unit, but not quite in the millions.

  4. What would the financing be if the affordable units were not provided? Legally it should be zero, but in practice there are tons of tax breaks that the government doles out without regard for affordability. I realize it’s not the same thing, but New York City has gotten some flak from the left for subsidizing a new commercial development in the Bronx that pays low wages to the employees; it wouldn’t surprise me if the city subsidizes market-rate housing as well. In that case, the financing would not really be incredibly inefficient subsidies for affordable housing, but run-of-the-mill handouts disguised as subsidies for affordable housing.

  6. I think he means what would the state financing be, and by zero he means there would be no help with financing. Also, I’ll put a correction up in a minute with more info about the state financing scheme…

  7. It’s all theater. One of those “cost of doing business in NYC” rounding errors that the connected are so used to dealing with. It’s grotesque in itself, but I’m more curious what, if any, larger effect these deals have on housing for the rest of us.

  8. Maybe someone with more knowledge of development financing can interpret that for us and give a rough estimate of the NPV of the benefit.

    I’ve worked with proformas for projects VERY similar to these, and its tricky to filter out the value created by each of the various public benefits…. I could do it by running one with the tax-free bonds and one with market financing. Then – you would ask, “without any help, why would I rent these out for half of the market rate?”… So, its almost easier to ask, “how much subsidy would it take for me to rent these out at about half the market rate?”, and assume the net benefit is marginal, but enough to go through the headache….

    Back of the envelope: Lets assume the rent in an affordable unit in these buildings is $1000 less than market. The present value of that stream is more than $100k per unit, which seems to match my estimate if I assume a 2% interest savings and spread that over the affordable units.

  9. NYC is able to hide the subsidy, and probably off the budget by offering it as tax-exempt bond financing. They don’t have to shell out any cash, but its another xxx million dollars of financing being backed up by taxpayers leaving less room to borrow for other reasons. It’s a shell game, because it’s only a problem when there’s a default.

  10. what, if any, larger effect these deals have on housing for the rest of us.

    the good:
    – it helps create more housing overall.
    – Helps integrate people of different incomes into the same building. (if that’s a virtue…)
    the bad:
    -20% of units are taken away from the marketplace, meaning that many units less are satisfying the huge demand for market housing. Thus, makes housing more expensive for the rest of us who don’t get help.
    – It takes resources away from the non-housing economy.
    – Affordability could be better achieved by just taking the $100k+ per unit and giving it to the poor to make their own choices, and perhaps living in an area that better catered to the budget of such a person.
    – (The biggest in my opinion) These complex systems of housing finance (not to mention land-use regulation) creates a sort of housing cartel, where only the biggest, most politically connected, mercantilist developers can compete to provide housing. This means there are less developers, less innovation, more corruption, and in the long-run less housing at higher prices than a free-market system.

  11. Don’t have time at the moment for detailed extended comments, but it seems to me that most discussions of government affordable housing programs look at only one or two of the issues involved (e.g., the efficiency of “x” subsidy) and therefore overlook some of the other important issues – and the “big picture” as well. Also, it seems to me that the triumph of the “city planning” mentality has been so complete that even most market urbanists tend accept the general premise of the “need” for government affordable housing programs – or, perhaps, only engage in rather weak, dispirited protestations. So, for the moment at least, I like to “outline” what I see as a comprehensive list of the problems with government sponsored affordable housing programs. (By “outline” I mean that I recognize that right now my statements are just sketchy assertions and that such arguments need to be fleshed out and ultimately backed up with data.)

    1) Affordable housing programs do not serve a legitimate purpose in the first place.

    What does it matter whether neighborhoods are economically integrated? What terrible problems will occur if neighborhoods aren’t economically integrated to the degree espoused by proponents? And how economically integrated does a neighborhood have to be in order to escape these supposedly terrible problems? Where’s the proof that these terrible consequences will occur at “x” level of non-integration. Where has this supposedly already occurred?

    2) Why not rely on the marketplace to provide for sufficient levels of economic integration?

    To take this discussion beyond what might be the initial protestations of proponents, who likely would argue that mixed income neighborhoods don’t occur “naturally” without government intervention, where’s the proof for such an assertion? Let’s really look at cities and see if this has really been true or not.

    It seems to me that, again, the triumph of the “planning mentality” has been so complete that most people – including most libertarian types – take it as “fact” that in a marketplace environment there would be no (or not enough) economically integrated neighborhoods. I think two example of this are the on-line articles on the gentrification phenomenon by Benjamin Schwarz and Megan McCardle (?) where the authors (who seem to me to be essentially economic conservatives, although I’m only guessing) seem to accept such claims. However, from what I’ve seen of cities (both as a life-long resident and a researcher), I’m skeptical.

    If you read these articles, by the way, I hope you will also read my comments to them where I indirectly discuss some of the issues that I’m discussing here. I have about three comments in the thread responding to the Benjamin Schwarz article, “Gentrification and Its Discontents.” (My main comment is the first one I made, and it is towards the front of the thread. I have two or three more scattered throughout the thread.) I have one comment in the responses to the SECOND of Megan McCardle’s two articles. (It’s at the very end, or towards the very end, of the thread.)

    3) By directly or indirectly making housing more expensive, affordable housing programs reduce the supply of housing and thus ultimately drive up housing costs for those who have not been “given” affordable housing units.

    4) Government affordable housing programs “freeze” certain areas into a set framework, and thus make cities less adaptable to change.

    5) By, more or less subsidizing housing in “good” neighborhoods, it takes the pressure off “bad” neighborhoods to improve. In other words, if people can’t afford the “good” neighborhoods of a city, the market response would be for these people to make some “bad” neighborhoods better. But with the government’s sponsoring of affordable housing in “good” neighborhoods this takes the pressure off the marketplace, and makes it less likely that such people will try to transform “bad” neighborhoods into good ones.

    In other words, with affordable housing programs, government is, essentially, “putting all its eggs into one basket.”

    6) By encouraging density in already dense “good” neighborhoods, such programs are also “killing the goose that is laying the golden eggs.”

    7) By distorting the marketplace such programs make natural, organic improvements in cities less likely.

    8) Such programs are inefficient ways to produce affordable housing. (This is the argument that I think the original Stephen Smith post is making.)

    Again, this is a quick outline and I may have made some overlapping / duplicate arguments, and/or may have left out some arguments (in which case, I hope people will point out those that I’ve missed). But I do think it is useful to think in terms of a comprehensive list.

    Benjamin Hemric
    Wed., December 22, 2010, 9:15 p.m.

  12. You really write a blog about urbanism, and you don’t understand NYC’s 80/20 program? You seem to have plenty of opinions, but a shocking lack of actual knowledge or idea of what you speak about. Makes you look ignorant…

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