In our ninth Brass Tacks event, two affordable housing developers talked to City Limits Editor Jarrett Murphy about what it takes to build and preserve affordable units. Michelle de la Uz, Executive Director of the Gowanus-based nonprofit Fifth Avenue Committee (FAC), and Martin Dunn, President of for-profit Dunn Development Corp., laid out the essentials of development in New York City today.
The private market can’t or won’t supply low-income housing without subsidies. For a developer, determining for whom to build and how much to produce requires careful calculus based on organizational goals, local demand, and available government incentives: “it’s clearly a math issue that the lower you go [in terms of incomes served], the less units you can build with the same subsidy,” said Dunn.
Financing an affordable housing deal is a complex and laborious process that often requires piecing together federal funds, state and local contributions, private investments, or philanthropic donations. Public subsidies are crucial to both for-profit and nonprofit developers but, with more equity on hand and easier access to capital, for-profits can often finance deals more efficiently. Due to the headaches of working with multiple tiers of government, Dunn looks to one source: “Almost none of our projects have city and state funding,” he said, preferring to rely on just one layer — most often the state’s Low-Income Housing Tax Credit (LIHTC). De la Uz, on the other hand, uses more of a patchwork process: “We are often combining multiple streams of financing and subsidy in order to reach the deepest affordability that we can.” (Try the math for yourself in the Urban Institute’s Does It Pencil Out? or the Citizens Housing and Planning Council’s Inside the Rent games.)
“Free” housing In the face of limited federal investment and high land and construction costs, affordable housing must increasingly pay for itself. That is, the cheapest units have to be cross-subsidized by higher priced ones, making mixed-income projects de facto policy. For instance, FAC managed the lease-up for the affordable units at the luxury development 363-365 Bond Street along the Gowanus Canal. The 140 affordable units (all at 60 percent of Area Median Income, or AMI, a figure calculated annually for the metropolitan region by the US Department of Housing and Urban Development) were required because the buildings were constructed under the city’s inclusionary housing program and received 421a tax exemptions. The housing lottery for 363 just closed, and “over 70,000 people applied for affordable housing next to a US EPA Superfund site. There is just such demand,” said de la Uz. Both Dunn and FAC usually mix incomes in their projects — although that doesn’t mean they necessarily include market-rate units. (There is no single definition of “mixed-income.”) The city’s Housing New York plan subsidizes various income levels, from extremely low-income (up to 30 percent of AMI, or $28,620 for a family of four) to middle-income (up to 165 percent of AMI, or $157,410 for a family of four). Creating three or four income tiers is common for both developers, although they rarely include units at the highest end of “affordable.” To that end, Dunn completed the first project under Housing and Community Renewal’s Mixed-Income Pilot Program, which allows for some units above the normal LIHTC threshold of 60 percent of AMI in order to cross-subsidize more deeply affordable units. Most new affordable housing comes in the form of income-restricted rental units, but both developers have done homeownership projects as well. At FAC’s 80-unit Atlantic Terrace co-op, built on city-owned land and opened in 2010, 60 units are affordable: nine at 65 percent, 31 at 80 percent, and 19 at 130 percent of AMI . Dunn’s multi-phase Navy Green project included a range of housing from rentals for formerly homeless individuals (14 percent of total units) to 23 market-rate townhomes for purchase (eleven percent of the total).
New York is the tops: it has the highest construction costs of any city in the world, and rising. A confluence of factors can make this true, according to Dunn and de la Uz: inefficiencies due to cobbling multiple funding sources, compounded by often-late government payments. Regulations, ranging from construction codes requiring a strict material palette to multiple compliance reports to the regular addition of new codes, such as the Fire Department of New York’s (FDNY) Auxiliary Radio Communication (ARC) system required in all new high-rises. The difficulty of staging construction in a dense, vertical city. Rehabilitation, which nonprofits in particular emphasize, is slow going because it is often performed with tenants in place. A recent report from the New York Building Congress — a construction industry trade group — echoed some of these issues, citing local regulations, poor project planning, workforce shortages, logistical issues, and environmental mitigation standards as “self-inflicted” contributions to rising costs.
Trade unions Unions no longer have a firm grip on construction labor in New York City, and their future, particularly when it comes to large-scale residential construction, is up for debate. In the 1970s, union members accounted for about 90 percent of all construction labor; that’s down to about 50 percent today. Unsurprisingly, tensions between union and non-union labor run high. Neither Dunn nor de la Uz have used 100 percent union labor on a project, although they have done prevailing wage jobs, which set rates to the union pay scale. Union labor is an estimated 20 percent more expensive than non-union labor, and “that’s a cost that in affordable housing has to be paid by more subsidy by government or by raising rents at the upper income tiers so that you can support more debt,” said de la Uz. “There’s either fewer units or less subsidy.” Dunn framed the conflict differently: “The big tension is between local hiring … and the building trades,” noting that many union construction workers live in Long Island, northern counties, or neighboring states. This echoes the arguments of open shop advocates, who point to higher residency in the five boroughs and minority representation among non-union workers. (The construction unions in New York City have historically been overwhelming white, although Black and Latino representation has grown recently according to an Economic Policy Institute report.)
As the supply of city-owned vacant lots (once robust, after the city foreclosed on thousands of properties following the 1970s fiscal crisis) has dwindled, finding suitable building sites requires creativity. When Dunn started out, “land was cheap”: He acquired his first site at a city auction for $130,000 (the DeKalb Avenue Apartments in Bedford-Stuyvesant, completed in 2004). Now, he looks to the private market. Of 28 projects completed or underway, 14 are on private land, eleven on city-owned land, and three on a mix of the two. One of Dunn’s current projects, a 79-unit building underway in the Norwood neighborhood of the Bronx, is on a lot he purchased for $3.2 million last year that has never been built on due to the rocky topography. He’s also looked to less typical public sites. Dunn was awarded one of the first NextGeneration NYCHA contracts for infill housing on public housing land, and has been building political and community support for a renovation of the former Triboro Hospital into affordable and supportive housing.
For de la Uz, publicly-owned land is crucial: “It’s hard for [FAC] to compete in the private market, honestly.” Yet public properties don’t always mean vacant lots. Over a decade ago, FAC began looking for publicly-owned sites that had excess floor area ratio (FAR, essentially additional development capacity) that might be appealing for a mixed-use project. That led to an evaluation of public libraries. This fall, FAC will break ground on a new branch of the Sunset Park Library topped with 49 affordable apartments. The units will rent for between 30 and 80 percent of AMI, or between $28,620 and $76,320 for a family of four, meant to keep current residents in a gentrifying neighborhood.
The numbers game Having committed to 200,000 new or preserved units of affordable housing by 2024, volume is king in Mayor Bill de Blasio’s Housing New York plan. The 200,000-unit target favors large mixed-income projects with a broader definition of “affordable” over fewer units of more heavily subsidized housing. (Paradoxically, "affordable" rents may exceed market-rate ones, as Sally Goldenberg notes in a recent Politico piece). Former Mayor Michael Bloomberg met his goal to build or preserve 165,000 units of affordable housing by 2013, but, as Murphy points out in a recent article, “the city felt substantially less affordable when he was done.” In the discussion, Dunn noted that de Blasio’s plan avoids some of the pitfalls of Bloomberg’s, with de la Uz adding, “it’s only year three.” She did suggest that the city could have focused more on the price point over the number, allowing city subsidies to create deeper levels of affordability.
The de Blasio administration, like the Bloomberg administration before it, relies on for-profit housing developers to meet its affordable housing goals. As the provision of affordable housing has become professionalized, it has also become a lucrative industry.
In the 1970s and ‘80s, under Mayor Ed Koch’s housing plan, nonprofit groups had a leading role as the city sought to rebuild neighborhoods devastated by abandonment and disinvestment. For-profit affordable housing developers in New York can be traced back to 19th century “philanthropic builders,” but they entered the modern arena in force in the 1980s, spurred in part by structural changes to the provision of housing subsidies. Beginning in the 1960s, the federal government shifted away from funding local public housing authorities and toward subsidizing private developers, hitting significant milestones with the Section 8 programs in 1974 and 1983 and the introduction of LIHTC in 1986. Now both are significant contributors in New York, but the balance has seemingly tilted to for-profit players.
Nonprofits struggle to compete in volume and efficiency, as for-profits often have technical expertise, financial assets, and access to capital that nonprofits often don’t. In 39 years, FAC has developed 900 affordable units with an additional 1,000 currently in the pipeline (in part because housing is just one part of their mission to advance economic and social justice in South Brooklyn). In 25 years, Dunn has developed over 3,500 units with hundreds more underway. These numbers are in line with national trends: Only ten of the top 53 affordable housing developers of new construction nationally are nonprofits, according to Affordable Housing Finance magazine.
Who provides best? In early June, the East Harlem-based nonprofit NERVE filed a lawsuit to prevent the sale of 1680 Madison Avenue to for-profit L+M Development Partners, claiming a right of first refusal on the property. The suit is indicative of tension between some in the nonprofit and for-profit development communities, amid charges that the city favors for-profits in awarding its contracts. Criticisms of for-profit builders have included a lack of long-term affordability restrictions and a prioritization of middle-income over low-income housing. At a recent event hosted by NYU’s Furman Center, Barika Williams of the Association for Housing and Neighborhood Development, a membership organization for nonprofits, raised concerns about time-limited affordability: “One of the things that has changed in affordable housing development is the difference between creating affordable housing units in communities versus developers doing this as part of a business model ... So what happens in a neighborhood where the entire premise of the city's investment is that a private entity will be able to profit off of taking those units to market-rate in 25 or 30 years?” Expiring affordability is not a new issue — New York City has 750 subsidized buildings set to expire by 2030, according to analysis by the Furman Center — but advocates are concerned that an increasing share of now-affordable housing could sunset within a generation. The strongest case made by nonprofit advocates boils down to commitment to longer and deeper housing affordability. Both nonprofits and for-profits come in many forms — “Martin and Fifth Avenue Committee actually share a lot in approach,” said de la Uz — and there’s not a cut and dry divide between the two groups, as they often partner to play to each other’s strengths. Dunn suggested that there can be a distinction without a difference: “My view is that you have to incentivize good actors, however they’re incorporated.”
