New Construction of Affordable Housing

The Failure of 421-a and the Limits of the 80/20 Model

The City is using the 421-a program to subsidize the creation of luxury housing for the wealthiest New Yorkers, causing rents to rise and making more neighborhoods unaffordable. In recent years, developers in Manhattan and downtown Brooklyn were required to make 20% of a development’s units affordable if they opted for a 25-year abatement. But if developers build in other areas of the City or if they opt for a 15-year abatement, there is no affordable housing requirement to receive these tax savings. So most developers have opted for the 15-year abatement and created very little real affordable housing in the City as a result.

A recent study by Real Affordability for All found that only 6% of new apartments in downtown Brooklyn between 2008 and 2012 were real affordable units. Developers exploited the luxurious loophole in 421-a: they used abatements to create new housing for wealthy households, because they weren’t required to create real affordable housing for low and moderate income households.

There are two key problems with the 80/20 model: 1) it is far too easy for developers to opt for 15 year abatements in the 421-a program and avoid having to build any real affordable housing units; 2) even if many more developers using the 421-a program opted for 25-year abatements and were required to build 20% affordable units in new buildings, it would not yield enough real affordable housing to meet the needs of low-income and moderate-income households.

The 80/20 model is unable to generate the real affordability that New Yorkers need and deserve.

The 50/50 Model: Maximizing Real Affordability in New Housing

Mayor de Blasio set a goal of building and preserving at least 200,000 affordable apartments while simultaneously creating a more equitable and affordable city for households at all income levels. To achieve this laudable goal, the Mayor’s housing plan must include a bold commitment to building and developing for deeper density. That is to say: there must be a major up-zoning of many neighborhoods currently zoned for commercial, manufacturing and low-density residential use. By requiring developers to use up-zoning, subsidies, and other tools more effectively, the City can ensure that a minimum of 50% of new housing construction is real affordable housing.

A 50/50 model that replaces the 80/20 model would yield long-term real affordability for a wide array of low-income and moderate-income households shut out of the new housing developments built under Bloomberg. And not only that: the 50/50 model would also give city taxpayers a higher return on their investment in new affordable housing developments while still enabling real-estate developers to reap significant profits and construction trade union workers to get good jobs.

There are many ways to conceive and build 50/50 developments that would achieve a level of real affordability that is simply impossible within the narrow constraints of 80/20 developments.

Affordable housing developers, private sector developers and housing experts agree on two broad 50/50 scenarios that are viable and pragmatic, based on existing developments, current real-estate market assumptions, and the latest mathematical modeling:
  1. For high-cost areas of the City (particularly Manhattan), depending on the level of up-zoning, new developments can ensure that 50 percent of the units are market rate and 50 percent are real affordable units targeted to low-income households: specifically, households of four earning 30-60 percent of Area Median Income.
  2. For the outer boroughs, where land costs are lower, 100% of new developments can be affordable: 50 percent of the units can be for low-income households (those earning 30-60 percent of Area Median Income) and 50 percent for moderate income households (those earning up to 100 percent of Area Median Income). 100% real affordability can be achieved by increasing current per unit subsidies in the outer boroughs and applying those subsidies to real affordable housing units for low-and moderate-income households.
The second scenario holds a lot of promise, as more residents and new arrivals look to the outer boroughs for real affordable housing, especially in neighborhoods that have not yet gentrified.

But together, both scenarios can achieve a much greater level of real affordability across the City than was achieved by Bloomberg’s housing policies and the 80/20 model in recent years.

Key elements of the 50/50 model would include: up-zoning for maximum density in areas with the most vacant land; increasing floor-to-area (FAR) bonuses in all new developments; adding real affordability requirements for low-income and moderate-income households in mandatory inclusionary zoning; removing height and bulk restrictions in new developments; transferring air rights; and providing permanent low-cost financing for new real affordability developments.

The City can identify vacant land for real affordable housing development from an array of sources, including publicly-owned land and land where the ownership is split between public and private. At all of these locations, zoning can be upgraded so that developers can build to maximum density while generating much more real affordability in new units.

Because land costs and market rents vary drastically in Manhattan and in the outer boroughs, the exact number of real affordable units will also vary in each scenario for the 50/50 model. But when implemented throughout the City, the 50/50 model will incentivize developers to use the best tools at their disposal to increase land values, and to maximize real affordability.

How the City Can Incentivize the 50/50 Model and Real Affordability

To ensure that the 50/50 model succeeds, the City can take specific actions that will yield the greatest quality and quantity of real affordability in new housing construction, especially for the lowest income New Yorkers who are shut out of and left behind by Bloomberg’s policies.

Below are five key recommendations:
  1. Use Subsidies More Wisely to Drive Real Affordability. Subsidies should only be offered to developers who can demonstrate a commitment to including the largest number of apartments for households earning below 50% of Area Median Income and with the most apartments available to households earning as low as 25% of area median income. Housing programs within the City’s Department of Housing Preservation and Development (HPD) and Housing Development Corporation (HDC) should achieve much greater, and more measurable, affordability for low-income New Yorkers. Subsidies are powerful bargaining chips that give the City tremendous leverage with developers. For too long, subsidies have been offered with few or any strings attached, and enabled already wealthy develops to become even richer. This approach will help ensure that a maximum number of the 200,000 housing units not only tackle the real affordability crisis, but also meet the two and three bedroom apartment size needs of low-income families.
  2. Implement a New Low-Income Real Affordability Framework Across All Housing Programs so that the City prioritizes and tracks in every single development deal, RFP, RFQ, land disposition, rezoning, and allocation of public resources the creation of more affordable housing specifically for the low-income New Yorkers, with a focus on two- and three-bedroom apartments, which are the most needed. New developments only geared toward housing production without attention to bedroom size are insufficient.
  3. Enable Not-for-Profit Developers and Owners to Play a Strong and Active Role in the City’s Housing Agenda. The best not-for-profit developers and owners are grounded in the local community, protect the affordability of developments, properly represent and address community concerns, maximize community value and benefit, and build neighborhood assets. Local not-for-profit developers bring more than simple bricks-and-mortar development. They bring a commitment to hiring locally, supporting local businesses and subcontractors, and otherwise make development decisions that create strong neighborhoods, not just buildings. For those reasons, not-for-profits with a strong track record of active housing development in underserved communities and neighborhoods should be play a greater role in executing the City’s affordable housing agenda moving forward.
  4. Prioritize Permanent Affordability for All City-owned Land Dispositions. This can be done through a variety of ways: a land lease arrangement, a city right of first refusal, a City option for a combination of a tax-abatement and regulatory agreement renewal. Ideally, priority is given to a mission-driven, not-for-profit developer including community land trusts if and when available. If the proper mechanisms are not yet in place to ensure permanent affordability, a minimum 60-year affordability term for any disposition of land that is likely to receive any type of tax-credit financing, as the term coincides with the maximum length of the 420c tax abatement as well as matching two potential terms of the City’s 30-year mortgage authority.
  5. Require that Developers and Investors Receiving Any Type of City Subsidy Provide a Reserve Fund that Creates a Safety Net for Excessively Rent-Burdened Tenants. This requirement would apply to all affordable housing developments underwritten and built with any type of City subsidy. It would help ensure that projects are economically viable not only for the developer and investors, but also for low-income residents who will actually live in these homes. The reserve fund would protect low-income residents whose annual certification verifies extreme rent burden, and enable long-term affordability, without damaging or jeopardizing new developments.

Financing Real Affordability: Mechanisms and Policies to Raise Revenue

To ensure that a maximum number of real affordable housing units are created in the coming months and years, City government should actively create mechanisms and promote policies that would raise substantial revenue for new buildings.

Below are several recommendations.
  1. Flip Tax. City government should establish a new incremental transfer tax on high-end residential properties in the five boroughs. Revenue from this source would be earmarked specifically for affordable housing. Initial estimates from Real Affordability for All estimate indicate that such a tax could generate between $100 and $150 million per year. 
  2. Non-Occupancy Tax. Wealthy buyers from foreign countries are increasingly purchasing high-end luxury condos in new buildings as investment properties, with no plans to ever live in them and contribute to the tax base in New York City. City government should aggressively tax all buyers who are non-occupants of these apartments. Too many of these apartments are sitting vacant and these new condos are inflating housing prices across the City, but especially in rapidly gentrifying areas. The City should establish strict occupancy requirements and tax these buyers are progressively higher rates the longer they do not live in the luxury apartments they own here. 
  3. Property Tax Overhaul. City government should look seriously reforming the property tax system and creating a more equitable system. Relevant agencies should review taxes on multiple dwellings (rentals), particularly buildings for low and moderate income households and seniors, and tax vacant land to incentivize affordable housing development and dis-incentivize “holding or buying low and selling high for speculative or luxury development.” 
  4. Water and Sewer Tax Reform. City government should look at the water and sewer tax system and set a cap rate particularly for affordable housing developments.
  5. Density Bonuses. Funds generated by having developers “buy up” additional space via increased floor-to-area bonuses to a fund managed by the City to finance real affordable units in outer borough neighborhoods where market rents do not generate a full internal cross subsidy – that is to say, where market rents are not high enough to offset the cost of building for real affordability for low and moderate income households. Additionally, at the State level, City officials should lobby for an overhaul of the 421-a program so that the program is used only by real affordable housing developers not luxury developers.

Meeting Housing Goals While Creating Good Jobs

The administration should work in partnership with organized labor and the building trades to ensure jobs for construction and building operations workers include decent wages, healthcare, retirement benefits and adequate safety training to make career paths in construction more viable. Additionally, the administration should prevent irresponsible, law breaking contractors with records of wage and hour, minimum wage, prevailing wage and safety violations from working on subsidized housing.

Sandy Rebuilding: An Opportunity for Real Affordability in Hard-Hit Areas

Hurricane Sandy devastated many communities and neighborhoods across the City. Thousands of housing units were lost in some of the lowest-income areas of the City. As a result low-income communities and immigrant communities are still dealing with the fall-out effects of the storm-the loss of affordable housing, which if the City does not act fast will become permanent. The rebuilding and recovery process after Sandy is a major opportunity to ensure that real affordability for Sandy survivors is achieved in new housing construction. In fact, federal rebuilding funds, including the Community Development Block Grant-Disaster Recovery (CDBG-DR) funds are governed by the Fair Housing Act, which requires that grantees use the funds to “affirmatively further fair housing”.

  1. The City can direct the Housing Recovery Office (HRO) and the Department of Housing Preservation and Development (HPD) to make real affordability a prerequisite for landlords accepting federal disaster aid. HRO and HPD can attach real affordability requirements if landlords use federal aid for repairs or rehabilitation (for multifamily or rental single-family homes). Without real affordability requirements on rental apartments, landlords will renovate units and drastically increase rents, in this way public funds will help to line the pockets of landlord. In fact, this is already happening: a recent Alliance for a Just Rebuilding survey of Sandy-affected renters found that the median rent paid by Sandy-affected households has increased $200 a month since the hurricane. There is precedent for a real affordability requirement in disaster recovery efforts elsewhere in the country: Louisiana’s The Road Home Program after Hurricane Katrina attached 10-year affordability requirements for landlords receiving federal aid. 
  2. The City can use federal disaster recovery funds to invest in the development of real affordable housing. Sandy exposed and exacerbated inequities in our City’s housing, and destroyed thousands of affordable housing units, especially basement apartments and other accessory dwellings, as well as units owned by small mom and pop landlords in low-income areas like Far Rockaway, Coney Island, Red Hook, and the South Shore of Staten Island. But the City can use for real affordable housing construction in those neighborhoods a portion of the CDBG funds and other federal funds that have or will have been earmarked for Sandy rebuilding and recovery in the coming months. In fact, the federal Department of Housing and Urban Developers (HUD) already requires City government to spend at least half of CDBG funds on households earning 80 percent or less of Area Median Income. 
  3. The City can use land from the acquisition program to build affordable housing in Sandy affected areas. Through the Build it Back program, homeowners who have damages equal to more than half of the value of their home will have the option to participate in the City’s acquisition for redevelopment program. Through this program the City will purchase these properties and redevelop them for other uses. The City should commit now to ensure that all of the properties through this program are dedicated to the creation of affordable housing. 
  4. The City can also use federal disaster recovery funds to increase the availability of Temporary Disaster Assistance Program (TDAP) for low-income renters who were affected by Sandy and still grappling with displacement. TDAP vouchers should be available to all Sandy-impacted residents, regardless of immigration status, to ensure that the most vulnerable among them can gain access to real affordable housing. 
  5. Create a Land Bank to address problems faced by Sandy-affected housing, over-leveraged multi-family buildings, and homes in foreclosure. An ideal land bank would prioritize non-profit, community-led institutions (including community land trusts), and create permanently affordable housing for Sandy victims, those displaced by foreclosure, and extremely low-income people.