Affordable targets put bite on Big Apple resi schemes

Mayor’s push for bigger affordable element may drive developers out, writes Al Babarino

REC 11.14 de Blasio, Bill
New York mayor Bill de Blasio’s pledge to protect affordable housing may hit developments’ viability

A year into his term as New York City Mayor, Bill de Blasio’s proposals to make good on his campaign promise to preserve 200,000 affordable housing units across the city are stoking controversy.

His initiatives include a proposed change from the 80-20 development model, which gives developers incentives for designating 20% of a development’s units for affordable rent. The new model would entail 50% market-rate, 30% moderate-income and 20% low-income households.

While most embrace the idea of creating more affordable housing, developers – and their lenders – are weary of changes to a system that they say has already stretched them thin, arguing that development will grind to a halt if the 80-20 programme ends.

“People aren’t going to build low-income housing just because they’re altruistic,” says Rick Lavrich, a senior vice-president at German bank Helaba. “It has to be paid for.”

There are already several incentives for developers to provide affordable housing, through state tax abatements and other financial incentives that help cover the expense. But many of the benefits, such as state-issued tax-free bonds, are in limited supply, and recent surges in development mean there has been less to go around.

“You can’t keep watering down the benefits, which have already been watered down,” says Lavrich, who estimates that at least 25% of his bank’s 25 or so lending deals so far this year involved 80-20 properties.

“At some point, people will stop developing, especially with land costs as high as they are. Whether or not this is the straw that breaks the camel’s back, I don’t know.”

Land prices outpace rents

One developer claims he is receiving tax- free bonds only on the affordable portion of his new projects, whereas they were once also available on the 80% market-rate portion. One-third of gross income already goes straight to real estate taxes and land prices have soared far faster than rents over the past several years, he adds.

“If the city increases the percentage of affordable housing and reduces the market- rate element, the rental housing business will grind to a standstill,” says the developer, whose firm has focused on 80-20 housing in the outer boroughs. “The margins are so slim that it’s not going to make sense.”

Most agree that something must be done to increase the city’s affordable housing stock, but it’s a complex puzzle and opinions vary widely on how to achieve it. Many real estate industry leaders embraced de Blasio’s plan – including Steven Spinola, president of the Real Estate Board of New York, who said in a statement after the plan was announced in May that it “identifies the problems and provides a realistic road map for solutions”.

But Spinola voiced concern about another stipulation in the plan: mandatory zoning, which would replace a voluntary programme and force developers to create additional affordable housing in exchange for changes to zoning regulations, which allow them to increase the floor area ratio (FAR).

Increases to FAR boost developers’ rental income by giving them greater density and allowing them to build taller structures. But community groups and advocates have made it tough for the city and developers to strike an agreeable balance, as they don’t want their neighbourhoods obscured by tall buildings. A shift from the 80-20 ratio could “break the camel’s back” for some developers.

“The problem is that if you want to put 50% affordable housing on a project, it’s going to cost more, so you have to increase density by maybe 20% or 30%,” Lavrich says. “Then the community says: ‘We don’t want that tower here. It’s too big.’”

The Mayor’s office did not respond to requests for comment, but the Mayor has acknowledged publicly that the 50-30-20 programme would not work for all developments and he has shown some flexibility in tailoring affordable housing programmes to particular circumstances.

For example, in late September the City Planning Commission approved Alma Realty’s Astoria Cove development of 1,700 apartments on the Queens waterfront. This will be subject to the mandatory inclusionary zoning plan, but will follow the existing 80-20 plan. Alma was promised no financial subsidies from the city and planned to apply for the state’s tax abatement programme.

The highly contentious project shows that a delicate balance is difficult to strike; the Queens community board originally voted to reject Alma’s application unless it included at least 35% affordable apartments.

REC 11.14 Astoria Cove NY
A 20% affordable housing allocation at Alma Realty’s Astoria Cove has proved controversial

Not so affordable housing

City Planning Commission member Michelle de la Uz reportedly declined to vote because the so-called “affordable” units were priced above the market rate of many apartments in Astoria. The City Council then claimed the “affordable” rents are too high and said the 20% allocation must be raised, signalling that Alma will need to go back to the drawing board for final approval.

De Blasio rejected calls to increase the percentage of affordable units in two recent Brooklyn rezoning proposals, in East New York and Bushwick, which would allow for more residential development, despite pleas from various housing advocates.

However, the zoning changes now on the table might not appease developers if the 80-20 programme is altered.

“If the city wants to take something with a 2 FAR and make it a 12 FAR, that might be a different story,” says the 80-20 developer. “The problem is I don’t think that’s what they’re thinking. I suspect that community pressure will prevent that, because they like low-lying neighbourhoods, and they’ll go from a 2 [FAR] to a 5, and that’s not enough.”

In some cases, community groups have played into developers’ fears regarding the rezoning concerns. “I’m against high-rises, because once you start building, you’re taking away from the integrity of the neighbourhood,” Joyce Scott-Brayboy, a member of Manhattan’s Community Board 5, recently told City Limits.

The city could see “a big rush” to get in under the existing 80-20 programme before it’s too late. After that: “It’s going to be a deadzone,” the developer says. “Everyone is just going to do condos.”

Lavrich is gearing up to look at different opportunities, noting that “we’d have to spend more time on office and retail” if 80-20 goes away.

 

Looking to the outer boroughs

He suggests that the city and its developers could look to underdeveloped outer borough areas, where land is cheaper, as an option for affordable housing.

“You’d get the same housing for $150 [per sq ft] in dilapidated areas and save $500 [per sq ft],” he says, drawing a comparison between such areas and prime Manhattan. “These would be nice, safe new planned neighbourhoods.”

However, community groups and preservationists could still oppose such development and rents for new housing in once-derelict parts of the Bronx or Brooklyn wouldn’t come anywhere close to those in the prime residential areas.

REC 11.14 Miller, Jonathan
Jonathan Miller, Miller Samuel

“If the economic incentive is reduced and land sellers aren’t immediately responsive, development will drop off sharply,” says Jonathan Miller, president of New York- based appraisal firm Miller Samuel.

The condo market, where properties can pull in tens of millions of dollars per unit, is a clear alternative for developers, as is commercial development. But Miller suggests that as land prices adjust, a revival in the market for rental housing, with some affordable component, will be likely.

“You’ll have a transition period where land sellers are slow to adjust pricing and projects don’t make economic sense [for developers],” he says. “But over time, as land development site prices fall, maybe you’ll see this type of product being built again.

“New York desperately needs more affordable housing for middle and working class families,” he adds. “That’s how you keep the city great. But this idea is just one piece of a very large puzzle. No one programme will solve the problem.”

SHARE