The Danger of Speculating in Affordable Housing

September 3, 2013

Taxpayer land and money used for affordable housing should stabilize neighborhoods – not put them at risk of gentrification.

Affordable housing is a partnership between a developer and the public. The public generally puts in most of the money, in the form of tax credits, tax abatements, public land, and direct subsidies, while the developer is responsible for building and operating the actual apartments. The developer gets a nice return in the form of developer fees, management fees, and cash flow. And the public gets a return in the form of affordable housing. It’s a win-win. Non-profit developers, and sometimes responsible for-profit developers, have a vision of affordable housing being a partnership between builders, government, and the community – one that creates safe, stable, and diverse neighborhoods.

But there is a different, speculative vision for affordable housing development. It’s one that uses the enormous amount of taxpayer subsidy to build housing only affordable for the short term – with the intention of cashing in on luxury rents or flipping the property when these restrictions expire. This is because most New York City affordable housing developments only require short-term affordability, letting the developer opt-out of the “affordable” part of the “affordable housing” after only 30 years. Now the previous win-win becomes a win only for the developer who gets to keep the enormous amount of taxpayer equity and land intended for affordable housing development, while charging market rents.

It’s a troubling loophole that needs to be fixed. And most troubling is when this is speculation becomes a stated business model. For example, the head of L&M development, one of the City’s largest for-profit development partners, has said the ability to convert an affordable development to higher rents is a key incentive for the private sector, calling permanent affordability “giving up on the capitalist side of it.”

But developers who want market-rate returns should take market-rate risks, using market capital – not taxpayer subsidy and free land. And developers that want to invest speculatively, based on the idea that neighborhood will gentrify and they will eventually be able to push out residents and get high-income tenants, shouldn’t be allowed access to government programs designed to build housing for low- and moderate-income New Yorkers.

Fortunately, there are two solutions to this. First, we have a CDC development sector in New York that is community controlled and mission-driven to provide affordable housing for low- and moderate-income people in perpetuity. Under the Koch administration, New York City managed to develop about as many housing units as under the Bloomberg administration, in a much more difficult financial environment, with less private investment and much higher interest rates. They were able to do soin no small part because of the CDC sector which, as neighborhood steward, is dedicated to managing this affordable housing as stable community assets, not as for-profit investments. Much of this housing is in neighborhoods like North Brooklyn, the Lower East Side, and Harlem, neighborhoods that are now undergoing enormous gentrification pressures. The benefits of developing housing that’s affordable over the long term – and not cashed in at 30 years – are obvious. As a neighborhood becomes more expensive, these developments will represent most of the affordable housing left in these communities. Where will we be if these developments are able to become luxury apartments after short-term affordability expires?

Secondly, the next City administration has the ability to stop this kind of speculative investment with the stroke of a pen – by requiring that affordable housing developments stay affordable for the long-term, or most beneficially, in perpetuity. Affordable housing development has historically been undertaken by responsible actors, dedicated to the health of our neighborhoods and their residents – not speculators. We need to make sure this continues under the next Mayor’s affordable housing program.

Blogger – Moses Gates

ANHD blog team: Benjamin Dulchin, Moses Gates, Ericka Stallings, Jaime Weisberg, Barika Williams, Eric Williams. Anne Troy, editor.