Plans to Build Low-Rent Units Raise Question on Subsidies

http://www.nytimes.com/2005/12/25/ny...25housing.html
Plans to Build Low-Rent Units Raise Question on Subsidies

By JANNY SCOTT
Published: December 25, 2005

One of the biggest problems facing New York City is its shortage of housing for people of moderate or modest means (people like the majority of New Yorkers, that is). There are all sorts of programs intended to encourage developers to build lower-priced housing. But, with land prices and construction costs shooting skyward, exactly how much public help does a private developer need?

Take the case of Atlantic Development Group, a developer of low-income housing that wants to build two apartment buildings on the East Side of Manhattan for New Yorkers making roughly $30,000 or less. The apartments would rent for less than $700 a month. The developers have asked the state to issue $41 million in tax-exempt bonds to help finance the project; and they intend to use federal income tax credits, city property tax exemptions and other city incentives.

But Brad Lander, an advocate for low-income housing who works as director of the Pratt Center for Community Development, has asked the state Housing Finance Agency not to issue the bonds. At a public hearing on the projects recently, he called Atlantic's cost estimates "wildly inflated." He said the agency would be "dramatically oversubsidizing" the projects, and the developers would be misusing public programs for personal gain.

The developers, Peter Fine and Marc Altheim, dispute Mr. Lander's assertions. In interviews, they said that they had developed nearly 40 low-income housing projects over the last nine years and that they were building these two as efficiently as possible. They said construction and land costs had escalated sharply. Without the ability to use multiple subsidy and incentive programs, they said, they could not build the apartments.

They also say they are not using city or state tax money (though they would be getting tax-exempt bond financing, city property tax exemptions and federal income tax credits). They point out that, in return for low-income housing tax credits, they must make the apartments affordable to poorer people than they would otherwise. And, in return for property tax abatements, they must contribute to a city-run reserve fund intended to ensure that the apartments remain affordable to those tenants.

"There's no scarce resource here," Mr. Fine said in an interview, which was arranged by a public relations firm hired in response to the scrutiny that the deal has attracted. "There's no pot of money. This is no plum that we're being handed. We're using every resource that we have - time, money, creativity - to create the governmental benefit. It doesn't exist."

The argument over the two buildings - an 18-story, 49-unit building at 385 Third Avenue, between East 27th and 28th Streets, and a 10-story, 42-unit building at 250 East 60th, between Second and Third Avenues, - offers a glimpse into the arcane world of developing so-called affordable housing, housing for people with incomes well below the median. The shortage of such housing was a big issue in the recent mayor's race; and Mayor Michael R. Bloomberg says he intends to create or preserve 165,000 low-income units by 2013.

Although the federal government once took the lead in creating low-income housing, federal financing has dwindled. Now, the job falls heavily to nonprofit and private developers. In New York City, there are numerous programs - city, state and federal - intended to enable developers to create low-cost housing, which in the current real estate market would be a money-losing proposition without subsidies or other help.

But it is the responsibility of government to provide the least subsidy necessary to ensure affordability, housing experts say. The interests of the government and the developer should be in tension. Developers need to have their costs covered; government agencies should get the most they can for the public's money. The question arises: What are reasonable - or unreasonable - costs?

In Atlantic's case, the housing finance agency's staff is recommending that the agency's board approve the bond deal. The board is expected to take up the matter in early 2006. The board is made up of administration officials and others nominated by the governor. Mr. Fine and Mr. Altheim are major donors to the governor, George E. Pataki.

In addition to its application to the state, Atlantic has applied to take part in a city-run program intended to promote a mix of housing in neighborhoods becoming increasingly prosperous. Under that program, a developer who builds affordable housing can earn certain benefits entitling him, or another developer, to build market-rate housing nearby at greater density than would otherwise be allowed.

The affordable-housing developer can sell those benefits, worth up to a 20 percent increase in the floor area allowed under the zoning, to other developers who are building market-rate housing in the same community board district, or no more than a half mile away. The developer of the low-income housing can use the proceeds to cover his costs.

According to documents released by the state, Atlantic expects to sell those so-called inclusionary housing benefits from the Third Avenue building for $35 million and the benefits from the other building for $23 million. If the state approves the bonds, Atlantic will also receive low-income housing tax credits from the federal government, which it has valued at nearly $13.5 million. Atlantic can sell those credits, too.

In addition, the buildings will be exempted from property taxes for up to 30 years.

"All of those are policy tools that exist for the development of low-income housing," said Mr. Lander, who developed 500 units of affordable housing in Brooklyn in his previous job as executive director of the Fifth Avenue Committee, a nonprofit community development corporation. "Here, I believe they are being used to enrich the developers way beyond what's appropriate."

Mr. Fine, however, said the proceeds from the sale of the so-called inclusionary housing benefits are insufficient to cover the full costs of his projects. Only when the land is donated by the city, he said, is it possible to avoid using tax credits and bonds. He said, "Given the cost structure of these projects, I made a business decision in the late summer that I didn't think the inclusionary market was high enough to build the buildings without some tax credits to sell to raise additional money."

The housing finance agency initially estimated the construction costs for the Third Avenue building at nearly $383,000 per unit, or $391 per gross square foot, the measure commonly used by developers. For the East 60th Street building, it put the construction costs at $300,000 per unit or $361 per square foot. Testifying at the hearing on Nov. 14, Mr. Lander described those figures as "nearly double the construction cost of $200 to $225 per square foot (or $185,000 to $215,000 per unit) reported by other Manhattan affordable housing developers."

But Mr. Altheim, in an interview the following day, said the agency had "inflated our construction costs." He said the construction costs were approximately $300 per square foot. When asked to explain the discrepancy, Tiffany Berns, an agency spokeswoman, released new estimates of the construction costs on each building, putting them at just over $290 per square foot.

Clifford Archer, the agency's vice president for construction, said the costs had dropped after the agency received more detailed architectural drawings. He said the agency constantly revises its cost estimates as its review process moves ahead. He said the overall square footage of the buildings had increased while the total costs remained the same; so the costs per square foot dropped.

Asked how Atlantic's costs compared with those of other projects, Ms. Berns produced a spreadsheet showing 15 recent multifamily housing projects that received bond financing from the agency. Atlantic's construction costs per gross square foot were above the average, $268, even though a majority of the other projects were mixed-income, which developers say tend to cost more than all-low-income ones.

Another developer with a project on the spreadsheet said the numbers on his project were wrong. That development, Extra Place, is 51,000 gross square feet - not 32,500 - and the cost per square foot was $167, not $269. Asked about the discrepancy, Mr. Archer said his numbers came from a "preliminary submission." He said the building grew by nearly 20,000 square feet after the closing, so the cost per square foot dropped.

The construction costs per unit for Atlantic's Third Avenue building were more than $100,000 higher than the $278,000 average, the spreadsheet showed. Mr. Archer said that difference could be explained by the units' size: They are studios and one-bedrooms but are relatively spacious. Ms. Berns said, "We're not in the business of financing uncomfortably small and difficult-to-live-in affordable housing."

Mr. Fine and Mr. Altheim offered additional reasons. First, construction costs had nearly doubled over the past 18 months, Mr. Altheim said. Secondly, Mr. Fine said, the nature of the sites on which they are building makes construction more expensive. For example, one is a small site in the middle of a block. He said, "On a square-foot basis, these are very difficult, inefficient sites. There is a 15 to 20 percent cost factor on that that."

Finally, he said, the agency includes the developers' fee in its cost calculations. That is not done, he said, in the case of other projects on the list, such as mixed-income projects in which the developer can expect to make money off rents.

Mr. Lander raised another question about Atlantic's proposal.

Under the city's inclusionary housing program, developers are required to enlist a nonprofit agency as "administering agent" for the low-income housing they build, to ensure that the apartments remain low-priced and that the tenants are eligible. Atlantic had initially planned to give that task to Senior Living Options, a nonprofit that Mr. Altheim said he and Mr. Fine set up in the 1990's.

At the hearing, Mr. Lander questioned whether Senior Living Options is sufficiently independent of Atlantic. "This raises questions about whether transactions between the entities are arms length, and whether the not-for-profit itself is a legitimate entity for receiving several types of favorable tax treatment" or whether it is being used to increase the developers profit, he said.

In response to that criticism, Mr. Fine said last week that Atlantic had replaced Senior Living Options with the Metropolitan Council on Jewish Poverty, another nonprofit. He said, "We felt that if people's sensibilities were offended, we would just switch. We wanted to take issues off the table that people would object to.">