He ran the New York City government program that repossessed run-down real estate and sold the property at low prices to new landlords eager to house low-income tenants responsibly. Jerry Salama practically gave these buildings away, hundreds of them during the 1990s, along with government subsidies to help keep rents reasonable.
When Salama left the housing department, he decided to get into the business himself (with the blessing of the mayor’s Conflicts of Interest Board). When the city ran out of abandoned buildings to redevelop and sell, he and his partner in Janus Property Company started looking for real estate to purchase in the private market. “We’ve been trying to buy multifamily rentals and fix them up–stabilize them, make capital investments, get rid of drug dealers,” explains Salama. Subsidies would help them maintain low rents.
For a while, the projects kept coming. But with New York City’s real estate market too hot to touch, being a savvy and connected entrepreneur just isn’t enough anymore. “I haven’t been able to buy anything in the last year and a half,” Salama laments. Everything is priced way out of reach.
Speculators are now purchasing these apartment buildings for as much as seven and a half times their annual rent rolls. With that kind of overhead, there may not be enough money left over to pay for heat, maintenance and other basics. A lot of buyers don’t care–they are looking to flip the buildings within a year or two, for a quick profit. Often they’ve never even seen the real estate they’re purchasing.
Salama’s former employer, the Department of Housing Preservation and Development (HPD), is just now trying to figure out how to respond. When Salama met recently with two new men in charge–Commissioner Shaun Donovan and Deputy Commissioner for Development Rafael Cestero–they asked him, “What can we do to help?”
Lessons in Creativity
There’s no shortage of ideas for how HPD and the city’s housing finance agency, the Housing Development Corporation, could help build more affordable housing: Give community development corporations (CDCs) immediate access to cash for down payments; offer low-interest bond financing and subsidies; have the city help financial institutions shoulder the risk on loans. And while HPD has succeeded in transferring to private ownership tens of thousands of units of housing that had been taken over for nonpayment of taxes, the City of New York still owns various pieces of property and could make them available for development.
As HPD gears up to address these needs [see “Rafael’s Reforms”], its partners in the private sector haven’t waited. Determined to keep making new low-cost, high-quality housing available to low- and moderate-income New Yorkers, CDCs, supportive housing organizations and entrepreneurs like Salama are diving headlong into the private market–on their own, without a net.
The creative prevail. When he was looking for a Bronx site last year for a new 118-unit apartment building for formerly homeless people, Eric Galloway, executive director of the Lantern Group, didn’t bother looking in a residential neighborhood. He went to an industrial zone in Bathgate and picked up three lots for $925,000. A loan from the Corporation for Supportive Housing tided him over until state financing came through. There was just one problem–he needed a zoning variance to build apartments there, and there was no guarantee the city’s Board of Standards and Appeals would grant one. As it happens, it did.
“We look for land that has less of a value to bigger players,” explains Galloway. “There’s a risk we take, of course.” The Lantern Group is currently negotiating with the Landmarks Preservation Commission to partially demolish and renovate a former Police Athletic League building and turn it into 125 apartments, a project that will also require a zoning change.
But Galloway is now discovering that he can’t even find industrial sites in his price range. The state’s new brownfields tax credit rewards developers lucratively for rebuilding in these spots, which have thus become hot properties. [See “The Green Lady,” September/
Affordable-housing developers say they need faster, easier access to cash to help them pounce on properties before other buyers do. They also typically need to have a site secured before they qualify for any government subsidies that will help finance construction. Housing finance institutions are starting to respond to the demand.
In the north-central Bronx, Shaun Belle watched as his own organization’s success in improving the neighborhood made it attractive for private developers to build new apartments, without government subsidy. These homes, marketed as “affordable luxury,” rent for $1,000 a month and up, more than most neighborhood residents can pay.
When two vacant lots became available, Belle’s organization, Mount Hope Housing Company, turned to the Enterprise Foundation for a speedy loan and was able to buy them. Mount Hope is now seeking Low Income Housing Tax Credit financing to make the new apartments available at a fraction of market prices.
The Enterprise Foundation is considering making such loans routine business in New York City, says Northeast Regional Director Bill Frey. “We’ve heard from our nonprofit partners about the importance of getting access to property,” says Frey. “We understand that’s important and are looking at putting together a fund.” In July, Enterprise announced a commitment of $25 million for acquisition of new sites for supportive housing, along with $125 million to finance their development.
The other major national CDC finance group, Local Initiatives Support Corporation, is creating its own “strategic acquisitions” fund,” with the help of private grants.
Securing sites is particularly important for creators of supportive housing, who typically count on multiple slow-moving government agencies to finance development.
Recognizing that supportive housing groups are in a bind, Deutsche Bank recently changed the rules for its Supportive Housing Grants Program. Starting this year, applicants no longer need to have a site already secured.
Middle Income’s Not Much Easier
With tight budgets and downscale tenants, developers of low-income housing have the hardest time picking up real estate in the marketplace. These days, though, companies building apartments for middle-income renters are reporting that they can no longer buy development sites, either. The sale prices are just too high to make the projects feasible, even with rents as high as $2,100 a month and subsidized bond financing through HDC’s New Housing Opportunities Program. “Some of the owners think their property is more golden than it is,” says Vinny Riso, a principal of the Briarwood Organization, which until now focused on redeveloping city-owned land in Harlem and Far Rockaway.
So Riso is making property owners an offer: Become joint partners with Briarwood and reap the rewards of investment instead of sitting on an empty lot. Riso says he’s “actively negotiating four or five sites, in Harlem and the Bronx.”
Unlike Salama, Riso and other major New HOP developers are contractors as well as dealmakers, which gives them an edge in controlling their costs. In the past year, however, the nationwide construction boom has driven up the price of building materials significantly, and labor and insurance costs remain high. Alan Bell, principal of the Hudson Companies, a Brooklyn-based developer, says that the cost crisis is even making it prohibitive to build federally subsidized housing for senior citizens, formerly a straightforward transaction. Says Bell, “You can’t make the numbers work.”
picking up property on the way down?
Bell and other vets of New York City real estate say they’re confident the market will calm down sometime soon. In the Bronx, Jim Buckley, executive director of University Neighborhood Housing Program, anticipates it could descend with a crash, leaving speculators stuck with apartment buildings they have no commitment to maintaining over the long haul. Some troubling signs suggest that might already be happening. In 2002, after years of steady improvement, 13 predominantly low-income neighborhoods saw an increase both in serious housing code violations and the number of buildings where landlords had failed to pay taxes for more than a year–indications that these neighborhoods could see habitable housing abandoned, not gained.
Buckley doesn’t want the Bronx to repeat its history of large-scale landlord abandonment–and he does want his CDC and others to continue to rebuild and manage affordable apartments. He is working with financial institutions, including Enterprise and Fannie Mae, to, as he puts it, “lay the groundwork for acquisition as the market drops.”
The working concept is a Multifamily Assistance Center that could advise lenders–who have the right to intervene if their property becomes degraded–on how to rescue their real estate from negligent landlords.
Buckley sees this effort as a potentially vast source of affordable housing in the long term. “We may see more buildings moving to affordable housing opportunities,” says Buckley.” “We’re thinking preventively now.” •