As the new spectator sport of watching for condominium developers to go bankrupt continues – just see websites like Curbed and The Real Deal to track luxury developments' struggles for survival – the city is developing a plan to populate those under-subscribed buildings with New Yorkers in need of affordable housing.
Following an announcement by City Council Speaker Christine Quinn this winter that new, vacant apartments "now represent our best asset in the fight for affordable housing,” officials are working to determine exactly how to “turn these unsold apartments into affordable homes,” as Quinn said in her State of the City speech in February. The outlines of how defunct condos might come into the hands of affordable housing developers are beginning to become clear, though a formal announcement of a program is still probably weeks away, according to officials.
The city’s existing affordable housing programs will only have the resources to address some, but not all, of the failed condo projects. Officials say they would choose which bankrupt buildings to convert to affordable housing based on how many subsidy dollars the deals would need for each affordable home produced, and also on how their intervention would help stabilize neighborhoods where the city has recently spent significant resources to build affordable housing communities—neighborhoods like Bushwick, Brooklyn or parts of Harlem.
“We want to make sure the city is getting bang for their bucks,” says Holly Leicht, deputy commissioner for development for the Department of Housing Preservation and Development (HPD).
How many bankrupt condos?
While condo developers struggle to pay their bills, officials and market analysts struggle to understand how many condominium buildings might eventually be seized by their banks. “The universe of troubled properties is not complete yet,” says Leicht.
There are already 23 high-rise or mid-rise new condominium buildings totaling thousands of units in financial trouble. Some have been forced to stop construction because their financing has dried up, while others have been unable to sell units and are falling behind on their construction loan payments. Another six properties totaling more than 2,300 units that converted from rental apartments to condominiums in Manhattan are also on the brink of default, according to research firm Real Capital Analytics.
In addition, dozens of smaller condo projects are now finishing up in gentrifying neighborhoods, just as condo sales slow and prices fall. Real estate website StreetEasy.com counts 700 listings for one-bedroom apartments in Brooklyn at prices ranging from an average of $524,500 in downtown Brooklyn to an average of $337,000 in Bushwick. Condominium properties like these, if sold in foreclosures auctions, could be sold for less than their appraised value, according to Jessica Ruderman, senior analyst for Real Capital.
“You could get a third off,” Ruderman says.
Picking the winners
With potentially tens of thousands of condominiums teetering on the brink of foreclosure, city officials will have to decide which buildings to pursue.
“I’m sure there will be many more sites than we can absorb,” says Leicht. The city’s capacity is large — but still limited. Before the real estate market tanked, after all, the mayor's New Housing Marketplace Plan was well underway. From June 2007 to June 2008, the city’s programs helped finance 17,000 units of affordable housing. But the city is unlikely to focus all of its affordable housing resources on reviving defunct condos. Its programs already have more proposals for affordable housing developments in the pipeline than the programs can fund, as they have had every year for the last decade or more. “There is a robust preservation and new construction program already,” says Leicht.
Officials are also watching as many as 70,000 rent-stabilized and affordable rental apartments slip toward foreclosure because their speculator owners took on larger loans than the properties are probably worth.
With only so much money to pay for affordable housing, officials will focus on proposals that use government funds most efficiently. That means avoiding properties that will probably be put back into productive use even without government intervention. “We don’t see ourselves as competing with the private sector,” says Leicht.
For example, the 346 condominiums at The Exchange at 25 Broad Street are unlikely to be empty for long, even though the plan to convert the rental apartment building to luxury condos stalled for lack of financing and the sales office has now closed, according to reports in the local trade press. A property like this, near Wall Street with a proven rental history, is very likely to find new private investors even if it is forced to go through the worst-case scenario of a foreclosure auction.
The city’s programs also effectively limit the amount developers can pay for properties. “Our subsidy caps are around $65,000 per unit, depending on the program,” says Leicht. Though affordable housing developers often layer subsidies from several programs together to make their projects work, even the most expensive affordable housing communities rarely get much above $275,000 per unit in total development costs, according to local developers.
When the city’s new budget is soon finalized, it may include some funds to help. But whatever new money the city can provide in a tough budget year is unlikely to make a huge difference compared to the high cost of building or buying housing here. For the most part, affordable developers will continue to rely on existing affordable housing programs, led by the city’s supply of federal low-income housing tax credits.
As a result, the city will probably stay away from high-rise condo properties, even if the towers could eventually be bought for a fraction of their development cost in foreclosure auctions. In the distressed condo markets of south Florida, “vulture fund” investors are now buying distressed condominium properties using private equity at half, or less, of the original prices. But even at these discounts, condo towers would be too expensive to buy using existing affordable housing programs. Officials also want to avoid bidding against buyers from the private sector, creating a price war that would only help bail out condo developers and lenders.
“We’re not looking to compete for million-dollar condos,” says Leicht.
Instead, city officials are focused on smaller condominium projects that are less likely to find new investors and that are located in transitional neighborhoods — “where abandoned buildings would have the most destabilizing effect,” she says.
The city’s Department of Homeless Services has already identified one such struggling condominium project on the east end of Crown Heights, where through a nonprofit partner the city is renting condos to operate a homeless shelter, according to a story in the Daily News.
These neighborhoods — from parts of Harlem to Brooklyn neighborhoods like Bushwick, Kensington, and Bedford Stuyvesant — have often already suffered through decades of disinvestment and sometimes crime. Many are just beginning to turn around though they may be near to much more expensive residential areas. Now that the boom has vanished, city officials want to be sure abandoned condominium construction sites don’t hurt these neighborhoods, and the affordable communities that are already there.
“These are neighborhoods where we’ve already invested a lot,” says Leicht.