‘The next mayor and comptroller can speed New York City’s recovery by working with public employee pension funds to increase investment in affordable housing, as they have in response to previous economic distress.’
The COVID pandemic exposed the unprecedented severity—and the adverse consequences of— New York City’s extraordinary shortage of affordable housing. The next mayor must meet this crisis head-on by increasing production and preservation of affordable housing to reduce and prevent homelessness, expand housing access and stability, and provide a foundation for improving an array of societal and familial outcomes. Increased housing investment will help jumpstart the city’s economy by generating jobs and economic activity at a higher rate than just about any other kind of capital investment.
Re-energizing New York City’s pension funds’ historic commitment of 2 percent of its $250 billion of assets ($5 billion) for community investments would offer an opportunity to scale up the city’s efforts to address its housing needs. Coupling these pension dollars with streamlined public programs can expand the preservation and new construction of smaller properties which are not easily served by the more complex Low Income Housing Tax Credit program (LIHTC). Importantly, it is in these properties where large numbers of low and moderate-income households reside.
This has been done before. In response to the housing distress experienced by New York City in the 1970s and ‘80s, the pension funds initiated economically targeted investments (ETIs) in 1983 with the Community Preservation Corporation (CPC) to finance the preservation of deteriorated housing. The program performed well and grew to become part of the critical infrastructure for rebuilding the city’s low and moderate-income communities.
However, the potency of this financing tool has been dulled by changes made over the past several years. This report describes the elements of that earlier success and how it might be revitalized to meet today’s challenges.
A historic investment
CPC was established in 1974 by the major New York City banks to work with the city to reverse the housing decline that had resulted in thousands of abandoned and deteriorating apartment buildings. By 1982, CPC had invested over $90 million to restore 11,000 apartments, with only one $300,000 loss that was fully recovered by City’s Residential Mortgage Insurance Company (REMIC). In that same year, CPC sought to expand its long-term funding resources and turned to the New York City employee pension funds. It was a good match as the pension funds’ long-term liabilities—the workers’ pensions—needed long-term assets to meet those obligations.
The timing was fortuitous. The city comptroller and union trustees of the pension funds wanted to create a program that reserved up to 2 percent of their assets for “economically targeted investments” (ETIs) to strengthen New York City’s economy. CPC’s request for 30-year fixed-rate mortgage funds to rebuild apartment buildings—supported by the recently enacted mortgage insurance program of the State of New York Mortgage Agency (SONYMA)—seemed to be an ideal fit.
The pension funds’ investments had to meet a “prudent business standard,” meaning the return had to be at a market rate commensurate with the risk. To meet this standard, the funds sought to align the proposed CPC investment with a housing investment it routinely made—purchases of 30-year Government National Mortgage Association (GNMA) securities. Agreement was made between Jack Meyer, the pension funds’ chief investment officer, SONYMA and CPC to increase the insurance coverage; add a prepayment penalty and a risk premium reflecting the difference between SONYMA and GNMA insurance. Finally, a formula was created to compensate the pension funds for setting the long-term mortgage rate at the start of construction, thus stabilizing affordable housing by protecting it from interest rate spikes.
With this agreement in place, in August of 1983 this first-in-the-nation program was approved. City Comptroller Jay Goldin announced that the CPC investment met the fiduciary duty to the city’s retirees by achieving a “triple bottom line”—a secure investment, a market rate of return, and community benefits in the form of affordable housing and jobs. The police pension fund was the first to approve, with a commitment of $50 million, followed shortly by other city employee pension funds. A few years later, the state pension funds created a program on similar terms. Over time, several major banks were approved to originate loans for the funds’ investments.
Triple bottom line – 1983 through 2011
How did the CPC investments measure up to the comptroller’s “triple bottom line?” First, the investments were secure. From 1983 through the end of 2011, over $1.5 billion of CPC loans was invested by the city and state funds without a loss of either interest or principal. The losses that did occur, about $6 million, were fully covered by the SONYMA insurance. This record of no losses has continued to the present day.
Second, the return on investments was also impressive. In 2011 the city pension funds reported that the yield on the CPC investments was among the highest in its fixed income portfolio.
The third leg of the “triple bottom line” was perhaps the most impressive: In that 28-year period, CPC pension fund investments financed the renovation of about 55,000 apartments in New York City. Thousands of construction and administrative jobs were created by this effort.
This high level of production occurred as the pension funds invested into a well-developed system for renovating deteriorated buildings. CPC and the city had pre-approved standards for renovation scopes, loan underwriting, borrower qualifications and other items when using a city program with 1 percent subordinate funds and reduced real estate taxes. This streamlined process enabled CPC to work with small, inexperienced property owners, who otherwise might be unable to deal with complex public programs.
Loans closed expeditiously, typically six to nine months after application. Closing costs using pre-approved documents were low. Development costs also were low. The certainty and timeliness of the process aided in negotiations for competitive prices for construction and other costs.
Once construction was completed, the program needed the coordination of the city’s Housing, Building and Finance departments to obtain approvals and get all public subsidies in place. SONYMA would then insure the mortgage, and the pension funds would purchase it at the previously agreed interest rate. At a ribbon cutting for the opening of a 35-unit building in the Bronx serving formerly homeless veterans, a representative of the pension fund marveled at how the fund was able to seamlessly invest in this small but important project.
Sometime in 2012, several changes were made by the then-city comptroller to the investment program that diminished its effectiveness.
The benchmark GNMA rate was replaced by a Federal National Mortgage Association (FNMA) rate and an additional premium was added to that. The result was that the base rate increased for its 30-year mortgage by about 7/10th of 1 percent. Additionally, a minimum rate of 5.25 percent was set for the funds’ 30 year forward priced mortgages. This is high compared to current rates. The original pension fund rate formula, if used today, would be around 3.55 percent to 3.75 percent.
Second, duplicative processes were added to transactions, replicating those already carried out by CPC, SONYMA and the city’s Department of Housing and Preservation (HPD) where direct subsidies are involved. This delayed the funds’ purchase of insured mortgages, adding late fees and additional carrying costs
Why does this matter?
Higher rate financing, particularly if it’s above market, narrows the range of lower income properties that can be financed and/or increases the need for public subsidies. Add to this difficult processing, and the public’s encouragement for owners and lenders to use the pension funds to undertake needed renovations will be dampened.
The pension fund program has proven to be extraordinarily responsive and flexible in meeting a wide-range of housing needs in historically underserved neighborhoods. In 1983, the great need was to restore wide swaths of deteriorated apartment buildings, particularly small properties owned by largely inexperienced owners, whether private or non-profit. The financing leveraged effective public programs to help revive iconic neighborhoods in northern Manhattan, the northwest Bronx and central Brooklyn.
It has met other challenges as well, supporting the rebuilding of vacant city-owned buildings during the Koch and Dinkins eras, and helping to restore defaulted properties to physical and financial health in periods of recession. This has included both affordable rental and cooperatively-owned housing. It has also financed senior and special needs housing.
A similar need is now upon the city as it seeks to deal with the ravages of COVID. The comptroller and pension trustees might look back at that earlier time in 1983 as an example of how a sound “economically targeted investment” program consistent with a “prudent business standard” can work in concert with city programs. Within this context, the changes to the investment program made in 2012 should be reassessed.
A reinvigorated pension fund program provides an opportunity for the city to diversify its sources of financing for housing, and be less dependent on bond financing. Leveraging this financing with streamlined public programs may extend city housing programs to a much broader array of buildings. This can create a safety net for vulnerable existing housing, and a new program for building affordable row and in-fill housing. To reach scale, the city needs to partner with construction lenders, both banks and community development financial institutions, to implement such programs in accordance with pre-approved work scopes, designs, documents, and underwriting standards. In this way, both the staff and capital of the city can be leveraged to produce a new generation of preserved and newly constructed affordable housing.
Michael Lappin was the past CEO of the Community Preservation Corporation (1980-2011). Currently he heads Lappin Associates, providing development and advisory services for affordable housing. Mark Willis, senior fellow at NYU’s Furman Center, Ted Houghton of Gateway Housing and Mike Gecan of Industrial Areas Foundation reviewed and provided helpful suggestions for this piece. The author is solely responsible for the content.