Fiduciary Landlords: Life Insurers and Large-Scale Housing in New York City

by Adam Tanaka

JCHS Meyer Fellow

For a brief window between the late 1930s and the late 1940s, life insurance companies built approximately 50,000 middle-income rental apartments across the United States. Most were racially-segregated, market-rate projects in semi-suburban locations. Others were central city redevelopment projects, built with the powers of eminent domain and offering below-market-rate rentals. Stuyvesant Town, an 8,755-unit apartment complex in New York City developed by Met Life, is perhaps the most famous of these projects (Figure 1) but there were many others, including Lake Meadows in Chicago (developed by New York Life), Hancock Village in Boston (developed by John Hancock Mutual Life), and the Chellis-Austin Homes in Newark (developed by Prudential).

As corporate entities with access to vast institutional funds, insurers achieved considerable economies of scale in construction, financing, and operation, and accepted longer, lower yields than conventional real estate developers. As such, policymakers hoped that life insurers and other fiduciary institutions, such as savings banks, would play a key role in building and operating large-scale, low-cost urban housing and in modernizing the postwar city more generally. By the early 1950s, however, a combination of disappointing financial returns and bruising controversies over discriminatory leasing drove insurers from the housing field.

The 789-unit Hancock Village, which straddles the Boston-Brookline border, was built in 1946 by the John Hancock Mutual Life Insurance Company. Source: “Greater Boston Housing Development Charted,” Christian Science Monitor, 01/05/1946.

While the volume of life insurance housing soon paled in the face of the postwar suburban boom — built for much the same demographic and often financed by life insurance dollars — insurers’ brief venture into multifamily development represents a significant and understudied episode in the history of affordable housing. With Stuyvesant Town currently enjoying an unexpected renaissance as both high-class investment and public policy touchstone, the time is ripe for a reevaluation of the substantial, if controversial, legacy of life insurance housing.

In a new Joint Center working paper, I provide an overview of the “rise and fall” of life insurance housing in the postwar period, with a focus on New York City, where the majority of insurance-sponsored apartments were located. The paper is part of my larger dissertation project, which examines the political and economic forces that drove various entities — including life insurance companies, labor unions, public authorities, and for-profit developers — to build some of the world’s largest middle-income housing projects in New York in the mid 20^th century, as well as the factors that abruptly terminated this “large-scale approach” in the mid-1970s.

In the paper, I argue that when it came to middle-income urban housing, the 1940s represented a moment of unusual convergence between corporate need and municipal interest. While incentives were aligned, thousands of relatively low-cost apartments were built in America’s most expensive housing markets. These apartments proved a panacea for white families who earned too much for public housing but not enough to purchase suburban homes. As soon as civic and corporate needs began to diverge, however, insurance capital moved beyond city limits to suburban jurisdictions offering higher returns with fewer political obstacles. In the context of today’s continued shortage of affordable housing — particularly for middle-income renters in high-cost cities like Boston and New York — the story can be read as both missed opportunity and cautionary tale.

From the Archives: When New York’s Legendary “Power Broker” Spoke at the Joint Center

by David Luberoff
Senor Associate Director

Fifty years ago today, Robert Moses, the legendary “power broker” who reshaped New York City in the mid 20th century, gave a lunchtime talk at the Joint Center for Urban Studies of MIT and Harvard. Thanks to Adam Tanaka, a 2015 Joint Center Meyer Doctoral Fellow who was doing research for his thesis on the construction of large-scale, middle-income housing in New York City, the Joint Center recently received a copy of his speech.

Given today’s debates about housing, transportation, and other issues related to urban development and urban policy more generally, it’s instructive to look back at Moses’ remarks, which were given at the predecessor of today’s Harvard Joint Center for Housing Studies. Moses, whose language was florid and at times supercilious, asserted that most major municipal problems could be solved “by genuine courage as distinguished from braggadocio, empty millennial problems, buck passing to Washington and yielding to every obstructionist group, every Johnny-Come-Lately planning expert, every editorial pundit, and every racial, religious and sectional minority. Water supply, sewage and waste disposal, roads, parking, schools, hospitals and health, all are the same category of works requiring an honest, factual, fearless approach and attack by officials with at least a thirst for martyrdom and an instinct for the jugular.”

Robert Moses

The remarks and the harsh judgments are particularly striking because Moses – whose importance is sometimes compared to Baron Georges-Eugène Haussmann’s impact on 19th century Paris – was a singularly important figure in New York specifically and American cities generally. Working from a series of appointed state and city positions (many of which he held at the same time), Moses oversaw the construction of 13 bridges (starting with the Triborough Bridge, now known as the Robert F. Kennedy Bridge), 416 miles of highways (including the Long Island and Cross-Bronx Expressways), 658 playgrounds and parks (including Jones Beach State Park), key cultural and non-profit institutions (including Lincoln Center and the United Nations), and 150,000 mainly high-rise housing units for the city’s low- and moderate-income residents (including Trump Village, a 3,800 unit complex in Coney Island built by Donald Trump’s father). These changes not only transformed New York, they also provided a template for redevelopment and highway projects throughout the country.

Image by Hassan Tahir (Own work) [CC BY-SA 4.0 ], via Wikimedia Commons

However, such changes came at a huge human cost. In The Power Broker, a critical and seminal biography of Moses that won the Pulitzer Prize in 1974, Robert Caro estimated that taken together, Moses’ road, bridge, housing, and urban renewal projects displaced about 250,000 people, most of them poor and many of them blacks and Puerto Ricans. Moreover, Moses strongly supported policies that did not allow blacks to move into many of the new housing projects, such as Stuyvesant Town in Manhattan – a private moderate-income housing development built on land cleared by a city entity that Moses oversaw.

By the time that Moses spoke at the Joint Center, his power had begun to wane largely because of increasingly intense disputes about his aggressive approaches to urban development and growing feuds with key elected officials, particularly then New York Governor Nelson Rockefeller. His opponents, who included Jane Jacobs, author of The Life and Death of American Cities, had stymied his efforts to radically transform lower Manhattan via the construction of an elevated expressway from the Hudson River to the East River and to use urban renewal powers to clear parts of Greenwich Village for high-rise middle-income housing developments. As a result, by the time he gave his Joint Center talk in 1966, Moses, who once simultaneously held 12 separate city and state positions, had only one official post, chairman of the Triborough Bridge and Tunnel Authority, a self-financed public entity that he had chaired since he had led the effort to create it in the 1930s. When Moses spoke at the Joint Center, the authority owned and operated nine bridges and tunnels, including the Verrazano-Narrows, Throgs Neck, and Bronx-Whitestone bridges as well as the Brooklyn-Battery and Queens-Midtown tunnels.

In his remarks, Moses – who was fond of the French aphorism (sometimes mistakenly attributed to Joseph Stalin) that “you can’t make an omelette without breaking eggs” – made it clear that his recent defeats had not changed his views. He began by hailing the approach to urban problems taken by Daniel Patrick Moynihan, who headed the Joint Center from 1966 to 1969 and who went on to several prominent posts, including serving as one of New York’s U.S. Senators from 1976 until 2000. “I like Mr. Moynihan’s approach to our municipal problems,” Moses said, “because it is honest and forthright at a time when solutions are mainly the province of demagogues screaming for perfection, smooth politicians with new catchwords and slogans appealing to every racial, religious, sectional and economic faction and minority, image makers, fanatics, self-appointed wowsers, reformers with direct links to Higher Regions, far-out critics with long claws and venomous serpent’s tongues, ponderous editors, computer analysts, and just plain nuts.”

Moses went on to endorse his support for what had become a common, but inaccurate reading of “The Negro Family: The Case for National Action,” the controversial report Moynihan had prepared in 1965 while working in the Johnson Administration. Moses began by restating – and expanding – the report’s best-known assertion. “If I understand him,” Moses said, “Mr. Moynihan says, and quite rightly I believe, that family, church, and other ancient responsibilities and disciplines must be restored if we hope to meet the problem of negro, Puerto Rican, and other slums and ghettos.”

However, like many conservatives who embraced Moynihan’s assessment of the state of black families, Moses did not repeat Moynihan’s assertion that the problems were largely caused by “three centuries of unimaginable mistreatment” of blacks by whites. Nor did Moses support Moynihan’s proposals to address those problems via large-scale government programs focused on strengthening black families. Instead, Moses asserted that responsibilities to family, church and other institutions had to “come first, ahead of improved housing, schools, recreation, the Four Freedoms, integration and even human rights.” He added, “But our political and opinion-making leaders don’t go for such simple and sane reasoning because it represents restraint and, like charity, begins at home.”

Moses, who was forced out of the TBTA in 1968 when the agency became part of the newly formed Metropolitan Transportation Authority which used some of the TBTA’s revenues to subsidize the region’s subways and commuter rail lines, concluded with a somber assessment of the then-current urban policy landscape. “Almost no one in high office wants to be told that a motorized civilization is bound to glut the roads and that the best we can do will not meet the problem short of approaching much more drastic regulation which will require sacrifice,” he said. Then he returned to some familiar critiques of others’ ideas, asserting, “Careless experts say we shall meet the demands by preferring rails to rubber, substituting regionalism for states, master planning, super duper departments run by administrative giants of an elite corps of experts who are also seagreen incorruptibles, trained to be public tycoons, more business in government, the repeal of Parkinson’s Law, rebuilding everything without hurting or discommoding anybody, and combining immediate, uncompromising slum clearance with revolutionary social objectives.”

Moses, who died in 1981, concluded by noting, “Here endeth the lesson, if I have any to offer, and the beginning of the interrogation which will enable you to get even with me.” While we haven’t yet found a transcript of that discussion we’re sure that, like Moses’ remarks, they not only would be an informative historic artifact but also would highlight many of the urban issues that we are wrestling with today.

Read the speech transcript.

Democracy and the Challenge of Affordability: Preserving the Affordable Housing Stock in New York City

Adam Tanaka
JCHS Meyer Fellow

This post is cross posted from a series that our colleagues at the Ash Center for Democratic Governance and Innovation are doing on affordable housing as a challenge to the health of American democracy, and in particular local democracy in the United States. The series, edited by Harvard Kennedy School Assistant Professor Quinton Mayne, is part of the Ash Center’s Challenges to Democracy series, a two-year public dialogue inviting leaders in thought and practice to name our greatest challenges and explore promising solutions.

As part of this series, Adam Tanaka explored the ways in which housing shortages in expensive global cities are leading to a redefinition of affordability, both for low- and middle-income residents. Population and productivity growth, coupled with increasing income inequality, is contributing to a pressure-cooker housing market in which supply is falling far short of demand. As a result, public authorities are finding new ways to partner with private developers to try and meet demand for below-market housing. Tanaka sat down with private developers who are playing an important and telling role in the delivery and management of affordable housing.

For this interview in the series, Tanaka traveled to New York City to interview Rick Gropper of L+M Development Partners, a private affordable housing development company with thirty years of experience in New York. Their conversation reveals some of the political challenges still facing developers operating in this field, as well as new opportunities for innovation across the public-private divide.

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New York City has a long tradition of innovation in affordable housing. From building the country’s first public housing project, to establishing its longest-running program of rent control, to experimenting with tax credits that influenced the adoption of the federal Low Income Housing Tax Credit, the city has a strong legacy of public intervention in the housing market.
New York cannot rest on its laurels, however, as a number of trends continue to threaten the city’s affordability. Most obviously, the city’s population is growing, adding considerable stress to the housing stock. Following dramatic population decline and widespread abandonment in the 1970s, the city has rebounded, reaching an all-time high of 8.5 million residents in 2014. The city’s housing market, however, has failed to keep pace, with a shortage of new development driving up housing costs to the point that the median sales price of a home in Manhattan is just shy of $1 million. A surge in foreign investment has added further stress to the system, as a growing number of condominiums sit empty, purchased as assets rather than homes. As the real estate market surges, the “funding gap” between market and affordable rents grows, requiring ever larger subsidies to develop new affordable homes.

In theory, the city’s existing affordable housing stock is supposed to be unaffected by these market trends. Programs like public housing, rent control, and Section 8 vouchers were purpose-built to protect low-income families from a housing market out of their reach, providing long-term affordability through a variety of methods. In reality, however, a number of programmatic impediments have begun to erode the city’s affordable housing stock. This includes the expiration of affordability requirements for many housing developments built in the 1970s and 1980s as well as the removal of units from rent regulation through a technicality known as “luxury decontrol.” It is estimated that over the course of Mayor Bill de Blasio’s first term in office, 45,000 housing units will exit affordability, allowing landlords to charge market-rate rents for the first time if no new subsidies are put in place.

Even public housing—owned and operated by the public sector and thus theoretically the most secure form of affordable housing—is threatened by an increasing lack of federal money for both daily operations and long-overdue capital improvements. As the country’s largest housing authority, the New York City Housing Authority (NYCHA) has been particularly hard-hit by this federal shortfall. In 2014, the agency suffered from a $77 million budget deficit and had estimated capital needs totaling $18 billion, mostly in structural improvements to buildings, many of which are over fifty years old. As such, NYCHA officials are actively exploring new ways to generate revenues for the agency and close the funding gap. One strategy is to lease under-utilized land adjacent to public housing to private developers for new construction. Another is to restructure the funding for public housing to tap new federal sources such as the Rental Assistance Demonstration program.

A third method, which this interview explores in detail, involves the Housing Authority partnering with for-profit developers to access both private capital and federal funds only available to private applicants. In February 2015, NYCHA formed a public-private partnership with two private development companies, L+M Development Partners and BFC Partners, to revitalize a particularly distressed subset of its portfolio: six project-based Section 8 developments housing over 2,000 residents across the Bronx, Manhattan, and Brooklyn. The project-based Section 8 program, initiated in the early 1970s by the Nixon administration, was an operating subsidy mostly intended for use by private developers. However, a number of Section 8 developments fell into the housing authority’s portfolio during the city’s fiscal crisis in the mid-1970s, when NYCHA was better capitalized than the city itself.

Queensbridge Houses, largest public housing development in US (source).

Now that this situation has reversed, NYCHA is exploring new ways to generate revenues not only for its Section 8 projects, but also for its general portfolio. Transferring 50% ownership of these developments to private hands opens the door to tax-exempt bond financing and tax credits, sources generally unavailable to housing authorities. The private partners, meanwhile, benefit from Mark-Up-To-Market contracts from the Department of Housing and Urban Development (HUD), which compensate landlords for the difference between 30% of tenant incomes and market rents.

Of course, even this partial privatization of public housing has generated substantial controversy amongst tenants, local politicians, and housing advocates. To learn more about the politics behind this proposed deal, the Ash Center spoke to Rick Gropper at L+M Development Partners. One of the city’s foremost private affordable housing development companies, L+M’s evolution over the past thirty years epitomizes the growing professionalization of the sector as a whole. The conversation with Gropper reveals some of the political challenges still facing developers operating in this field, as well as new opportunities for innovation across the public-private divide.

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Adam Tanaka: Could you describe L+M’s position within the affordable housing landscape in New York City?

Rick Gropper: L+M has been around for about thirty years. The first projects that we did were under the Vacant Building Program, where the city acquired buildings that were in tax foreclosure. These buildings were vacant, and many of them were shells. The city then transferred them to private developers for a dollar. Prospective owners would bid down the rents. One would say: “I can do this job and I’ll charge the residents $500 a month.” Another would say: “I can do $450 a month.” Whoever came up with the financial structure that charged the least rent would get the building.

Then the Tax Act of 1986 introduced a new financial mechanism, the Low Income Housing Tax Credit (LIHTC). The founders of L+M figured out how to syndicate tax credits and place tax-exempt bonds, and they used that financing to charge residents even less for rent. That was the genesis of L+M, working with city and state agencies to gut-renovate buildings across the city.

As the affordable housing industry matured, the company moved to new construction, working with the city to subsidize projects on city-owned land. The city had a lot of land because they had demolished buildings for a variety of reasons. The Department of Housing Preservation and Development, the city’s housing agency, would offer different development sites for a dollar, and would then work with the developer to figure out how to finance them, whether it’s tax-exempt bonds or tax credits or subsidy, or some combination of all three. From the mid-1990s until today, L+M has been predominantly a developer of new affordable housing. We’ve slowly gotten into some other things, such as new construction of market-rate buildings, but most of our work is affordable housing.

There’s been a lot of media attention recently on the expiration of various affordable housing programs. Has L+M been involved in the refinancing of housing developments to enhance their affordability?

Five or six years ago, a lot of the housing stock that was developed in the late 1980s and early 1990s hit what’s known as the “Year 15,” which is the end of the tax credit compliance period. When you’re working with Low Income Housing Tax Credits, they’re delivered to the owner over a 10-year period, and there’s a 15-year compliance period. Once that compliance period ends, you can actually re-syndicate the tax credit properties. When you re-syndicate, you extend the affordability for another 15 years. We have worked to extend affordability in a number of areas facing market pressures, such as Harlem, the East Village, Bushwick and Clinton Hill. When you re-syndicate a building, you might put $40,000 into a unit for renovation, replacing roofs, common areas, boilers, systems and technology changes over time. Being able to re-syndicate and renovate is really important.

What factors do you think drove the city to start relying on the private sector for affordable housing?

For a long time, the city used to build and finance new housing. That ended in the 1970s. Now it’s very expensive for city agencies to build buildings. That’s just not necessarily what they’re good at. When the private sector was brought in, the city realized that they could get more housing built, do it more efficiently and cost-effectively, and create units much more rapidly than they could on their own. That said, it’s always a push and pull with the city. As a private-sector developer, we’re making money on developer fees and cash flow, and the optics of that can be a challenge, politically, for the city. People are wondering, “Why are these private developers making money off of the city?” In reality, we’re building buildings more effectively and efficiently than the city would be able to do on their own. If it develops a project, the city has to do it subject to all the public work rules that apply, which drives up costs and timelines. In the private sector, we have an outstanding record of delivering buildings on time, on budget, and safely.

With an increasing erosion of federal funding for public housing, do you see housing authorities operating in a more entrepreneurial manner?

Housing authorities are already operating in a more entrepreneurial manner, and that started at least five years ago, with the Rental Assistance Demonstration Program (RAD). That program, initiated by the Department of Housing and Urban Development (HUD), enabled housing authorities to bring in private partners if they wanted to, or even finance buildings on their own. With public housing contracts, it’s very difficult, if not impossible, statutorily, to put debt on buildings. That’s a real challenge for NYCHA, which has 170,000 units in various stages of disrepair and about $18 billion of deferred maintenance. The only way that they’re going to generate enough capital to renovate the buildings to a more sustainable standard is to partner with the private sector and to use programs like RAD so that they can finance their own buildings, generate capital, and reinvest either directly back into the building they financed, or into their portfolio.

What stakeholders influenced the outcome of your joint partnership with NYCHA? Did any political dynamic inform the outcome of the deal?

Whenever NYCHA partners with the private sector, there are a host of stakeholders who become very skeptical. The mayor was on board and the various housing agencies understood the urgency of the problem. But there was a whole other cohort of stakeholders–residents, elected officials–who needed to be convinced. So NYCHA spent a long time getting those people on board, assuring the residents that there would be no rent increases or evictions. It was an educational and outreach process.

Image of Saratoga Square, one of the developments undergoing partial privatization

The six sites are located in a wide array of neighborhoods. Presumably this makes each project quite unique, not only financially, but also politically. Can you speak to this variation?

Each property is subject to three levels of public involvement. First, the residents and the tenant association (TA) president. Then the local councilperson. From there, you have the bigger picture: the chair of the Public Housing Committee of City Council, the Committee itself, and the Speaker. So in each case, there were different concerns. The residents’ concerns were related to the specific building. The elected official’s concerns related to the specific climate of the City Council district. And then, on a broader scale, the City Council committee raised issues on transparency, long-term affordability and so forth.

In the East Village, at a property named Campos, it was a challenge to get the local elected official on board, while residents and resident leaders were in support of the deal. There’s a lot of development going on in the neighborhood, and local residents are being displaced. The council-person was skeptical that we might come in and build condos there, even though we can’t do that without NYCHA’s permission. But because of what was happening in that council district, the council-person was very protective. Anything that she could have a say in, she was clamping down on.

Compare that to the property in the Bronx, where we had a TA president who was very skeptical, and a local elected official who was less vocal against the transaction. She knew L+M, knew what we had done in the past, and understood the necessity of the transaction from a security and sustainability perspective. In the Bronx, there was less concern that we were going to convert the buildings to market-rate condos.

Can you explain how NYCHA will benefit from the partnership?

NYCHA will receive a series of payments. They received a partial payment of the purchase price when we closed on the financing of the property. Then when we stabilize the properties and convert to the permanent phase of financing, they’ll receive the rest of the purchase price. They’ll also benefit from a portion of the developer fee and ongoing cash flow. So, NYCHA’s received a big payment up front that they’ve already reinvested into other properties and used to close their budget gap for the first time in many years.

The transaction itself enabled the buildings to be renovated with about $80 million worth of hard cost, and NYCHA to take $250 million in purchase price and put it back into their budget for whatever they see fit. We did that by leveraging the mark-up-to-market HUD contracts, and using debt and tax credit equity to combine into the financial structure for the deal.

From an ongoing perspective, NYCHA will receive half the developer fee and then three quarters of the cash flow. There’s also a seller’s note that they will be paid on. So there are a number of different buckets of proceeds that NYCHA will receive, and they’ll be able to use it however they wish.

What kinds of “reasonable cause” can NYCHA cite to cancel the contract with L+M and BFC? And what is the nature of the 30-year opt-out clause governing the buildings?

NYCHA has a number of different rights in the joint venture. They are the ultimate decision-makers in basically everything. We can’t sell the property; we can’t convert to condos; we can’t really do anything without NYCHA signing off on it. And we have no interest in doing that with these properties. Through the deal we are receiving HUD contracts, which are very valuable and pay market rents. NYCHA has a purchase option in 15 years and can take back the properties if they want to. And then, at the end of the 30-year affordability period, NYCHA is the ultimate decision-maker. They decide what happens at that point. Most likely, we will do a similar transaction and extend the affordability further.

Do you see this deal as providing a clue to the future of affordable housing in New York?

We see this transaction as a model for the potential of public housing. We can generate proceeds that NYCHA can use to reinvest in their portfolio. We renovate their properties and manage them. And we do all of that in a more efficient and effective manner than NYCHA can. It’s a public-private partnership and a real joint venture with NYCHA in which NYCHA has decision-making capability and can leverage the strength of the private sector in terms of what they’re good at doing: building and managing housing.

There’s a way to do that effectively and in a real partnership where the residents feel like their interests are protected, and from our perspective, we’re making money off the property, which gives us an economic incentive to do the right thing and reinvest money into the property and operate it well. As the property does better, we do better.

Adam Tanaka is a Ph.D. student in urban planning at the Harvard Graduate School of Design and a Meyer Fellow at Harvard’s Joint Center for Housing Studies. His research focuses on housing policy and development in the contemporary United States, drawing from the fields of political science, law, urban planning, and real estate to develop methods for understanding and improving urban housing provision.

Many thanks to Jessica Yager at the Furman Center for Real Estate and Urban Policy for helping to arrange the interview.

Read more in the Challenges to Democracy series, including Adam Tanaka's posts.

Read the opening post to this series, which we cross-posted in April 2015.