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.

Why Does Affordable Housing Need Saving?

Alexander von Hoffman
Senior Research Fellow

In recent years the skyrocketing housing prices in major cities in the United States have raised the specter of driving out people who cannot afford to pay the increasingly high rents. Many housing advocates argue that the most practical way to prevent dislocation of the poor is to save government-subsidized privately owned low-income rental dwellings.

Why does such “affordable housing” need to be saved? After all, you might point out, public housing doesn’t change into private market housing.

In fact, subsidized rental housing is quite different than public housing. Begun in the 1930s under President Franklin Roosevelt, public housing was created and managed solely by government agencies. Under subsidized housing programs, the first of which started about 1960, the federal government gave various financial incentives to private nonprofit and for-profit companies to build, manage, and own rental projects for low-income households. Public housing was pretty much all government; subsidized low-income housing took the form of public-private collaborations.

Most significantly, the projects under the two housing programs ran for dramatically different lengths of time. The federal government financed public housing over such long terms – with sixty year construction loans, for example – as to make it seem almost permanent. In contrast, the terms of the subsidies under public-private housing schemes were relatively short – most for only twenty or twenty-five years.

Back in the 1960s and ‘70s, the authors of the subsidized housing programs gave little thought to what would happen when the subsidies ended. But years later, when the subsidies began to expire, people realized that enormous numbers of low-income dwellings could easily disappear. Poor people would have no place to live. In response, housing advocates raised the cry, “preserve affordable housing!”

New Franklin Park Apartments in Boston, Massachusetts

The story of how people realized that privately owned subsidized housing needed to be saved and how they went about saving it is the subject of my newly published Joint Center for Housing Studies working paper, “To Preserve Affordable Housing in the United States: A Policy History.”

For some time now, I have been examining the subject of public-private low-income housing. Unlike public housing, remarkably few people know about these programs. Ask about them and you might get a vague response, “Is that Section 8?” Such unawareness is remarkable because these subsidized housing programs have created millions of low-income rental units, far more than public housing has.

I first studied the origins and causes of America’s subsidized low-income housing and published my findings in an article, “Calling Upon the Genius of Private Enterprise: The Housing and Urban Development Act of 1968 and the Liberal Turn to Public-Private Partnerships” published in the journal Studies in American Political Development (October 2013).

Now in the Joint Center working paper, I have explored the way America’s public-private housing policy unfolded.

Skyview Park Apartments in Scranton, Pennsylvania

My research reveals that the public-private housing programs created in the 1960s and 1970s were highly productive but beset by troubles. Buffeted by bad underwriting, weak management, and economic hard times, many of the early housing projects deteriorated. Housing advocates for the poor jumped in to rescue the troubled projects from defaulting, becoming unlivable, or both. After studying the problems, the advocates sought ways to buttress the incomes of financially troubled housing projects or convey them to responsible parties. In Washington, sympathetic federal officials implemented new programs and procedures to help the advocates stabilize the conditions of the beleaguered properties.

The process, I found, created a cadre of experienced and informed housing activists and government officials. So when the subsidies of the housing programs began to expire in the 1980s, these policy veterans threw themselves into preventing the low-income residential stock from either deteriorating or being converted to expensive private-market housing.

Their efforts, however, set off a political backlash from the owners of the housing who insisted on the right to do what they wanted with their property, including cashing out. The two sides fought each other in the courts, Congress, and federal government until the late 1990s when they compromised and joined forces.

Since then, a broad coalition – including advocates for the poor, for-profit and nonprofit developers, government officials, and philanthropic institutions – coalesced to support preservation of affordable housing. Since the 2000s, the National Housing Trust, with the support of the MacArthur Foundation, has led a highly successful campaign to enlist state and local governments in the cause.

In short, the plethora of programs and efforts to maintain the subsidized low-income housing has become a key component of America’s low-income housing policy. Perhaps it is not surprising, then, that people now suggest preservation of affordable housing as a practical way to prevent displacement of the poor.

Read the working paper

Affordable Rental Housing Development in the For-Profit Sector: A Case Study of McCormack Baron Salazar

by Rachel Bratt
Senior Research Fellow

Despite the private for-profit sector’s importance in affordable housing development, there has been relatively little research on the sector. Many researchers working on affordable housing issues have, instead, focused attention on the role of nonprofit organizations and public housing authorities. My new working paper on one of the country’s leading for-profit affordable housing developers, McCormack Baron Salazar (MBS), provides some insights into their successful business model.

In view of the fact that the private for-profit sector is not able to build housing that is affordable to lower income households without public assistance, while still realizing the desired level of profit, the federal government has been providing various incentives to the private sector for more than 50 years. Public incentives, which can be used by both for-profit and nonprofit developers, replaced the prior federal strategy of providing deep subsidies to local housing authorities to produce public housing. Although private for-profit developers have the potential of adding “market discipline” to deals, a key challenge is how to provide sufficient incentives to encourage private sector participation, while also safeguarding the public purposes of housing programs—providing housing over the long-term, at prices that are affordable to lower-income residents who are unable to compete in the private housing market.

The Low Income Housing Tax Credit (LIHTC) program, created in 1986, cemented the role of private developers in affordable housing development and is now the major federal housing subsidy program aimed at assisting lower-income households. According to data compiled by JCHS Research Analyst Irene Lew, for-profit developers have produced about 78 percent of the LIHTC projects placed in service between 1987 and 2013.

A search of the literature* explores the extent to which for-profit developers meet the requirements of the “Quadruple Bottom Line.” This concept suggests that all affordable housing developments should:

• have the financial backing necessary to preserve the development’s long-term affordability;
• address the social and economic needs of the residents;
• contribute positively to the neighborhood; and 
• be environmentally sustainable (Bratt 2008a, p. 358; see also Bratt, 2012). 

The case study of MBS, which focuses on their home-base city of St. Louis, presents information on this company’s approach to meeting these standards. MBS is well aware of these concerns and appears to be incorporating them into their operations.

The roots of MBS go back to 1973, embracing the vision “to rebuild low-income communities by providing quality housing options for all people.” The firm’s first projects involved the development of relatively small-scale mixed-income rental properties on single sites. This model changed over time, with the major focus being the redevelopment of large deteriorated housing developments into new mixed-income communities.

In addition to revitalizing places, the firm has a strong commitment to the residents of the communities they build. With the assistance of Urban Strategies, the separate nonprofit organization they formed, MBS works with local officials to develop high quality new neighborhood schools, collaborates with social services providers, and creates well-designed developments with amenities that support family living. Through all these efforts, MBS strives to promote the economic security of their residents.

Over the years, MBS has identified a group of “essential ingredients” that are needed for it to make a commitment to do a specific project:

First, in understanding their role as outsiders to the community, MBS believes that a strong local partner with a stake in the development is essential. This can be a local government, a philanthropic investor, a large nonprofit institution such as a hospital or university, or a private business that is willing and able to contribute significant financial and in-kind resources to the early phases of the project.

Second, the proposed development must have an attractive location. It must be either downtown or close to an anchor institution in that community. Often, the lead local development partner is, in fact, that anchor institution and therefore has a great deal to gain by upgrading the general area in which it is located.

Third, and consistent with securing an appropriate local partner, MBS works to limit as much as possible their up-front risk in a deal. Thus, MBS expects its local partner(s) to cover most or all of the soft costs involved in getting the development launched, including architectural and engineering studies and acquiring the necessary permits. Once development is underway, MBS becomes fully in charge of the process and is ready to assume the bulk of the risk.

Fourth, in order to make MBS’s large, complex deals work, and to ensure that the housing will be affordable to the intended group of households, additional financial resources are typically required (e.g., from the federal, state or local government, from a private institution, from a philanthropic entity, and/or from a corporate partner). In short, there is usually a great deal of subsidy money involved.

Fifth, development fees must be adequate, and, for the most part, are non-negotiable.

Even a project that incorporates all of MBS’s “essential ingredients” may still face significant challenges, largely due to external constraints and the complexity of developing and managing high quality affordable housing. A problem facing some MBS developments is that insufficient public housing authority reserves have been set aside. This issue is looming in projects owned by the St. Louis Housing Authority, for example, where some stakeholders fear that the high quality of the developments will suffer once reserves are depleted. However, unless Congress drastically cuts public housing operating subsidy funding, MBS principals feel that such depletion is unlikely at least within the next few years.

A second major issue is the lack of a budgeted line-item for resident services. Although MBS has a commitment to providing high quality supports and educational opportunities for its residents through Urban Strategies, its ability to do so depends on funding from outside sources.  Many nonprofit organizations strive to provide resident services through cash flow generated from the operation of their buildings.

MBS’s redeveloped properties are typically only able to offer the new housing to about 20-30 percent of the original residents. Although this is apparently higher than the standard for this type of redevelopment project, the often-heard criticism of HOPE VI projects, that resident selection processes result in “creaming” (admitting only the most stable and reliable tenants to the new developments), also appears to be a factor in MBS properties. The other side of this argument, of course, is that property managers and resident committees are responsible for assuring, as much as possible, that the new tenants are able to pay their rent and that they will not cause any problems for management or for the other residents.

Going forward, it is not clear how easy it will be for any firm, including MBS, to pursue its preferred strategy—large-scale, mixed-income development. A number of circumstances aligned in a positive way and provided fertile ground for MBS’s current business model to emerge and flourish.

The paper concludes with an overview of the components of successful public-private affordable housing programs, regardless of whether the developer is a for-profit or a nonprofit. The paper also suggests that there is a need to better understand the full range of for-profit affordable housing developers, including their overall strengths and weaknesses; clearly, MBS represents only one type of for-profit firm. Certainly, the mission driven aspects of MBS’s business model are not typically a motivating factor for the great majority of private for-profit affordable housing developers. The recommendations also emphasize the importance of a strong and committed federal role in affordable housing development, including the need for deeper housing subsidies, with less reliance on multiple funders for putting together affordable housing development deals. Even a large, well-capitalized firm like MBS cannot develop affordable housing without additional and significant public and private resources, and assembling them can be a difficult and time-consuming process.

---

Renaissance Place at Grand, St. Louis, Missouri

• The Arthur Blumeyer public housing development was built in 1968, housing 1,162 family and elderly households.
• HUD awarded the St. Louis Housing Authority a $35 million HOPE VI grant for Blumeyer’s redevelopment in 2001.
• The new community, renamed Renaissance Place by residents, and developed by MBS, contains 512 mixed-income apartments, including 140 which are in universally-designed accessible buildings

Context of the large-scale housing development – a neighborhood within a neighborhood.

Photo by Peter Wilson, courtesy of McCormack Baron Salazar

Photo by Peter Wilson, courtesy of McCormack Baron Salazar

---

Note * The  literature review part of the paper was written jointly with Irene Lew, Research Analyst, Joint Center for Housing Studies

References

Bratt, Rachel G. 2008. "Nonprofit and For-profit Developers of Subsidized Rental Housing: Comparative Attributes and Collaborative Opportunities." Housing Policy Debate 19(2):323-365.

___. 2012. "The Quadruple Bottom Line and Nonprofit Housing Organizations in the United States." Housing Studies 27(4): 438-456.

Evicted: Confronting Some Uncomfortable Truths

Chris Herbert

Managing Director

Matthew Desmond’s new book Evicted: Poverty and Profit in the American City is just being released today, but it has already generated an amazing buzz which started with an article in the New Yorker a few weeks back, and has continued with reviews and commentary in major news outlets across the country. His bottom line conclusion that “without stable shelter everything else falls apart” is a message that housing advocates have long felt keenly. Given that the country’s serious housing challenges have failed to make an appearance at any Presidential debate, the substantial public attention the book is generating is profoundly important.

I got the chance to read an advance copy of the book myself and finished it this past weekend. As someone familiar with Desmond’s work and with a strong interest in trying to bring attention to the desperate straits that some 11 million renter households face by having to devote more than half their income to rent, I expected to be moved by the book’s up-close-and-personal depiction of struggling renters in Milwaukee. While I was certainly moved, what I didn’t expect was how challenged I would be by Desmond’s account.

The Joint Center for Housing Studies has for many years been documenting both the magnitude and consequences of a lack of affordable housing through meticulous analysis of national survey data to help fuel the policy debate. But while numbers may inform the head, they don’t move the heart and so by themselves have a hard time moving the needle on policy. Housing advocates have come to appreciate the importance of personal stories in putting a face on the numbers. The Make Room campaign, launched by Enterprise Community Partners in the past year, is a particularly effective attempt at documenting powerful stories of struggling renters to help sway hearts as well as minds.

Desmond’s stories are also powerful, but in a very different way. The Enterprise campaign focuses on people who have been undone by sickness and other life events outside their control, who struggle to make a decent living, not from lack of trying, but by a lack of good paying jobs. In contrast, Evicted largely tells the story of people who are dealing with what often seem like self-inflicted wounds—drug addiction and questionable choices about how they spend what little money they have, people who are prone to violence and seem to make only sporadic attempts to work. In short, while Enterprise shines on a light on the so-called ‘deserving poor,’ Desmond doesn’t shy away—in fact, seems to seek out—the “undeserving” poor; people whose own families and social networks often refuse to offer assistance.

But through the course of the book, and with the support of hundreds of footnotes that draw on the academic literature and put forth more of Desmond’s own arguments, he builds a convincing case for how the circumstances of grinding poverty lead to choices that otherwise might be hard to understand and how drug addiction and a history of abuse and deprivation exert a powerful tide that is extremely hard to escape. In short, Desmond forces readers to confront their own embedded notions of the “deserving poor.”

One of the most thought-provoking aspects of the book for me was a footnote that confronts this issue directly. Desmond notes that liberals tend to ignore the “nastier, more embarrassing aspects of poverty.” Citing William Julius Wilson, he argues that this approach will ultimately fail to garner support anyway as the public wants to see these behaviors taken into account. Lambasting this approach, Desmond writes, “There are two ways to dehumanize: the first is to strip people of all virtue; the second is to cleanse them of sin.” He’s right. We do need to construct a policy argument that accounts for the sinners as well as the saints—not least of all because no one’s a saint.

Evicted has also challenged my thinking about how the housing market operates at the lowest rungs of the ladder. On its face, the rental market would appear to fit the classic competitive model: there are many buyers and many sellers, information on rent levels is fairly easily available, and there are few barriers to becoming a landlord. Sure, rents are quite high relative to property values, but wouldn’t high maintenance costs, the very real risk of non-payment of rent, and the costs of carrying out evictions account for the high rents? Maybe in part. But the examples Desmond details suggest that, even after taking these costs of doing business into account, the returns earned by landlords are extremely high. The most telling example is the $16,900 house in relatively good condition in a stable block. The mortgage payment on such a small mortgage would be less than $100 monthly. Even with property taxes and maintenance factored in, it wouldn’t take much rent to earn a decent return. And he notes the landlord had acquired other properties for as little as $5,000.

So why aren’t these markets more competitive? One barrier to entry is the lack of access to capital by those who are looking to live in these neighborhoods. Given what’s involved in managing these properties, there may be few landlords who are willing to take on property ownership under these conditions, limiting competition. Landlords also have over a barrel those tenants with a history of eviction, a criminal record, or no visible means of support. With the need for housing so fundamental, landlords can extract the lion’s share of a household’s income. As Desmond notes, researchers have focused a great deal of attention on the provision of subsidized housing but very little on the supply of non-subsidized, low-cost rental housing where a large majority of the poor find their homes. As this book makes clear, this is a major oversight.

So what does Desmond propose as policy responses? To begin with, he advocates for an entitlement program for low-income renters to obtain housing vouchers in the private market. This proposal is actually not that radical, as the Bipartisan Policy Center Housing Commission made this same recommendation. There is a strong case for such a policy, particularly for those at risk of homelessness who are profiled in Evicted. The short-term outcomes report by Abt Associates for the Family Options Study provides compelling evidence that providing housing vouchers to families coming out of the shelter system produces more stable living situations, reduces domestic violence and substance abuse, keeps families together, and reduces the number of school moves among children. And it achieves these results at no greater cost than the traditional assistance families receive coming out of shelters. Desmond also advocates for publicly provided legal assistance for renters in eviction hearings. Given the stories presented in Evicted, there is a clear need to level the playing field between landlords and tenants. If tenants have access to universal vouchers, landlords will have less to worry about in terms of unpaid rent.

The one part of Desmond’s recommendations that puzzled me is that he suggests relaxing housing quality standards as part of a universal voucher program to entice more landlords to participate. He argues in a footnote that in countries where such programs exist without quality standards, tenants are able to use the market power of their voucher to choose higher quality units. But given how the current system exploits renters’ vulnerabilities to accept appalling housing conditions, I would worry about leaving the market to determine this outcome.

In fact, Desmond makes a forceful case that exploitation of the poor thrives when it comes to essentials like housing and food. For that reason it might also have been useful to consider including some recommendations about expanding property ownership among those who would be less likely to exploit the poor—including the poor themselves. In cities like Milwaukee where home prices in inner city neighborhoods are so low, homeownership may be a cost-effective solution for some. More ownership of low-cost rentals by the public or non-profit sectors could also provide needed competition for for-profit landlords.

What’s also missing from his recommendations are supports beyond just rental assistance that are needed to address some of the root causes of instability, such as treatment for addiction and mental health disorders. Housing assistance is a critical step but by itself may not be sufficient to help people become stable tenants. But Desmond is focused on the housing part of the equation and so can’t be faulted for looking at all the ways we need to shore up our social safety net.

Overall, Evicted tells a powerful story and presents persuasive evidence about the fundamental importance of housing instability as a cause and a consequence of poverty, and in the process makes a compelling case for the need to foster housing stability as part of efforts to address poverty. Evicted is that rare book that will generate spirited thought and discussion not only among a general audience but also among those of us who spend a great deal of time trying to understand the critical interplay between housing affordability, poverty, and social mobility.

--

On Thursday, March 3 at 6 PM The Malcom Wiener Center for Social Policy at the Harvard Kennedy School is holding a book launch event for “Evicted: Poverty and Profit in the American City” with author Matthew Desmond, Co-director of their Center’s Justice and Poverty Project, along with a distinguished panel. View their event flier >

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.

---

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.

---

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.

House Appropriations Bill Underfunds Housing Assistance Programs

by Irene Lew
Research Assistant

The FY 2016 appropriations bill covering spending for Transportation, Housing and Urban Development, and Related Agencies (THUD) is headed to the full House for debate this week. Approved on May 13 by the House Appropriations Committee on a party-line vote, the FY 2016 bill provides $42 billion for HUD, which is $1 billion above the FY 2015 enacted level but still $3 billion below the amount requested in the President’s budget. Due to the Congressional Budget Office’s projection of a $1.1 billion decline in revenue from FHA insurance premiums in FY 2016 and a shift to a calendar-year funding cycle for the project-based rental assistance program, HUD had required an increase of about $3 billion in FY 2016 just to maintain rental assistance for the millions of families that currently receive it. However, the bill has approved funding for rental housing assistance programs that are well below levels requested in the President’s budget (Figure 1).

Source: House Appropriations Committee on Transportation and Housing and Urban Development

The proposed funding level for HUD programs in the appropriations bill reflects the continuing impact of spending caps on non-defense discretionary programs that had been established as part of the 2011 Budget Control Act. As OMB Secretary Shaun Donovan points out, real budgeted discretionary spending (referring to programs that are funded on an annual basis and exclude entitlements such as Medicaid and Social Security) now stands at its lowest level in a decade. The THUD bill slashed funding for the public housing capital repairs program by nearly $200 million from the FY 2015 appropriation. Furthermore, despite a 3 percent funding increase over the FY 2015 level for housing choice vouchers, this increase does not restore the 67,000 vouchers lost to sequestration in 2013 and the amount allocated for renewals falls nearly $183 million short of the amount that HUD estimated it would need for renewing assistance for all current voucher holders in FY 2016.

Furthermore, of concern for many affordable housing advocates is the proposed transfer of all the funding set aside for the National Housing Trust Fund (HTF) in FY 2016—an estimated $133 million— to the HOME program in order to account for a 15 percent reduction in the appropriation for HOME. Although the Committee voted to maintain HOME funding at the FY 2015 level of $900 million, 85 percent of this amount ($767 million) will be directly appropriated for the program while the remainder will be transferred from the HTF, which was finally being capitalized after a long delay. This transfer puts the HTF at risk because the bill forbids Congress from putting any other money into the HTF following the transfer.

The capitalization of the Trust Fund would have supported the expansion of rental housing targeted at  households with extremely low incomes (up to 30 percent of Area Median Income), the first new production program aimed at this group since the creation of the Section 8 program in 1974.  Existing affordable housing production programs like HOME and the Low Income Housing Tax Credit (LIHTC) program have higher income-qualifying limits than those established by the HTF, with income eligibility capped at 80 percent of Area Median Income (AMI) for HOME and 60 percent of AMI for the LIHTC program. In order to make tax credit units affordable to extremely low-income tenants, units in these properties often require layering of additional rental subsidies in the form of vouchers or project-based assistance, according to a 2012 report from NYU’s Furman Center. Furthermore, while state housing finance agencies—the entities responsible for allocating housing tax credits—may provide incentives for developers to set aside a certain portion of LIHTC units for extremely low-income households, HOME does not provide any specific set asides for the lowest-income renters.

Unlike HOME and other federal housing assistance programs, the HFT was created with the intention that it would provide a predictable pool of funding not subject to the uncertainty of annual appropriations. The potential elimination of the NHT in the current House appropriations bill comes at a time when the need for housing that the lowest-income renters can afford has never been greater. Rental assistance enables households with the lowest incomes to access safe, decent, and affordable housing by making up the difference between private market rents and what these families can afford to pay. Yet the capacity of federal, state and local governments to provide aid continues to lag behind a growing need. HUD’s latest Worst Case Needs report estimated that while the share of those with assistance has remained essentially unchanged from a decade ago, with a third of eligible households receiving rental assistance in 2013, (Figure 2), overall numbers of extremely low-income renters have increased by 22 percent over the past decade, from 9 million in 2003 to 11 million in 2013.

Note: Extremely low-income refers to households with incomes not exceeding 30 percent of Area Median Income.
Source: HUD, Worst Case Needs Reports to Congress. 

In this tight budgetary climate, the preservation of the existing subsidized stock in the private market, especially those units assisted through the LIHTC program, remains a key part of addressing the housing affordability crisis over the coming decade. Although the LIHTC program has higher income-qualifying limits than public housing or other rental assistance programs, a recent HUD report noted that a sizable share of LIHTC households—46 percent—have extremely low incomes. Tabulations of the most recent data from the National Housing Preservation Database show that over 1.2 million (58 percent) of the nearly 2.2 million total federally assisted units (excluding units subsidized through housing choice vouchers and public housing units without additional project-based rental assistance) with affordability requirements expiring between 2015 and 2025 are subsidized through the LIHTC program (Figure 3). As I pointed out in a previous blog post, units subsidized through the LIHTC program are at lower risk of being removed from the affordable stock and most continue to operate as affordable housing without new subsidies even when tax credit properties reach the end of their affordable-use compliance period. Recent HUD initiatives such as a pilot program to expedite approvals for the purchase or refinance of LIHTC properties through FHA’s Section 223 program will also help preserve the affordability of existing tax credit properties, with estimated lending for FHA-insured LIHTC projects doubling from roughly $900 million to $1.8 billion last year. 

Notes: Other units include those funded by HOME Rental Assistance, FHA insurance, Section 202 Direct Loans, USDA Section 515 Rural Rental Housing Loans. Date of expiration refers to latest date of any subsidy expiring in property. Data includes properties with active subsidies as of February 20, 2015. 

Source: JCHS tabulations of National Housing Preservation Database, Public and Affordable Housing Research Corporation and National Low Income Housing Coalition.

What Does the President’s Budget Mean for Affordable Housing?

By Irene Lew
Research Assistant

In his ambitious Fiscal Year 2016 budget submission to Congress last month, President Obama requested funding increases for nearly all of HUD’s programs, with significant boosts for rental assistance and homeless assistance programs. In total, the president’s budget has proposed $49.3 billion in gross discretionary funding for HUD programs, nearly $4 billion higher than the amount that Congress enacted in FY 2015 (Figure 1).

Source: White House Office of Management and Budget; HUD

Proposed Funding Increases Prioritize Housing Affordability and Supportive Services

As HUD’s budget documents indicate, nearly three quarters (72 percent) of the requested $4 billion funding increase is dedicated to two core assisted housing programs: project-based rental assistance and housing choice vouchers (Figure 2). Together, both programs currently serve 3.6 million low-income households, according to HUD administrative data.   

Source: White House Office of Management and Budget; HUD 

The president’s request of $10.8 billion for the project-based rental assistance program is 11 percent higher than the FY 2015 appropriation and would fully fund 12-month renewals of all contracts and contract amendments. A complete calendar year of funding would eliminate the uncertainty of funding for owners with contracts that received less than 12 months of funding in FY 2015 due to the shift of the program from a fiscal year to a calendar year funding cycle.

The budget has also proposed a 9 percent increase for HUD’s largest rental subsidy program, housing choice vouchers, which had been hit hard by sequestration cuts in 2013. The increased funding request would renew all existing vouchers for 2.2 million of the country’s most vulnerable households and restore 67,000 vouchers that were lost to sequestration.  The voucher program assists households with the lowest incomes who would have difficulty paying for housing without a subsidy: 68 percent of voucher households have annual incomes of less than $15,000. If the president’s requested appropriation of $21.1 billion for the housing voucher program is enacted, the program would serve an additional 200,000 households (for a total of 2.4 million households).  However, as market rents rise and renter incomes continue to fall, the growth of the voucher program has not kept up with the growing unmet need for rental subsidies over the past decade. Between 2001 and 2013, the share of very low-income renter households without assistance who paid more than half of their income for rent, lived in severely inadequate housing or both (those with worst case needs) jumped by 53.9 percent, according to a preview of HUD’s 2015 Worst Case Needs Report cited in the agency’s budget documents. Yet, the voucher program expanded by just 11.6 percent over the same period, addressing only a fraction of the growth in very low-income renters with worst case needs.

Building on successful federal efforts to reduce homelessness among veterans using housing vouchers, about 45 percent of the restored vouchers (30,000) will be targeted toward additional groups such as homeless families and Native American households, as well as survivors of domestic and dating violence, and youth aging out of foster care. Unlike previous years, there won’t be any new VASH vouchers for homeless veterans; vouchers for this group will be rolled into the total pool of new vouchers. The President’s budget also includes a 16 percent increase in homeless assistance grants from the FY 2015 enacted level, which would help fund more than 25,000 new units of permanent supportive housing for the chronically homeless. Since the 2010 release of the first federal strategic plan to end homelessness, appropriations for homeless assistance have increased by 14 percent.

In good news for many affordable housing advocates, the FY 2016 budget also estimates that $120 million in mandatory funding will finally be provided for the National Housing Trust Fund, the first new housing production program targeted to extremely low-income families since the launch of the Section 8 program in 1974. The Housing Trust Fund was signed into law in 2008 with the directive that it would be financed with contributions from the GSEs. However, before Fannie Mae and Freddie Mac could begin paying into the Trust Fund, they were hit hard by the financial crisis and were placed into conservatorship by FHFA in 2008; FHFA also suspended GSE contributions to the Trust Fund, stalling its implementation. In December 2014, after determining that the financial situation of the GSEs had stabilized, FHFA director Mel Watt finally lifted this suspension and directed Fannie Mae and Freddie Mac to set aside funds for the Trust Fund starting January 1, 2015.

Additional budget highlights for FY 2016 include the proposed expansion of existing HUD programs focused on improving the economic self-sufficiency of tenants with vouchers and those in public housing, including expansion of the Moving to Work demonstration program, an additional $10 million for the Family Self-Sufficiency program, and an $85-million increase in funding for Jobs-Plus. The proposed funding increase for Jobs-Plus will be used to extend the program to Native American households. This year’s budget also outlines several new pilots, including a $300 million mandatory appropriation for a new local housing policy grants program and a rental assistance demonstration program in consultation with the Department of Health and Human Services (HHS) that aims to help older tenants in Section 202 housing avoid institutional care by integrating health and wellness into a housing-and-supportive-services model. 

Proposed Increases for FY 2016 Do Not Reverse Substantial Cuts to Other HUD Programs Over Last Decade  

With a continued emphasis on demand-side subsidies such as housing vouchers, federal funding for necessary repairs to public housing—the nation’s oldest subsidized housing program—and other HUD programs such as Section 202, HOME, and the Community Development Block Grant (CDBG) is still well below typical levels a decade ago (Figure 3). 

Source: White House Office of Management and Budget; HUD 

The $455 million request for the Section 202 program is up 8 percent from the FY 2015 enacted level but includes no new construction funds and does not reverse a $327 million reduction in appropriations over the past decade. Furthermore, the requested FY 2016 appropriation for HOME is 18 percent higher than the previous year’s appropriation, but does not restore the 53 percent decline in funding between FY 2005 and FY 2015. 

The CDBG program was the only HUD program that did not see any funding increases for FY 2016, with the president’s budget proposing a 7-percent reduction in funding for the CDBG program from $3 billion in FY 2015 to $2.8 billion in FY 2016. This proposed reduction comes on the heels of a 37-percent decline in appropriations for the CDBG program over the past decade. However, part of the proposed decrease for the CDBG program in FY 2016 also reflects federal efforts to overhaul and modernize the 40-year-old program, including improved targeting of grants to the neediest communities. The CDBG and HOME programs will be part of a new HUD and Department of Health and Human Services (HHS) initiative proposed in the FY 2016 budget that enables states and localities to streamline and combine their CDBG, HOME, and HHS block grants into one flexible fund.

Meanwhile, in spite of a proposed $95 million increase (5 percent) between FY 2015 and FY 2016 for the public housing capital program, the entire increase in funding would be used to expand the Jobs-Plus program and would not mitigate a 28-percent decline in federal appropriations for the public housing capital repairs fund over the past decade. However, the proposed expansion of the Rental Assistance Demonstration (RAD) in FY 2016 would continue to leverage private investment to help address the estimated $26 billion backlog in necessary repairs for public housing by converting public housing units to long-term project-based section 8 contracts. The budget has proposed eliminating the current RAD cap of 185,000 conversions and has requested $50 million to finance the conversion of another 25,000 public housing units.

LBJ’s Biggest Housing Program that No One Remembers

by Alex von Hoffman
Senior Research Fellow

Now that we have reached the half-century mark since President Lyndon Johnson began passing legislation to achieve his vision of a Great Society, it is worth remembering one momentous law that has been largely forgotten: the Housing and Urban Development Act of 1968. When he signed the act, LBJ declared it to be “the most farsighted, the most comprehensive, the most massive housing program in all American history.” Truly, its goal was breathtaking: to replace within ten years every slum dwelling in the country by building six million homes for low- and moderate-income families.

The 1968 act forever changed the politics and policy of low-income housing in this country, and for that reason it has long fascinated me. A few years ago I published my early research on the origins of the 1968 housing law as a working paper, and more recently have written about the causes and effects of the act for the journal Studies in American Political Development in the article “Calling upon the Genius of Private Enterprise: The Housing and Urban Development Act of 1968 and the Liberal Turn to Public-Private Partnerships.”

President Lyndon Johnson signing the 1968 Housing and Urban Development Act
(LBJ Library photo by Donald Stoderl)

The great accomplishment of the 1968 act was to shift housing policy toward programs that used the private sector, not government, to create and run low-income housing. Until the law was passed, public housing was the nation’s principal social-welfare program.  The public housing program dated from the 1930s and, as a creation of the New Deal, used government agencies to develop, own, and manage apartments that were rented to low-income people.  In the 1960s, few federal programs used private developers to provide social housing, and those that did had produced only small numbers of dwelling units.

And then came the long hot summers.  Violent riots rocked the African-American ghettos of American cities, leaving hundreds dead, thousands injured, and tens of millions of dollars of damage from burning and looting.  The situation called for action, especially in housing.  Most observers – including the famous Kerner Commission (officially named the National Advisory Commission on Civil Disorders) – were convinced that a major reason that African Americans were rioting in the streets was that they were condemned to live in ghetto slums.

12th Street and Clairmount, Detroit, July 23, 1967 (Detroit Free Press)

Seeking a way to right this wrong, President Johnson established a blue-ribbon committee to rebuild the slums of America. But the president made clear that he wanted recommendations that would fall outside the traditional confines of the government-run programs that he had long championed.  “We should call upon the genius of private industry,” LBJ asserted, “to help rebuild our great cities.”  

At the time, executives from hundreds of businesses were volunteering to help solve the nation’s pressing urban and social problems.  The president welcomed these “public-private partnerships,” in part because the soaring costs of the Vietnam War prevented him from asking Congress to foot the entire bill for his ambitious social programs. Thus, LBJ named the president of the corporate conglomerate Kaiser Industries, Edgar Kaiser, to head his housing committee, stacked the committee with business executives, and asked them to propose ways that businesses – not government – could rebuild the slums. 

Taking Johnson’s cue, Democratic Congressional leaders, Robert Weaver – by then secretary of the new Department of Housing and Urban Development (HUD) – and the Kaiser committee worked together to write the ambitious social housing legislation to be carried out by the private sector.  In the summer of 1968, Congress passed the bill by overwhelming margins.

Remarkably, the once bitterly divided housing field came together to support the bill.  For decades, liberal interest groups had fought ardently to promote public housing, while industry trade associations fiercely opposed public housing at every turn.  Now liberals recognized that public housing was politically unable to generate six million new low-income housing units and agreed to try a new approach.  The industry trade groups naturally approved of the 1968 act’s private-sector programs.  After all, the officers of the National Association of Home Builders had worked with the Kaiser committee, the Democratic congressional leaders, and HUD to shape the bill’s provisions.  This political truce proved to be a historic turning point: since the 1968 liberal reformers and housing industry leaders have worked together to lobby the government for low-income housing. 

The 1968 act contained three major housing programs.  Perhaps the most successful was the rental housing scheme, called Section 236.  It provided private developers of low-income housing with financial incentives, including subsidizing the interest rate they paid on their mortgages.  By end of the 1970s, this rental program had encouraged the development of about 540,000 apartments, which exceeded the output of the public housing program. The financial incentives were poorly conceived, however, and in 1974 the federal government replaced the program with the better known and even more productive Section 8 program, which relied on the simpler mechanism of rental assistance to promote new construction. In 1986, the government enacted low-income housing tax credits, which has become the most productive of all the private sector type of housing programs.  As a result of the changes started by the 1968 act, today private organizations, about three-quarters of which are for-profit companies, develop most subsidized low-income housing in the United States.

Another of the 1968 act’s programs helped low-income families purchase their homes.  When a popular Republican senator from Illinois, Charles Percy, proposed a homeownership plan that utilized nonprofit agencies to counsel and first-time low-income home buyers, Senate Democrats and HUD officials pushed aside his plan and passed a large-scale building program that subsidized private lenders and promoted private home builders. In the 1970s this program produced 419,000 new homes for low-income families.  It was temporarily halted in the mid-1970s due to a scandal and terminated in 1987, but low-income homeownership returned in the 1990s to become a permanent fixture of American housing policy.

Madison Park Village in the Roxbury neighborhood of Boston;
an example of subsidized housing built after 1968 (Photo by Glenna Lang)

The Kaiser committee contributed the third component of the 1968 act’s social provisions for private housing finance.  It established the National Corporation for Housing Partnerships (NCHP), which raised money from corporate members and investors to provide working capital and, if needed, technical assistance, to developers of local housing projects.  It turned out that Section 236 tax incentives, especially the use of accelerated depreciation schedules, attracted the bulk of investors so that in ten years the NCHP helped develop a relatively meager 40,000 dwellings.  It pioneered the syndication of low-income housing, which resurfaced later and particularly after 1986 when syndicators found corporate investors to purchase low-income housing tax credits in return for equity investment in housing projects.

The Housing and Community Development Act of 1968 began a transformation of American housing policy.  At a time of national urban crisis, it brought warring housing interest groups together in a political alliance that has persisted ever since.  Moreover, the law turned away from government-centered public housing and firmly committed the federal government to using private-sector agents – especially for-profit businesses – to develop and run social housing.  Reflecting the thoroughness of this transformation, private developers now routinely redevelop public housing projects. As we commemorate the many landmark Great Society laws, don’t you think we should recall the 1968 housing act?