New York Housing Conference released a report today on the alarming share of affordable housing buildings that are in distress and the need for action to preserve these buildings. Two studies of samples of affordable housing buildings showed that more than half are likely experiencing operating deficits, where rents are not covering expenses. This means that a significant number of affordable housing buildings are in distress. Policy interventions to increase revenue and decrease expenses are required to prevent these buildings from defaulting on their loans with private banks and the City of New York. Interventions are especially needed if there will be a four-year rent freeze.
Affordable housing is publicly subsidized, and income restricted by a regulatory agreement with a city or state housing agency. They represent about 213,000 units in the rent stabilized stock of 1 million apartments. Rents in these buildings are initially set according to the area median income (AMI) designated by their regulatory agreement, and subsequent annual increases follow the Rent Guidelines Board (RGB). They are typically exempt from property taxes and their financing is structured so that the project will remain sustainable assuming a 5% vacancy allowance, 2% annual increases in rent and 3% annual increases in costs. However, over the last decade affordable housing has experienced RGB increases below 2% on average and since the pandemic, rent collection has been lower than expected. Over the same period, expenses have been increasing, jeopardizing the financial stability of many affordable housing buildings.
When operating costs and debt service exceeds rental income, building owners don’t have the necessary funds to make repairs but even more consequential is that financial instability threatens the financing making these buildings affordable, putting their tenants at risk. A large number of non-profit owners are also susceptible to financial risk while trying to keep their distressed buildings afloat. And there are significant implications for the City’s housing plan at large.
A major pillar of Mayor-elect Zohran Mamdani’s campaign platform is to freeze the rents on rent regulated housing to provide relief to tenants who are struggling to make ends meet and to offer owners property tax relief to offset impact. Analysis by NYC’s Rent Guidelines Board (RGB) study found that 45.5% of rent stabilized tenants are rent-burdened paying more than 30% of their income on rent. Freezing rent will help these tenants, with average incomes of $60,000, to better afford living in NYC. However, a multi-year rent freeze will exacerbate financial difficulties for distressed affordable housing while undermining the City’s own affordable housing financing assumptions of 2% rent growth.
The City of New York must actively prevent default of affordable housing which has received significant public investment to protect tenants, affordable housing providers and New York City Housing Development Corporation (HDC)’s bond rating. The following policy reforms are necessary to preserve this stock and to offset negative financial consequences of a multi-year rent freeze.
INCREASE REVENUE
- Affordable housing regulatory reset for vacancies at current AMIs as per regulatory agreements.
- Expand use of rental assistance to increase revenue and improve processing times to reduce vacancies.
- Establish a new Affordable Housing Stability Court Initiative to decrease housing instability and nonpayment.
- Make Housing Connect re-rental waiver permanent to prevent lengthy vacancies.
- Streamline access to operating and capital reserves and establish a reserve replenishment fund.
DECREASE EXPENSES
- Fund $1 billion financing program for projects at risk of default to restructure debt.
- Decrease insurance rates by financing Milford Street Affordable Housing Insurance Captive and support legislative reforms to lower rates.
- Reduce & Fix Water Rates for regulated affordable housing.
- Renew and reform the J-51 tax abatement to expand investment and improve housing quality.
- Exempt all preservation financing programs from any new labor requirements.
Read coverage of our analysis in Bloomberg here.