By Michael D. Lappin
February 4, 2021
Today’s historically low interest rates create an extraordinary opportunity to repair and stabilize vulnerable affordable housing. A new program, let’s call it Rehab Plus (RP), patterned after successful preservation efforts of a generation ago, can shore up low and moderate income housing, create thousands of jobs, and provide a needed stimulus to help restore the City’s economy. For residents it means safe and secure housing for years to come.
Rehab Plus would provide monies for essential repairs by combining today’s low cost private financing (long-term rates are in the mid-3% range), with a modest amount of 1% publicly subsidized subordinate loans and real estate tax relief. City or State mortgage insurance is available for eligible mortgage loans. The program would be targeted to apartment buildings where average rents are affordable to lower income and working families of the City. In order to reach as many buildings as possible, the program’s processing would be streamlined to make it easily accessible to small building owners.
The potential size of the program is huge. Over 1.5 million New Yorkers whose families earn below the area median income (AMI) live in private and non-profit-owned rental buildings. This is where retirees, service workers of all types and essential workers live with their families. These are the workers who keep our City functioning. Even if they wanted to move, most don’t have the luxury of leaving the City.
Much of this housing is 60 years old and older, in buildings with fewer than 50 units, and have a variety of serious physical needs. Some of those deficiencies – poor heat, leaky plumbing, drafty windows – are incubators of health problems which might have contributed to high levels of COVID infections in lower income neighborhoods.
Many owners of these buildings are inexperienced and lack the financial resources to fully address those needs. They might have the wherewithal to fix plumbing leaks, but not enough to pay the $6000-$8000 per apartment to replace the plumbing that causes those leaks. The mismatch between costly building upgrades and owner resources becomes increasingly apparent as one goes down the continuum of affordable housing. An ironic, if unintended consequence of the tight strictures of the Tenant Protection Act of 2019, is that it has compounded the difficulties these properties have in obtaining financing for needed repairs.
Rehab Plus can cut through these problems. It can provide a safety net for vulnerable housing, thus avoiding the risk of further deterioration during what may be a prolonged period for the City’s economy to recover. This financing program would act as a bridge to that recovery.
How precisely would the program work? Participating lenders would partner with the City to provide low cost mortgage loans to refinance existing debt and fund rehabilitation for targeted buildings. These funds would be combined with expanded real estate tax relief and, to the extent needed, up to $10,000 a unit of 1% (possibly interest only) of public funds, subordinate to the mortgage. For elderly, very low income tenants and those impacted by COVID, rental assistance may be coordinated with the program.
Renovation work would center on upgrading or replacing essential building systems – boiler/burner, plumbing, electrical, elevator and the building’s envelope – roof, pointing and windows. Standards for scopes of work that would extend the useful life of these systems for another 20 years or so would be pre-approved with the City. For additional non-critical work, the buildings finances would be restructured to provide sufficient cash flow to make future upgrades, as well as pay for sound management and maintenance, with operating margins sufficient to meet bank lending standards.
Applying this formula to a sample of buildings with average rents affordable at the 60% to 80% AMI range (families of three earning between $58 and $77 thousand a year), it is estimated that up to $20,000 to $30,000 per apartment of new money could be feasibly lent for renovation. For many buildings, this should be a sufficient amount to meet the above standard. Mortgage insurance might be available for private lenders if at least 20% of the private and public loan proceeds go toward renovation.
How many buildings at these rent levels could benefit from such a program? Modeling various scenarios on the above building samples, a rough estimate of 1000 to 1500 apartments might be preserved for every $10 million of 1% public funds used by the RP program.
However, not all buildings will work. To encompass lower income buildings needing more extensive repairs, the program parameters can be expanded to include more subsidies, including individual rent assistance. If a building is over financed, a discount of its existing debt and/or an infusion of equity may be needed. More troubled buildings might be voluntarily sold, or be subject to a forced sale through debt or tax foreclosure. In the latter cases the fate of the building and living conditions of its occupants is uncertain.
To maximize the scale of the program, and reach smaller property owners, portions of the RP processing would be delegated to the City’s lender partners. This will require the City to reorganize how it delivers its rehab programs. Delegation would involve adherence to preapproved standards for loan underwriting, construction work scopes, costs, borrower qualifications and documentation. A mutually agreed upon engineer/architect employed by the lender would approve construction advances and change orders. The City would have the right for a final review to confirm that each loan conforms with the preapproved standards. The goal is to close loans and start repairs between 60 and 150 days after receiving a completed application.
The participating banks can play a unique role in expanding the scale of the program: they can identify defaulted loans in their own portfolios which might work with Rehab Plus. Rather than enduring lengthy periods for workouts or foreclosure, risking deterioration and tenant hardship, the banks, owners, and tenants will all profit by the building being restored to physical and economic health. In these cases, the City would undertake a more detailed review of debt restructuring to ensure that it does not compromise performing necessary renovation work.
The cost of the Rehab Plus program compares favorably with other City preservation efforts. The $10,000 a unit of 1% public funds is a fraction of typical City renovation efforts, where subsidies may run up to $90,000 a unit, and is an even smaller fraction of what the latest plans call for to renovate Housing Authority buildings. All of the above programs involve a reduction or elimination of real estate taxes over an extended period.
The Rehab Plus program is both new and old. No comparable program exists today. Versions of this program were routinely offered by the Community Preservation Corporation and the City a generation ago. It began before the Koch years, and, with the City’s “Vacant Building Program”, extended through the end of the Dinkins administration. Tens of thousands of apartments were renovated quickly and at relatively low costs.
Preserving the City’s existing affordable housing stock should be a permanent component of the City’s housing agenda. The Rehab Plus program provides a blueprint for a sustained effort. It is hoped that the leaders of government, business and residents can come together and recognize the opportunities afforded by these historically low interest rates to restore our City, and act.
 These numbers assume the buildings would receive 150% of real estate tax benefits under the City’s J-51 program either by qualifying for “moderate rehabilitation” status or through an expanded definition of “substantial governmental assistance”. The City also should consider revising the Schedule of Costs to match market cost of common renovation items (see footnote 4) more closely. Legislatively, the assessed value cap of $40,000 per unit will exclude many of the low- or moderate-income buildings from receiving J-51 benefits. This cap should be adjusted to support this program.
 A sample of walk-up and elevatored (up to 6 stories) buildings with these rent ranges were modeled with various renovation scenarios. The amount of additional work that could be financed utilizing the public subsidies was sensitive to the circumstances of individual buildings, e.g., interest rate and amount of existing debt, unusual operating costs, etc. Excluded were buildings that had significant real estate tax reductions from either NYC’s 420 C or Article XI programs. Also excluded were buildings with significant commercial income.
 See NYS Dept. of Housing and Community Renewal cost schedule for major capital improvements hcr.ny.gov/operational-bulletin-2021-1.