Spotting Glut, Mayor Deflates Condo Cushion

030606 article schuerman Spotting Glut,  Mayor Deflates  Condo CushionReal-estate developers love Michael Bloomberg. He’s one of them, after all: It was he who finally built a huge skyscraper in the languishing pit that for so many years was the former Alex-ander’s department-store site. His ambitions to host the 2012 Summer Olympics may have gone unrealized, but in the effort he made the West Side safe for big-budget developers. And though he never laid a paw on the federal-funds rate, he oversaw an unprecedented boom in the city’s market that seemed to make everyone, including his city’s treasury, awfully rich. Not to mention: skyscrapers in Brooklyn?

So when he recently—and rather suddenly— inserted a big pin into the oxygen-deprived real-estate bubble, developers shuddered.

“The real-estate market is slowing down dramatically, and we’re going to have a real problem down the road,” he said in a weekly WABC radio interview a little over a month ago. “If people who want to sell their houses have to wait a longer time before someone comes along and buys it, it would be a miracle if prices didn’t start to go down.”

Reuters swiftly picked up the pronouncement and carried it as an item, which resounded rather predictably within a certain real-estate-market echo chamber.

But that was only the beginning. On Feb. 23, in the market-leveraged precincts of a Harlem co-op apartment building, Mr. Bloomberg announced the establishment of a task force to overhaul a Lindsay-era program (the term of art is the 421a program) established back when there was little hope of attracting new construction in the city.

In recent years, hundreds—if not thousands—of market-rate condominiums have sprouted up across the city on the public’s dollar under the program. It had been a Band-Aid, really, and Mr. Bloomberg was ripping it off.

And then, just this week, on Feb. 28, he traveled down to Washington, D.C., and exhorted a lobbying group called the National Low-Income Housing Coalition to stick it to the (real) Republicans and “reject the proposed short-sighted cuts to H.U.D.’s budget.”

He had talked a lot about the affordability crisis during his campaign, after all. Had he suddenly become a housing activist?

Showdown on Wooster Street

On Wooster Street in Soho, Douglass Street in Boerum Hill, West 23rd Street in Chelsea, these tax abatements were exploiting, if not fueling, the city’s condo boom.

The way Mr. Bloomberg introduced the changes was innocuous enough. “Because our population is growing, demand for housing has outstripped the supply, and for many New Yorkers, incomes are not keeping pace with increasing rents,” he said. “The problem before us is no longer abandonment but affordability.”

In a follow-up interview, Rafael Cestero, deputy commissioner of development for the city’s Department of Housing Preservation and Development, made it clear that the Mayor had no intention of gutting the program in a top-to-bottom rehab, and also that he was not trying to cool down the housing market by tightening loopholes on new construction.

“Our belief is that the 421a program has been successful in stimulating housing starts and that we do not want to undo that,” Mr. Cestero told The Observer. “If we go too far, we will have a destructive effect on the housing market. We right now have about a 3 percent vacancy rate, and we need to maintain the right balance.”

But anybody who understands how ingrained the abatement program has become in the lives of developers knows how heated, and important, that task force’s doings will be in the coming months.

When the 421a abatement program began in 1971, it reduced property taxes on new multifamily construction—rental or condo—anywhere in the city, so desperate was Mayor John Lindsay to get anybody to build anything anywhere. By the mid-1980’s, Mayor Ed Koch excluded central Manhattan—south of 96th Street to Houston on the West Side and 14th Street on the East Side—from automatic abatements unless the developer agreed to provide housing for low-income families as well. But as gentrification has advanced, housing advocates—and, according to one source, the Mayor’s budget aides—believe that those old boundaries make a mockery of the old program. Subsidized housing in Soho? The Lower East Side? Wall Street?

“When it came along in the dog days of the 70’s, it made some sense to give tax breaks for residential development,” said Brad Lander, director of the Pratt Institute Center for Community and Environmental Development. “Now it has become a $300 million tax giveaway for luxury housing.”

One of the recently certified buildings in the 421a program—195 Bowery, at the foot of Spring Street—offers a pretty good example of what the abatements have subsidized. There, the developers added 11 stories on top of an existing five-story building to create a hybrid commercial-residential tower. The condos on top have high ceilings (10 1¼2 feet), good views (of the Empire State Building), and a balcony or terrace for every unit. It’s due to open in May, and all but one of the units have sold—at prices averaging $800 a square foot. (The duplex penthouse is still available, if you have $3.995 million to spare.)

Charles Blaichman, one of the developers of the building, said that it’s difficult to build a condo even at that price, given the high land prices, and that Mr. Bloomberg should be ready for a construction slowdown if he acts too rashly. “I think that between recording taxes and other fees developers pay to the city, the 421a does not make that much difference to the city—and if it was eliminated, it would hurt the city,” he said. “A few years down the road, perhaps you could change the boundaries, but this area, it was not as active as it is now. I still think that it is on the edge.”

The wariness to change is apparent even in independent voices, like that of Preston Niblack, the deputy director of the Independent Budget Office. “This is deeply imbedded in the housing market now,” he told The Observer. “When you start talking about making changes, it makes people nervous about the overall housing market.”

In other words, will we go back to the 1970’s?

The task force, which includes advocates (Mr. Lander) as well as developers (Jeff Blau, president of the Related Companies), is supposed to figure out how to shape the abatements to apply only to buildings that would not get built without them, rather than icing projects that could stand on their own. In so doing—by expanding the area where abatements come only if low-income housing is provided—the reforms are also supposed to stimulate more affordable housing.

Developer v. Developer

Developers will not just be fighting housing advocates, though. They will also be fighting one another. Rental developers, which include some pretty big names, argue that they are getting shortchanged because as long as they are receiving 421a rent abatements, they’re required to keep rent increases within the 2 to 4 percent determined each year by the Rent Guidelines Board.

“I would argue that rentals are at an equilibrium, while condos are out of control,” said Jed Walentas, a principal of Two Trees Management, which has lately moved into rentals from condo conversions. “The property you are going to develop is not owned by the developer; it is owned by someone who is looking to sell the parcel, and they are looking at pricing from a condo perspective. They’ll look and say, ‘The guy can build 100,000 square feet here and get $1,000 a square foot. What can you afford to buy that land for?’ Condos are so far ahead of rentals. The economics for a rental just don’t work.”

The new 421a units are rent-stabilized even if they come onto the market above $2,000 a month, a point at which older units would normally be deregulated. Two Gold Street, Rockrose’s 51-story bet on the Battery, starts at $2,200 for a one-bedroom, even as it saved $5 million on taxes last year because of the abatement, according to city Department of Finance records online. But even at that price, luxury rentals deserve city subsidies, Rockrose president K. Thomas Elghanayan argued.

“Today’s market rent will be tomorrow’s below-market rent,” Mr. Elghanayan told The Observer. “That’s what’s happened in the past. We built 421a’s in the past and rented them for $1,000, and now those are below market value. Having rent-regulated apartments is extremely important for the future.”

Though only to an extent: The rent regulation will wear off once the abatement does.

The program, which has underwritten 110,000 units since 1971, has spurred its own set of dynamics, some of them vicious cycles. Developers know that they can sell condos with abatements for $20 to $50 a square foot more, but landowners know that too and raise the prices of their empty lots. Furthermore, the abatements shift the tax burden from buyers of new condos to residents of older apartments.

The 421a program, which accounts for about one-third of all new construction, explains a lot about all the recent condo activity in Brooklyn and Queens. A 100 percent tax exemption on the new construction lasts for 11 years in the boroughs, with four years at a reduced rate. In Manhattan, the full exemption lasts only two years, and the taxes are slowly phased in over the next eight. And an extra 10 years of tax breaks are added in Manhattan and the boroughs if the project includes affordable housing.

While outer-borough development is arguably beneficial to the city, the big question is whether the 421a abatements are stimulating it or simply benefiting from the hard work of rehabbers and long-time residents to spruce up their own neighborhoods.

An Observer analysis of the 4,002 buildings certified for abatements by the Department of Housing Preservation and Development since 1987 shows that an overwhelming number of the subsidized buildings—3,244—were approved once the real-estate market had become quite healthy, in January 1999, and a majority—2,381—came in the past two years alone, in the post–Sept. 11 recovery.

Just a small portion were located in up-and-coming or already arrived neighborhoods that will undoubtedly be the focus of any redrawing of program boundaries: the Lower East Side, Soho, Tribeca, the financial district, the East Village, Chelsea, Dumbo, Cobble Hill, Boerum Hill, Carroll Gardens, Park Slope, Brooklyn Heights, downtown Brooklyn, Fort Greene and Williamsburg. Of those 209 addresses, all but 25 were certified since January 1999, and all but 79 in the last two years. Far from trailblazing, it looks as if the 421a program is merely gilting a well-traveled road.

Ultimately, it is the city treasury that suffers when housing values outside the Manhattan exclusion zone increase, since it means that more and more tax revenue is being forfeited. In 2003, the Independent Budget Office reported that 421a accounted for $130 million in forgone taxes. In fiscal 2005, the number was $323 million. And while some of that amount has stimulated affordable housing, the I.B.O. found that only 7 percent of the units built under the program over the past 20 years were affordable to low- and moderate-income families.

But developers argue that what may look like low-risk neighborhoods carry tremendous perils, and they indicate that they will defend the existing boundary as if it were the Maginot Line, giving in only at Tribeca.

“We’re agreeing with the city that the program ought to be looked at,” said Steven Spinola, the president of the Real Estate Board of New York. “Tribeca probably makes sense. But Brooklyn, lower Manhattan? The city is talking about the need to have more housing in those areas. I’m a little bit concerned about starting to see prices for land go up as high as they are. If we want to see housing in lower Manhattan, I’m not sure we want to end 421a down there.”

Which brings us to another second-term priority: fighting with Larry Silverstein at Ground Zero. All along, however, he has argued that the housing market is stronger in lower Manhattan than is the office market, and that is why residential should go down there.

What if Mr. Bloomberg refused to subsidize Mr. Silverstein, only to subsidize a condo developer?