Developers Scramble as Spitzer Caps Financing

Real-estate developers like Tom Elghanayan and William Dickey once had a dream: buy up parcels on the barren West Side, wait for the right Mayor to come along and rezone it, and then become pioneers in the neighborhood of the future.

Suddenly, though, the success of that rezoning has made those dreams less lucrative. Right as the big-spending Pataki administration gave way to the parsimonious Spitzer one, someone looked in the collection box and noticed that the state had run out of the ability to authorize cheap housing bonds. Now, developers will have to accept lower profits, change their plans—or fight back.

On Feb. 26, the new president and chief executive of the state Housing Finance Agency, Priscilla Almodovar, sent letters to nine developers who were expecting state-authorized tax-exempt bonds to finance their buildings, basically asking them to resubmit applications in three weeks with the understanding that they would get less financing than they had first applied for.

How much less? These buildings qualify for tax-exempt bonds by keeping rents on 20 percent of the units affordable to low-income families. Under the new rules, developers would receive only $1.5 million in bonding for each affordable unit they create.

By contrast, Mr. Elghanayan’s company, Rockrose Development Corp., had asked last year for $2.12 million a unit for a tower at 455 West 37th Street, according to an H.F.A.-produced chart obtained by The Observer. Mr. Dickey’s firm, the Dermot Co., applied for $2.9 million a unit for their Hudson Mews project. Another developer, Steve Witkoff, was gunning for $3.14 million per unit in order to build a 301-unit building at 300 West 44th Street.

“The feedback I have gotten from three of the developers who received the letter is that it is not feasible to do the project at $1.5 million per affordable unit,” Steven Spinola, the president of the Real Estate Board of New York, told The Observer. “There probably is a number at which they can do it, but that’s not it.”

THESE BONDS, BECAUSE THEY ARE NOT TAXABLE, command interest payments between 1 percent and 1.65 percent a year lower than taxable bonds—a savings that directly adds to a developer’s bottom line. In addition, the tax-exempt bonds and the low-income apartments trigger other tax credits and tax exemptions that bring the developer’s internal rate of return—a term that means the profit margin annualized over a decade—to close to 30 percent, according to one housing-finance expert.

One alternative would be to turn to the city’s Housing Development Corporation, which this week began, in order to assist in the financing crunch, to offer developers a package of taxable bonds with a special 1 percent second mortgage on the affordable units. H.D.C. president Emily Youssouf told The Observer that the package would yield developers an internal rate of return “in the high teens.”

High teens, or 30 percent—that’s enough of a difference to do a little lobbying, no?

And so REBNY recently sent drafts of a bill out to state legislators that would try to solve the shortage without resorting to bond caps. The legislation, Mr. Spinola said, would permit the H.F.A. to allocate an unlimited amount of tax-exempt bonds for specific projects in future years.

Mr. Elghanayan, Mr. Dickey and Mr. Witkoff—who didn’t return messages or otherwise were not made available for interviews—could, in other words, take a portion of the bonds they asked for this year, another portion next year and another portion the year after that.

Tax-exempt bonds are privately issued and guaranteed, but they cost the federal government in taxes that are not collected on the interest that investors earn from them. As a result, the federal government caps the amount of these private-activity, tax-exempt bonds that each state can authorize on a per-capita basis.

New York gets about $1.6 billion a year. Albany, in turn, traditionally directs $200 million to $300 million of that amount to the state H.F.A., with the rest going to economic-development projects, the dormitory authority and other similar agencies.

Right now, Ms. Almodovar says that her office is sitting on $4.8 billion in bonding requests, an unprecedented amount triggered by many factors, among them the resurgence of rental projects, which lend themselves easily to the 80-20 configuration, and the bonus air rights that the rezonings of Hudson Yards, West Chelsea and Greenpoint-Williamsburg give developers in exchange for incorporating affordable units into their plans.

In fact, even if that $4.8 billion is spread out over the next 10 years, the H.F.A. still wouldn’t have enough. And that’s not even counting projects like Atlantic Yards (2,250 units of affordable housing!), or any other projects on the horizon that might need the same financing.

“This administration may have a very different idea about how to use this limited resource than REBNY does, and even the multi-year approach does not solve this issue,” Ms. Almodovar told The Observer. “I challenge the industry to find another way to underwrite these deals.”

MS. ALMODOVAR, FORMER SECURITIES LAWYER from White & Case and housing advisor on the Spitzer transition team, started work on Jan. 16. In a little more than a month, she has made quite an impression on for-profit developers.

Affordable-housing advocates, meanwhile, have fallen in love. While the city’s H.D.C. and Department of Housing Preservation and Development have long required developers to include a high ratio of affordable units in order to get benefits, the H.F.A. under the Pataki administration gained a reputation for profligacy with its separate pool of funds. No matter how much developers paid for land or preened their construction techniques, demand for these bonds was low enough that it could afford to finance them all. Last fall, a number of housing groups encouraged the Spitzer team to put some policy into the way the state gave out its bonds. Now, the H.F.A. has no choice.

“One of the things that the housing advocates wanted to do was to increase the affordable units produced with the tax- exempt bonds,” said Brad Lander, the director of the Pratt Center for Community Development. “It is something the Spitzer administration wanted to do also, but I think Priscilla and H.F.A. are confronting it more rapidly because of the scarcity of the volume cap.”

In the Feb. 26 letter, which The Observer obtained from a source, Ms. Almodovar writes that “the Agency’s eventual goal is to increase the number of affordable units,” and suggests that the longer a project can guarantee the affordability of its low-income units, the better its chances of winning the tax-exempt bonds.

The finance shortage is expected to hit the West Side hard, and it may have a deleterious ripple effect on the revenues needed to fund the No. 7 subway extension, Hudson Boulevard and other improvements. That is because some of that money was supposed to come from the District Improvement Fund, a mechanism by which the city would raise money by selling air rights that would permit developers to build higher.

But residential developers were only permitted to buy air rights from the fund if they included affordable housing. And if the developers determine that the affordable housing is too costly—well, then, who needs air rights? Who needs a subway, for that matter?

A NUMBER OF OFFICIALS SAYS THAT THIS SCENARIO is too far off in the future to speculate upon, and that there are plenty of other ways—payments from commercial buildings, for example—to pay for the improvements. Shaun Donovan, the city’s housing preservation and development commissioner, says that the Bloomberg administration supports the harder line taken by the H.F.A.

“Tax-exempt bonds are not the only way to get the affordable-housing component of the 80-20 program,” Mr. Donovan said. “There are literally billions of dollars available for that type of development.”

Mr. Donovan said that the financing shortage—which he called a “challenge” instead of a “problem”—would decrease land prices. (In other words, the tax-exempt bonds had inflated property values.)

Mr. Spinola, the REBNY president, said the likely short-term result would be that developers would chase whatever form of development would yield the highest profit. It turns out that Hudson Yards, a 45-block area that was expected to produce about 12,600 new apartments, was rezoned in such a way to allow many different types of projects.

“One result may be for the developers to shift to a hotel or a condo, or wait until this problem is corrected,” he said. “Clearly, what we would like to see is whether there is any possibility to increase the pool of tax-exempt bonds for the state of New York, and we are going to be talking to Washington to see if that’s feasible.”

And it turns out there will be an excellent opportunity to do so very soon: Three REBNY officeholders—Stephen Ross, chairman of the Related Companies, the publicist Howard Rubenstein and Rob Speyer, heir-to-be at Tishman Speyer—are hosting a fund-raiser on March 4 for Congressman Charles Rangel of Manhattan, the newly anointed chairman of the House Ways and Means Committee. Hey, he’s the one who sets federal tax policy!

Good thing the Democrats won the House.

Developers Scramble as Spitzer Caps Financing