October 20, 2019

AdvisoryCloud Featured Advisor Interview with Michael Lappin

Michael Lappin

Michael Lappin
Managing partner /MLappin & Associates LLC

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Michael Lappin was interviewed by AdvisoryCloud on 09/09/2019 as part of our Featured Advisor Interview series.

AC - Tell us more about your main areas of expertise as an advisor?

ML - The main area of expertise is my experience in going into a community, analyzing its housing problems, understanding the resources available to address such problems and proposing a solution. Implementation of such efforts might involve various legislative and/or regulatory initiatives. Examples of efforts I’ve led include reversing the deterioration of existing affordable housing, and building new, low-cost affordable housing.

I am also to advise for-profit, non-profit and institutional property owners on redevelopment potential for their real estate assets in emerging neighborhoods.

AC - Describe your main motivation for being an advisor?

ML - My value as an advisor comes from the experience I’ve gained by having played a leadership role for over thirty years in solving housing problems in both New York City and in many smaller upstate New York communities. I believe much of this experience can be adaptable to many communities nation-wide: urban, suburban and rural.

AC - Elaborate on the types of situations, challenges or decisions, you feel you could add the most value to as an advisor?

ML - Where there is strong local leadership, I can guide a community to creatively address its affordable housing problems in a manner that meets the needs of the community and is sensitive to local market conditions. This can include building and preserving of affordable housing and moderating the effects of gentrification. Below is a link to a recent article I wrote on moderating the effects of gentrification in New York City. This approach can be adapted to other municipalities.

'To compete in this environment, the city must offer an attractive affordable housing alternative, define the neighborhoods where it is available, and implement individual deals on a timely fashion.'https://citylimits.org/2019/06/26/opinion-to-combat-gentrification-nyc-needs-simpler-speedier-policies/

AC - Do you see any disruptive trends on the horizon in your industry or position?

ML - The main “disruptive trend” is the unnecessary complexity of many existing housing programs. We can simplify the process to lower the cost and increase production of affordable housing. Attached is a recent paper I wrote for one of the presidential candidates describing such approaches.

AC - Tell me about the most impactful project or decision you’ve been involved in as an executive.

ML - I shall describe two such projects: the first was working with the New York City Comptroller to bring the first major public employee pension fund in the country to invest a portion of its assets (up to 2%) in long-term mortgages for affordable, multifamily housing. The program is outlined in the attachment to question 4, above.

Second, is leading the renovation of the largest privately owned property in the country – the 12,271 unit Parkchester condominium project in the Bronx. It was restored in such a way to keep it affordable to its approximately 45,000 residents. See link to attached article.

'Parkchester’s rebirth reflects the best of New York and stands as a lesson for communities throughout the country seeking to preserve and enlarge their stock of affordable housing.'https://citylimits.org/2018/08/22/cityviews-the-lessons-we-learned-from-saving-parkchester/

If you are interested in speaking with Michael Lappin about this topic or others, you can book a meeting with him through his AdvisoryCloud profile here: https://www.advisorycloud.com/profile/Michael-Lappin

-For further reading, see Michael's article on affordable housing below


i How States and Cities can lower the cost and increase the production of affordable housing – with a little help from the Federal Government.

                                                                                            By Michael D. Lappin

                                                                                             September 7, 2019

I. Introduction:

Two persistent forces that have been the bane of affordable housing are the loss of units through both deterioration and gentrification.  While larger demographic and economic factors drive these forces, most communities have few effective tools to moderate their effects at the neighborhood level. The result is that sorely-needed affordable housing remains inadequate to meet the growing needs of our country’s population centers.  What is proposed here is a new financing mechanism coupled with a new type of bank that can intervene with well-crafted investments to shore up deteriorating housing in declining neighborhoods and build affordable housing in gentrifying neighborhoods. This program has the potential to both lower the cost and increase the production of new and restored affordable housing compared with current efforts.

At the center of the new financing mechanism is a program of mortgage insurance, patterned after New York State and City’s mortgage insurance fund, to incentivize long-term investment in affordable housing.  It was initially established to attract private mortgage financing to rebuild the wide-spread deterioration that engulfed many of New York City’s communities in the 1970s. Its unique focus, to differentiate it from national programs, was to provide funds to build and restore predominantly rundown privately owned apartment buildings.  Mortgage insurance was an essential component of the Community Preservation Corporation’s (“CPC”) financing of the renovation of tens of thousands of deteriorated apartments in the New York’s low and moderate-income neighborhoods. Many of these buildings were small rental apartment buildings, ranging from 10 to 49 units, housing low and moderate-income households.

  The New York programs have evolved over the years to insure loans that serve a wide  range of affordable housing needs. These include both the renovation of deteriorated buildings and new construction, as well as special needs housing.  The programs have been adaptable to diverse ownership structures and are compatible with a variety of local subsidy programs.


ii Michael Lappin was CEO of the Community Preservation Corporation from 1980 to 2011 and is currently founding partner of MLappin & Associates LLC, providing consultant and development services for affordable housing.


The programs have been strong enough to attract large institutional buyers of these insured, long-term mortgage loans.  Both New York City and State public employee pension funds have become significant investors, providing about $1.3 billion as of 2011, pricing their funding to conform with ERISA standards.  This has created a secondary market for affordable housing loans that do not always align with the requirements of national credit markets.   

The availability of such long-term financing can be a catalyst to create  a new generation of community development lenders and bolster the activities of existing ones.  This can be particularly important for building and restoring smaller buildings (less than 49 units), an often neglected market.  Some successful examples include CPC’s efforts with New York City to seamlessly incorporate local subsidies into their lending, thus providing  below market funds for housing. Other lenders have focused on using their financing to nurture a cadre of local owner/developers to renovate small properties in the neighborhoods they serve.  Some lenders do both. Spoiler alert! Where this has occurred, as illustrated in the three examples below, development costs have been lower and volumes higher, compared to typical affordable housing efforts.

Their success points to the central importance of process.  The lenders each organized a process -- a “one-stop-shop” -- where loans and other assistance were easily accessible to low-overhead neighborhood owner/builders. This enabled them to restore and/or build small neighborhood properties at low cost and at scale. A more unwieldy process might have excluded the participation of many of these same builders, resulting in less rebuilding activity.

The Federal government can incentivize the formation of local mortgage insurance programs nation-wide by setting a template based on the New York programs. For those that adopt that structure, Federal tax benefits could be channeled to properties whose mortgages are insured by these new programs.  This could include, with some modifications, benefits from Opportunity Zones (OZ), and allocations of Federal Low Income Housing Tax Credits (“LIHTC”). 

II. The need to build and restore small multifamily properties

Today, the most widely used program to produce low and moderate-income housing is the Federal Low-Income Housing Tax Credit. Here, government finance agencies issue tax-exempt bonds to build low-income housing. Attached to these bonds are tax credits which are purchased by corporations to lower their federal tax liability, generating  additional funds for these projects. The LIHTC program has produced over 3 million of new or renovated units since its inception in 1986.


The Employee Retirement Income Security Act of 1974 (ERISA) – See discussion of pension fund program. below


Critics charge that the program is too expensive and too complicated.- The issuance of bonds is costly, and the funds generated from these transactions are often insufficient to build the intended low-income housing. Additional sources of financing and subsidies must be found. These sources have their own, and sometimes conflicting requirements, with the administration of these funds spread among different public and private agencies.  Navigating this labyrinth adds additional costs. The process is lengthy, often unpredictable, and requires the hiring of a deep bench of experts.

Compounding this is the uncertainty and attendant costs in siting such housing if it’s subject to a discretionary approval. Opponents who object on NIMBY grounds, to those who fear gentrification, have frustrated many well publicized efforts.

Taken together, these factors can distort the cost and timeliness of building this housing. Projects must be large enough to absorb these costs and justify the risks.  In New York City this means most tax-exempt bond financed LIHTC projects are 60-70 units at a minimum. 


iii Reference to LIHTC refers to the “4%” program where tax credits are a component of tax-exempt private activity bonds originated by public housing finance agencies.

iv See Cato Institute Tax and Budget Bulletin No. 79 “Low-Income Housing Tax Credit: Costly, Complex, and Corruption-Prone” November 13, 2017.  By Chris Edwards and Vanessa Brown Calder.

v Governor Jerry Brown has said that he’s not putting any new state resources into subsidizing affordable housing until state and local governments figure out ways to reduce costs.  The Mayors of Portland Oregon and Saint Paul Minnesota have echoed similar sentiments. See Joe Cortright, City Commentary, April 19, 2017. 

vi Loan origination fees, legal and accounting fees, marketing costs, a “negative arbitrage escrow” which funds the difference between the interest costs of the issued bond interest rate, and the higher cost short term funds.

vii The recent tax legislation lowering corporate tax rates is expected to diminish the value of the tax credits by about 15 per cent. “Final Tax Reform Bill Would Reduce Affordable Rental Housing Production by Nearly 235,000 Homes”  by Michael Novogradac , December 19, 2017 in Tax Reform Research Center. This will most likely create the need to find more subsidies, possibly adding more layers of complexity. In NYC, it takes about two years of to get to a construction start.

viii See http://www.nydailynews.com/new-york/manhattan/mayor-de-blasio-whines-housing-deal-rejection-article-1.2757360 and http://www.nydailynews.com/new-york/queens/de-blasio-backed-queens-affordable-housing-project-scrapped-article-1.2798725  Further complicating siting decisions are recent court decisions, supported by academic studies, which challenge the legality and the wisdom of siting affordable projects in existing low-income neighborhoods. The legal argument focuses on the segregating effects of such siting, while the academic arguments point to the negative social outcomes of such concentration.


As a consequence, smaller projects will inevitably be neglected – a result deeply affecting low and moderate-income communities. A recent study found that 54 percent of the U.S.’s rental housing stock is in buildings containing between 2 and 49 apartments and these small buildings are home to the majority of low-income households -- including 60 percent of all renters who make less than $10,000 per year. Much of this housing needs repair, and the supply needs to be expanded. However, LIHTC’s high transaction costs and complexity limit its feasibility for financing small multifamily properties.  Thus, the adequate repair of deteriorated and/or vacant housing, and the building of small, “in-fill” housing on vacant lots within permitted zoning is left undone, as the infrastructure that supports these neighborhoods is left to fester.

When deterioration or gentrification occur, there is typically little public response.  While local governments may have many tools on paper, they are often inadequate to work on any scale to moderate market forces.  When it reaches a contagion level, resulting in widespread displacement either from massive deterioration as occurred in the Bronx or Harlem in the 1970’s, or from gentrification as has occurred in many Brooklyn neighborhoods in recent years, government action is typically too little, too late, or at a cost much higher than if preventive measures had been taken.  The result is that the most vulnerable populations suffer the consequences – their housing deteriorates, or they are pushed out of gentrifying neighborhoods as housing prices increase

A recent study has noted that there are benefits of gentrification to the “original residents” of the community. That being the case, it may be important to more firmly root  those residents in their communities, rather than their presence being but a transitional phase to their eventual displacement.

Models for preserving affordable neighborhoods

How then, can we address these problems?  Three effective programs that operated at scale on a neighborhood level were ShoreBank (nee South Shore National Bank) and the Chicago Investment Corporation (CIC), both focused on low-income neighborhoods in Chicago, and the Community Preservation Corporation’s (CPC) work in low and moderate-income neighborhoods in New York City.


ix Findings of researchers at Enterprise and the University of Southern California.  http://www.enterprisecommunity.org/resources/understanding-small-and-medium-multifamily-housing-stock-19423#sthash.mrd4sUK6.dpuf

x Few 4% projects in New York City are less than 50 units. The scarce “9%” program is sometimes used for smaller projects.

xi The Effects of Gentrification on the Well-Being and Opportunity of Original Resident Adults and Children∗ Quentin Brummet† and Davin Reed‡ July 2019.


The distinctive characteristics of all three are first that they dealt with largely private owners of small apartment buildings, now called “naturally occurring” affordable housing. Second, they created their unique version of a “one-stop shop” to assist these owners to repair and/or build their housing, providing financing and other tools to keep it affordable. Third, each had flexible financing that could provide consistent private mortgage funding for these often small and difficult projects.


South Shore National Bank, later known as ShoreBank,  was bought in 1973 by four local residents to prevent the bank from moving from its neighborhood on the South Side of Chicago, a community in the throes of disinvestment and deterioration. The new owners wanted the bank to direct its lending to support local businesses, eventually expanding to  restore the housing stock. Its residential mortgage lending focused on rebuilding the small multifamily residential properties – “three flats” and larger -- that was typical in the neighborhood. Their approach was to nurture a cadre of “rehabbers” to buy, restore and build this housing so that it was affordable to existing residents, and attractive to new households. The bank not only provided construction and long-term mortgage funds to the rehabbers, but also gave ongoing counsel to hone their construction, building and financial management skills – ShoreBank’s version of a “one-stop- shop”.  No public subsidies were used. Instead, when loan terms were reset, typically every two years, the bank would negotiate with the owners to provide additional funds for needed repair work to the extent that the property could feasibly support the new monies. ShoreBank seeded and provided this type of continuous institutional support for a rehab industry that grew in capacity, and over 40 years resulted in the broad scale redevelopment of many of the neighborhoods on the South side of Chicago. In all, the bank financed around 55,000 units in the low and moderate-income neighborhoods it served.

ShoreBank’s loans were generally small, all involving renovation or new construction, but contained no concessionary terms.  The commercial real estate division had the highest earnings in the bank. Its borrowers included many of the “rehabbers” who initially had little experience or financial resources, but over time became seasoned developers. ShoreBank created its own lending market, a market ignored or invisible (“red-lined” according to local residents) to more traditional banks. 

ShoreBank’s lending capacity, like all banks, was leveraged off its deposit base and its capital. However, because of its community development focus, it was able to attract both deposits (“development deposits”) and capital investments from a national community of “mission-based” institutions. All the real estate loans the bank originated were kept in its portfolio – a risky proposition given the geographic concentration of its loans.   It was unable to find a secondary market for what the bank’s CEO described as its “unorthodox loans”, i.e., small multifamily loans in neighborhoods with a history of decay.


xxi Jim Bringley was the chief mortgage officer for multifamily lending.  He and his staff organized and provided ongoing support for the rehabbers; he was the “professor” who generally conducted these sessions. His section of the bank was generally the highest earning division.  The link to the research follows: https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2019/wp19-30.pdf?la=en


Given its widely acclaimed successes, ShoreBank expanded both nationally and internationally.  It also gave rise to the Community Development Financial Institutions initiative of the Clinton Administration whereby similar institutions were seeded around the country.

The Chicago Investment Corporation (CIC)

The Chicago Investment Corporation, organized by Chicago banks in 1984, was largely modeled after the Community Preservation Corporation (CPC), as described below, but adopted some practices from ShoreBank. It too focused its lending activities on low and moderate-income neighborhoods in Chicago, with an emphasis in helping small building owners repair and stabilize their affordable rental housing.  It also became a vehicle for directing City programs to help those properties. Like ShoreBank, its “one stop shop” worked closely with local apartment owners to help them improve the financial and physical health of their buildings and keep them affordable to their tenants. CIC’s multifamily loan profile was similar to ShoreBank’s, with the exception that public funds were often entwined in individual transactions.

CIC has become a ubiquitous lender in the neighborhoods it serves.  In several, it has the highest market share of loans in the area – up to 10%. Since its founding it financed almost 62,000 affordable units.

Like CPC, its funding was through a line of credit from its participating banks to make construction loans.  This later changed when CIC became a member of the Federal Home Loan Bank, enabling it to use credit from the Bank to fund its short-term construction loans. Its sponsoring banks committed to purchase those construction loans and convert them to long term mortgage loans.  The vehicle for the latter was to create a security backed by the long-term mortgage loans CIC originated, with each participating bank buying a fixed percentage of each security. In that manner, the risk of CIC’s neighborhood lending could be spread among many banking institutions.

The Community Preservation Corporation (CPC)

The Community Preservation Corporation was established in 1974 by the major commercial and savings banks of New York City under the leadership of David Rockefeller. Its mission was to counter the massive housing abandonment and deterioration that was taking place in many of the City’s low and moderate-income neighborhoods. The strategy was to invest in neighborhoods adjacent to where abandonment was occurring and   preserve the existing, occupied housing from further decline. Thus, it focused on assisting private owners to rehabilitate their apartment buildings in a way that was both financially sound and affordable to their current residents. 

The vast majority of this housing was built before World War II and needed extensive renovation.  Recognizing the amount of private capital that would be needed to preserve these neighborhoods, regulatory and programmatic changes were needed in order to harness and harmonize public support with private financing that the banks would bring to the table through CPC. The City programs included real estate tax relief, subsidized financing, expedited processing through the City’s rent regulatory system and rental subsidies for residents who could not afford rental increases in the restored buildings. CPC would demonstrate how this could work in two City neighborhoods, one in Norther Manhattan, the other in Central Brooklyn, and lay a path which could be followed by other lending institutions.

This combination of City programs and private funds had to be made usable to the generally unsophisticated owners of the properties in the targeted neighborhoods.  This, combined with advice on renovation, became CPC’s version of a “one-stop-shop,” more fully illustrated in appendix A below. This produced restored housing that was physically and financially strong, and affordable to its residents.  See appendix B for a typical transaction.

The financing for CPC consisted of a line of credit from its member commercial banks to make construction loans for these properties, and a commitment from its commercial and savings banks to buy a fixed percentage of a security backed by individual long-term fixed rate mortgages once construction was completed. This mortgage backed security was CPC’s collateral trust note {CTN}. Importantly, the interest rate on those long-term mortgages were fixed at the time construction started.  Thus, the property was insulated from any spikes in interest rates that might occur during the construction period and provided long term stability to the newly restored housing – both important factors for affordable housing.


xxiii Initially, they used section 8 vouchers, or some combination of rent skewing.


There was one critical element that would give breadth to the CPC program:  its individual long-term mortgages would have mortgage insurance provided by a new City program called the Rehabilitation Mortgage Insurance Company (REMIC). This insurance was available for investments in designated low and moderate-income areas.  Several years later, the State of New York established a similar mortgage insurance program (State of New York Mortgage Agency –SONYMA) for investments in “under-served areas.” Neither program would insure the short term construction loans, only permanent mortgage loans. As one of the bankers famously said at the time “we’re willing to take the construction risk but want to socialize the long-term risk of possible neighborhood decline.” That proved to be the elixir to draw in capital to arrest neighborhood decay. The banks’ initial commitment of $32 million to CPC later was increased to $100 million.

Each of these insurance programs was structured to address the principal concerns of long-term lenders:  sufficient capitalization to cover losses; coverage of first losses up to a percentage of the mortgage amount; and satisfactory repayment protocols.  Underwriting standards for insured mortgages largely conformed to bank standards, but were flexible enough to meet diverse local needs, and mesh with local subsidy programs. The details of these programs are found in Chart I, below.

                                                                                                         Chart I


                                                                       City and State Mortgage Insurance Program

The City’s program, the Rehabilitation Mortgage Corporation (“REMIC”), was backed by a one-time capitalization from the City’s-tax exempt housing agency and reserved $1 dollar for every $5 dollars insured.  Beyond that, the City program was backed by its “moral obligation” which it subsequently dropped as the City faced bankruptcy in the mid-1970s. REMIC initially provided insurance for CPC’s permanent mortgages. It provides up to the first 1/3rd of losses of the initial face value of the mortgages it insures.

The State program, State of New York Mortgage Insurance Program (“SONYMA”), adopted in 1980, was similar to REMIC in most respects.  It was capitalized by an ongoing source, a ¼% surcharge on the State’s mortgage recording tax. Its reserve policy was to set aside $1 dollar for every $5 dollars insured, with any shortfalls from claims having first call on future revenues generated from the surcharge.  SONYMA’s standard policy provides up to the first 75% of losses of the initial face value of the mortgages it insures. Covered losses for both insurers include interest arrears, local taxes, fees, protective advances and other foreclosure costs. 

SONYMA at first sought a sharing of the first loan losses with the originating banks, but soon recognized that this would significantly diminish private bank investment in target neighborhoods.  Because of both its top loss feature and its strong capitalization, SONYMA became the insurer of choice for CPC and later for the public employee pension funds investments.

SONYMA and REMIC were initially unrated.  SONYMA eventually received investment grade ratings, as did REMIC. 

SONYMA and REMIC both underwrote eligible loans requiring that a project’s net income was at least 1.05 percent of expenses, including debt service.  Significantly, both program’s underwriting accounted for the benefits of local subsidy programs, such as real estate tax abatement and exemptions, below market secondary financing and other subsidies – an important difference from some national programs. The insurers both allowed for publicly subsidized subordinate financing. Both insurers have established strict criteria for those institutions eligible to submit mortgages for insurance.

SONYMA has been able to insure mortgages funding housing that meet a variety of affordable housing needs. In addition to multifamily loans, it has insured trailer parks, special needs housing, small buildings with ground floor retail and other specialized housing.  It also has become an insurer of tax-exempt bonds funding LIHTC projects.


xiv The City designated Neighborhood Preservation Areas.  In addition to mortgage insurance, other subsidy programs were available in these areas such as enhanced real estate tax abatement and exemption, certain below market financing subsidies.


CPC’s financing structure worked well:  by 1982 over 11,000 units of housing were restored or in the pipeline, representing investments of over $90 million.  Only one mortgage had defaulted, resulting in a loss of $300,000 which was fully covered by REMIC mortgage insurance.

However, as the Savings and Loan crisis unfolded in the early 1980s, this financing arrangement was no longer sustainable for many of CPC’s bank sponsors. Changing financial regulations resulted in an imbalance between many banks’ short-term liabilities (interest paid on savings accounts) and their long-term fixed rate mortgages (interest earned on mortgages). While the banks continued to fund CPC’s short term credit line, many said they could no longer provide the long-term fixed rate funding.  New sources had to be found.

To fill this void, CPC sought, and in 1983 obtained, commitments from the City’s public employee pension funds.   They would provide the long-term, fixed rate mortgages that CPC would originate. It was fortuitous that in early 1982 when the City’s Comptroller was approached, that several City pension funds were exploring ways to invest in the City.  The Comptroller, Jay Goldin and his chief investment officer Jack Meyer, recognized that CPC had the credentials, the organization and the record to invest on behalf of the public pension funds. CPC’s long-term forward priced fixed rate mortgages, insured by SONYMA, were compatible with the funds’ investment objectives, matching their long-term liabilities (retirees’ pensions) with their long-term assets.  In order to conform to ERISA (Employee Retirement Income Security Act), CPC’s insured mortgages were compared with GNMA housing investments (Government National Mortgage Association bonds) and priced accordingly. Several years later, the State public employee pension funds invested in CPC mortgages on a similar basis.


xv In 1980 regulation Q of the Federal Reserve was altered permitting higher interest rates on savings accounts.  Non-bank institutions offered certificates of deposits at higher rates than the thrift industry. This resulted in the precipitous decline of many savings and loan institutions as in order to compete, they had to pay more for deposits (their liabilities) but their assets were largely long term fixed rate mortgages.

xvi In 1983 the Police pension fund approved $50 million to invest through CPC. Thereafter, three other City pension funds approved additional investments.  See “New Pension Fund Role –Saving Housing” Frank Prial, New York Times, August 3, 1983.


By the end of 2011, the City and State pension funds invested over $1.3 billion with CPC with no losses of either principal or interest, with the insurers absorbing about $6 million of losses. At the end of 2011, the City pension fund manager stated that the CPC investments were the highest yielding of their fixed income investments – yielding over 7 per cent. The program became part of a new infrastructure to preserve and rebuild low and moderate income communities.  Through 2011, about 95,000 apartments had been built or restored in New York City.ï Chart II below summarizes the elements of the pension fund program.


xvii Three reasons account for this.  CPC had prepayment penalties that were applicable for ten years. Next, coming off the high rate environment of the 1980’s, many CPC loans had 1% subordinate funding from New York City, who’s policy was not to permit refinancing of CPC’s first mortgage without paying down an appropriate amount of the City’s secondary debt. Last, many of the properties were in neighborhoods where it was difficult to obtain institutional mortgages.  Thus, pre-payments were lower than might be expected with conventional multifamily mortgages. 

-Not all of these units were financed by the pension funds. About 10,000 units were newly built “work-force” housing sold as condominiums. Several thousand other units were financed through Freddie Mac, the most prominent of these was the restoration of the 12,271 unit apartment complex of Parkchester in the Bronx. See  https://citylimits.org/2018/08/22/cityviews-the-lessons-we-learned-from-saving-parkchester/. CPC also had an active program outside of New York City beginning in the mid-1980s. Over 45,000 units were built and preserved throughout urban areas in New York State, many of which used State pension funds. Several thousand units’ long-term funding was provided by third party banks, the United Methodist pension fund as well as CPC’s original CTNs.  CPC also lent in areas of New Jersey and Connecticut with third party banks without the benefit of mortgage insurance or pension funds. Through the end of 2011, CPC financed in total about 145,000 units representing public and private investments of almost $8 billion.



                                                                                                         Chart II


                                               The Public Employee Pension Funds Investing in Affordable Housing

In 1982 City public employee pension fund trustees sought prudent ways to invest up to 2% of the fund’s assets in City affordable housing projects. CPC’s success at that time– the company had invested about $90 million in rehabilitation loans -- was seen as an attractive way to meet that objective.   Several years later, the State pension funds adopted the same investment program. The principal features of the investment are:

Forward committed 30-fixed rate mortgages. The long term mortgage rate is set at the time of the construction loan commitment. Thus, once construction is complete (typically in 2 to 2 ½  years) and the mortgage loan is insured, the pension fund purchases the loan at par at the forward rate.

Individual mortgages insured by SONYMA:  Special provisions for public pension funds include loss coverage of 100% of initial mortgage amount; and timely payments to be made of principal and interest after 3 months of mortgage arrears.

Base mortgage interest rate: Priced by adding a spread over GNMAs, accounting for difference in risk of CPC mortgages insured by SONYMA as above (unrated at the time, now AA), compared with AAA rated GNMAs.  Other factors included the lack of liquidity of the CPC mortgages compared to GNMAs – a negative; CPC loans have a measure of call protection, GNMA’s do not – a positive.

Forward pricing premium:  A premium to the base rate was added to account for the lost earnings funds would have earned if invested in treasuries during the forward commitment period, e.g., if the construction period lasts two years, earnings that the funds would have earned if invested in two year treasury notes were calculated into the long-term rate.

Non-delivery fee of 1% for failure to deliver mortgage:  “Gentlemen’s agreement” that fee would not be used as a hedge.  Thus, even though market rates might be lower at delivery date, typically two years after the construction start in accordance with the forward pricing commitment, mortgages would still be sold to the funds at par.

CPC mortgage committee: Composed of senior loan officers from member banks were authorized to commit individual mortgages for pension fund purchase that meet required standards. The standard for all loans is that they are individually insured by the State or City mortgage insurance program.


III. A striking similarity of all three models – low costs, high volumes!

There were several similarities between CPC and the two Chicago programs. First, redevelopment costs of the privately owned “naturally occurring” affordable housing was significantly less expensive than comparable publicly sponsored efforts.  It was not unusual that costs of the three organizations were often half that of similar public efforts. The key driver of low costs is the simplification of process. Each company, through its own version of the “one stop shop” took on the burden of organizing the financing and, where used, the subsidy for local building programs.  Thus, for renovation of occupied or vacant apartment buildings in New York City, or the restoration or building of new three flats in Chicago, each program was made easily accessible to the small, neighborhood builders who were at the heart of the preservation and rebuilding efforts. 

Relieved of much of the processing of obtaining financing, and dealing with government bureaucracy when subsidies were needed, these entrepreneurial local developers  provided cost-efficient renovations which conformed to the banks’ guidelines. See Appendix I for more detail of these savings for CPC. Concurrently, the lenders organized themselves to provide timely construction starts and ongoing support as issues arose.  A six to eight month closing from the time of application for funds to build was not uncommon for the typical renovation job, a sharp contrast with many publicly assisted affordable housing programs.

A second similarity was the high volume of activity these organizations carried out in the neighborhoods they served. Over time, as the local owner/builders perfected their skills and built their organizations, they took on increasing numbers of projects. ShoreBank, CIC and CPC all had numerous repeat clients restoring buildings.  They could direct these builders to intervene in troubled buildings and maintain the redevelopment momentum. One example from New York City was in the early 90’s when a spike in Freddie Mac foreclosures threatened to undo redevelopment efforts. CPC offered its clients a quick financing solution, sometimes involving public subsidy, to purchase these foreclosed properties (often at significant discounts to their outstanding debt) and restore these properties to physical and financial soundness, while maintaining affordability for existing residents. These local developers became the engines of redevelopment in their communities.

An issue often raised regarding these efforts is lender liability, given the extensive owner counseling that was an integral part of the “one-stop-shop.”  The issue was tested for CPC when it was raised as a defense in a foreclosure action. See Michelin Associates v New York City Community Preservation Corporation, 1980.  The court dismissed the argument and found in favor of CPC. It was the only time the issue was raised in the courts up through my tenure. While larger banks may see this as an obstacle in replicating the “one-stop-shop” model, CPC, ShoreBank and CIC adopted strategies to minimize such risk.

IV. How the same model may be adapted to moderate gentrification pressures

How the one-stop-shop model of ShoreBank, CPC and CIC can be useful in moderating the effects of gentrification? 

Rapid population growth in about 20 of America’s largest, most prosperous cities, has brought affluent households into many low and moderate-income neighborhoods in search of lower cost housing convenient to their places of work. The change is readily visible:  increasing construction of new and renovated buildings, bike racks on the sidewalks, a new coffee shop, and perhaps a dog grooming salon on the corner. While this may affect schools, shopping and services in both positive and negative ways, its most visible affect is to increase the cost of housing.  As a consequence, existing residents often find themselves priced out of the neighborhood. However, this is not inevitable as there may be modest ways to moderate these pressures.


xix CPC would provide general guidelines as to what would conform to its lending criteria, e.g., construction work scopes and costs, leaving open opportunities for borrowers to present their own proposals, adjusting those criteria to their specific property.


Many gentrifying neighborhoods’ existing zoning permit multifamily housing development. Herein lie many opportunities to build new housing and to renovate existing housing.  These include vacant land, “missing teeth” in residential blocks, underbuilt sites, commercial strips with unbuilt residential potential, various institutional sites, and existing apartment buildings.  An active public program incentivizing an affordable alternative to market rate housing might create and preserve a portion of the neighborhood’s housing for moderate-income households, and a less pricey option for new arrivals.    How might this occur?

In a gentrifying market, expeditious decision-making is imperative.  New York City’s real estate market, like many urban markets in the country, is swamped with developers and/or builders looking for the next new neighborhood to be gentrified.  To compete in this environment, the municipality must offer an attractive affordable housing alternative, define the neighborhoods where it is available, and implement individual deals in a timely fashion.

Existing public programs often fall short; they are too encumbered with lengthy processing to affect a timely intervention and forestall the possibility of a robust program.  The speed and agility of the “one stop shop” might be adapted for this task. In New York City, a program which provided secondary loans at 1% rates in combination with CPC private financing was responsible for rebuilding tens of thousands of deteriorated and vacant buildings in the late 70s through early 90s.

What are the elements of an attractive affordable alternative to market rate housing?  First, is a high percentage of financing. The municipality, perhaps using subsidy funds,  combines with, but subordinates to, private financing, to fund up to 90% of the costs to build an affordable rental building. This is very attractive as most private developments typically finance about 60 to 70% of their costs, with the remaining monies coming from their pockets or from high cost equity funds.  Next, appropriate caps would be put on acquisition and/or refinancing costs. In exchange, the developer would agree to price rental apartments at an average percentage, say 80%, of market rents and/or housing costs in the area, and rent to income eligible households. All apartments would be put into a long term regulatory agreement, that fairly adjusts to keep pace with rising operating costs.

Second, to assure long term financial feasibility, real estate taxes might be reduced for the term of the regulatory agreement.  Furthermore, the municipalities’ subsidized funds would have repayment terms to provide adequate cash flows to account for normal operating cost fluctuations and a reasonable return on the owner’s investment. Ideally, a long term forward committed private first mortgage, perhaps public pension funds as described above, would provide the private funds for the projects. 


-An interesting exercise for local government might be to survey the amount of unused multifamily density available in gentrifying neighborhoods.  The use of this density for affordable housing might lessen the need to undertake politically difficult rezoning proposals.


The third and crucial component is expedited processing of the municipal programs.  This might be the most challenging element to deliver. To move quickly for new construction projects, prototypical buildings’ designs and specifications should be approved in advance for typical in-fill sites.  As an example, CPC developed some 60+ prototypical 8 unit, 4-story buildings that fit in vacant lots in mid-rise zoned neighborhoods. The construction cost of these properties built between 2004 and 2014 ranged between $100 to $180 a square foot, substantially less expensive than comparable public programs during that period.  We immodestly called it “an urban version of Levitttown.” Other prototypes can be developed for more or less dense residentially zoned areas. Thus, builder/developers who buy a property in a designated area and choose to build the prototype, would be eligible for the program’s benefits.

If this is to occur in a timely fashion, say within six to eight months after a purchase contract is signed, banking partners like ShoreBank, CPC and CIC with their one-stop-shop will be needed.  They would perform several roles. First, the bank would vet the credentials and financial strength of the builder/developer. Second, they would make an acquisition/bridge loan for the property, providing time for the subsidy programs to be put in place.  Beyond this, the bank would provide the private funds for the construction loan, and arrange for the long-term loan for the property, perhaps through pension funds.

For banks to play this role, they will need to be confident that significant public resources will be dedicated to the program, and that the program’s operation will function predictably and efficiently.  There should be advanced agreement on underwriting standards, construction and permanent loan documentation, prototype design and specifications, construction cost guidelines, program parameters, as well as caps on acquisition/refinancing.  Further, the City should deposit all its subsidy funds with the participating bank at construction loan closing, with the bank administering the construction loan. A single engineer/architect, agreed in advance by the City and bank, would have the authority to approve all construction loan advances on behalf of both parties in accordance with the construction loan documents.


xx In banking parlance, this means that the ratio of net income after expenses is at least 115% of the cost to pay for the debt, both the long-term first loan from the private lender and the second loan from the City. This should in almost all cases provide a reasonable return on the owner’s investment of 10% of the costs of the project.


Operationally, the City and bank must organize the program to insure that authoritative decisions can be made expeditiously as issues inevitably arise on individual transactions.  This was essential when the City undertook the restoration of thousands of small, vacant city-owned buildings during the Koch and Dinkins’ administrations.

Finally, the municipality will have to make a judgment as to what areas they will want to designate for such a program.  Some areas may have such high land prices as to render any affordable housing infeasible (excluding rezoned areas which can have an affordable component tied to the rezoning).  However, there are many mid-rise zoned residential areas that might be ideal for such a designation. To start, areas might be selected that are in the path of gentrification, e.g., transit hubs or along subway lines. Within these zones, real estate benefits, subsidy funds and local mortgage insurance would be available.    

One can envision this program taking root in many gentrifying areas engaging an army of small builders vetted by the participating banks.  Thus, stable, genuinely economically integrated communities may in some measure be achieved, with the benefits – schools, local services, nearby transportation -- flowing to its residents. 

V. Building a national financial model to routinely finance the preservation and building of small affordable multifamily housing. 

For New York City, a deeply felt crisis surrounding the viability of its neighborhoods catalyzed a high level partnership between the banks and government to take action resulted in the creation of CPC.  For many communities around the country, similar crises exist. Nationally, 50% of all rental households (21 million households) are rent-burdened, paying more than 30% of their income for housing and one half of those (11 million) pay more than 50% of their income for housing.

The center piece for a new program to address these issues is the creation of a mortgage insurance program on a State, City or regional level, to credit enhance the long-term financing of  affordable housing. The initiative depends on local levels of governments’ willingness to capitalize the insurance fund. The New York program provides two examples of how this might be accomplished, as mentioned in Chart I above.

The Federal government can play a vital role to stimulate such initiatives by providing a template for the program, modeled on New York State or City’s mortgage insurance program.  Its central features would include: a standard defining sufficient resources to adequately capitalize reserves, together with ratios of reserve requirements to insured amounts; top loss coverage; a credible claims payment program; criteria for selecting loan originators; and sound, but flexible underwriting that recognizes local conditions, and where available, can incorporate the use of local subsidy programs. 

To incentivize localities to create such mortgage insurance, the Federal government may make available some form of Federal subsidy on an as-of-right basis for mortgaged properties insured under the program. Two examples of subsidies that might be provided are in the tax code.

First, have an as-of-right allocation of LIHTC benefits for income-eligible properties built or renovated using the new mortgage insurance program.  To encourage investment in deteriorated but occupied low-income buildings, eligibility may be modified so that buildings located in low-income census tracts (where the average median income conforms, with the LITHC definition for the area) can receive LIHTCs without requiring income documentation from existing tenants, recognizing the difficulty of income-certifying current residents.   (Rent regulations in some jurisdictions, such as New York, preclude an owner from adding an income certification requirement upon lease renewal for existing tenants.)


xxi ”State of the Nation’s Housing 2016,” Joint Center for Housing Studies Harvard University and the National Low Income Housing Coalition

xxii See City and State Mortgage Insurance above.


Second, the Opportunity Zones provisions may be modified to permit existing owners to receive benefits if they invest to make improvements to their properties located in the zones, financed by mortgages insured by the new program.  (The Opportunity Zone regulations now require a change of ownership in order to receive the tax benefits.) 

To attract long-term investors, Fannie, Freddie, the Home Loan Bank or some other highly rated entity could provide reinsurance to local mortgage insurance programs. Such reinsurance can jump-start an investment-grade rating for the program, thus easing ERISA concerns of pension and other such funds. Given CPC’s experience, the public employee pension funds may be the ideal investors for this initiative.


xxiii Section 167K under the 1969 tax act provided for the five year accelerated depreciation of the full cost of rehabilitation of low-income rental housing up to $15,000 per unit, later increased to $20,000 – an adequate amount for most moderate rehabs at the time. Like the “opportunity zones” property owners could simply form a single purpose entity for the property to be eligible for benefits if it conformed to 167k’s requirements for low-income housing. This program was widely used in CPC’s efforts in restoring deteriorated properties.

xxiv See statement of Michael Lappin to the Millennial Housing Commission July 24, 2001. Reinsurers should be sensitive to local housing variations that might not typically be underwritten in their national products, e.g., FNMA may not recognize local real estate tax abatement programs. To the extent local mortgage insurers’ underwriting varies from their standard products, the national organizations can vary their top loss requirements. FHA may not be a good candidate as a reinsurer, given its rules regarding wage requirements, etc.”


Finally, the establishment of this new financing vehicle can serve as a platform to incentivize the creation of new specialized lenders with a construction lending capacity. This might include local banks and community development financial institutions. They will have to meet the threshold criteria that the insurers will set to enable them to originate mortgages for insurance.  The entrepreneurial and social challenge is for the banks and the municipalities to work together to develop a self-sustaining business model that includes a version of a “one-stop-shop” to efficiently deliver both private capital and public subsidies to housing developers, particularly smaller, less sophisticated developers. This is an under served market and an area ripe for innovation, given the great need for affordable housing. 

VI. A final word

The program suggestions herein are  designed to create the possibility of large volumes of affordable properties financed by some of the largest investment resources in the country.  As a past Mayor of New York said at a ribbon cutting of a new 25 unit building in the Bronx for veterans and their families “the real miracle with this building is how one of the largest pension funds in the country [New York City Common Retirement Fund] is able to fund the development of such a modest building serving an important need.” 

Success is not assured.  For CPC, which used a heavy mix of City and State programs, the strength of its “one-stop-shop” depended on a strong ongoing partnership with government. This can fluctuate over time, as the sense of urgency changes or as political administrations change.

Furthermore, as stated at the outset, larger economic and demographic forces can overwhelm vigorous local efforts.  The great recession of 2008 created enormous pressures on the neighborhoods in Chicago and New York and around the country.  It affected each of the three organizations cited. But within the margins of these larger forces, each of the organizations did enormous good for their communities, measured by the generations of families that benefited from living in sound, healthy and affordable housing.


CPC’s “one-stop-shop” was designed so that City/State programs and CPC’s financing requirements and protocols were combined to (1) satisfy bank lending standards; (2) meet the government’s affordable housing goals; and (3) be usable to the typically unsophisticated owners of distressed apartment buildings. Furthermore, CPC and New York City worked together to gain community support for the projects.  As much of the renovation activity was concentrated in targeted neighborhoods, and often while residents remained in-occupancy, building and maintaining community support over many years became an integral part of CPC’s activities.

The operational details of the one-stop-shop were:

Applications for public and private funds were combined; financing documents (commitments, mortgages, notes, participation agreements, servicing agreements), underwriting standards (debt service coverage, loan to value and to cost, operating costs standards), were pre-approved with government, lenders, and mortgage insurers.

A single commitment letter would be issued by CPC for both construction and permanent financing from both CPC and the City.

Standards for minimum scopes of renovation work, pricing (within a 10% contingency) and specifications for the scope of work were established, as were recommendations of pre-vetted contractors to do the work.  Owners were offered the names of multiple contractors from which to choose or would select others to be vetted by CPC and the City.

CPC became the City’s agent to administer the construction process.  A third-party inspector representing both CPC and the City would approve construction advances and change orders.

The results of the above arrangements had a major impact on costs.

Standardization kept third party reports, legal, financing, other transactions and closing costs low. The certainty of  CPC’s forward rate commitment for its permanent financing reduced required construction interest reserves.

Processing times were shortened, with typical rehab projects taking 4 to 8 months from inception to closing and construction start.

With short processing times and more predictable construction starts, coupled with CPC’s expertise on prices, construction costs for the major renovation trades were kept low, competitive with non-governmental work.

CPC’s assistance enabled local low-cost owner/developers to participate in neighborhood development activities as much of the burdensome coordination and paperwork that typically accompanies affordable housing projects was substantially reduced. 

Most savings were passed through to the project, reducing the need for public subsidies.  As early as December, 1981, in testimony before the President’s Commission on Housing, CPC noted that its moderate renovation and gut renovation projects cost about half that of comparable HUD programs. This pattern continued in ensuing years. 

During the Koch – Dinkins’ housing initiatives in the late 1980’s, the one stop shop was modified to finance the rebuilding of vacant City owned properties. Here too, low cost renovations were achieved. CPC financed renovations averaged about $75 a square foot (buildings were sold for $1) or about $70,000 to $75,000 per apartment, the lowest cost among the several approaches to rebuild these vacant buildings.  15,000+ units were financed by CPC through this program.

APPENDIX B               



Work scope: replace deteriorated mechanical systems; weather tightening, including new windows, roof, pointing; needed cosmetic and apartment interior improvements. Scopes were moderated to reflect individual building’s capacity to repay the debt.

Refinancing and/or acquisition: lesser of appraised value or actual cost.

Financing: up to 90% of costs including: approved refinancing/acquisition cost (no cash out); renovation costs; soft costs.

Construction Loan: rate spread over index for private portion; 1% rate for public portion (if required); non-recourse; letter of credit for 10% of total rehab cost; 10% retainage on construction loan advances.

Permanent private financing: 30-year fixed rate self-amortizing loan insured by SONYMA or REMIC with up 24 to 36 month forward rate set at construction closing; non-recourse to borrower.

Public financing: subordinate loan at 1% rate with amortization as required.

Debt service coverage: 125% on private debt; 115% on all debt.

Owner equity: 10% equity of new cash, typically at loan closing (may modify if low debt in building).

Rent increases:  as permitted by regulations; with subsidies and/or rent skewing for eligible households.

Real estate taxes: $0 taxes up to 20 years, improvements exempt from reassessment for 32 years.



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