September 04, 2019

Statement before the Millennial Housing Commission

Michael Lappin

Michael Lappin
Managing partner /MLappin & Associates LLC

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                                         Statement of Michael D. Lappin, President

                                         The Community Preservation Corporation

                                        Before the Millennial Housing Commission

                                                                  New York, NY

                                                                   July 24, 2001



Thank you for the opportunity to speak about strategies for preserving affordable multifamily housing. I am Michael D. Lappin, President of The Community Preservation Corporation. CPC was founded 27 years ago by New York’s major banks, and later, insurance companies, to invest in the preservation and development of affordable housing. Since our founding, we have invested over $2.7 billion of public and private funds for the restoration and stabilization of almost 85,000 housing units. Drawing from lessons learned by CPC in New York, I will outline the elements of a preservation system with the capacity to induce high-volume redevelopment of aging multifamily apartment buildings.


A persistent issue for our urban areas is the preservation of affordable multifamily housing. With our housing stock growing older, and the cost of replacing it beyond the reach of many of its residents, our urban neighborhoods have a continual need for new capital for upgrading.   How can we create a system for reinvesting in our aging multifamily housing stock which both preserves them and keeps it affordable? Three elements for such a system will be discussed: 1) organizing the preservation process for large scale redevelopment; 2) accessing the capital markets to support such redevelopment; and, 3) maintaining a regulatory backdrop for such reinvestment.


                                                    What stock are we preserving?


The term preservation has been used almost exclusively in the context of publicly assisted housing and the problems concerning expiring governmental contracts and use restrictions. However, governmental housing provides a relatively small percentage of low and moderate income housing.   The larger market that forms the core of most older urban areas consists of privately owned multifamily properties. The preservation of this housing stock holds the key to decent housing for this population, and will be the focus of this paper.


Nowhere is this more evident than in New York City. Nearly 60 percent of the City’s multifamily housing (about 1.4 million units, excluding public housing) was built before World War II. About 900,000 of these units are in low-and moderate income neighborhoods, with about 75 percent owned privately and unassisted by any major public program. This mirrors many older urban areas, with the possible exception that New York has been more aggressive in taking advantage of public programs. Many of these privately owned properties, particularly in the poorer neighborhoods, need some kind of upgrading. Their sixty year old mechanical systems – plumbing, wiring, boilers – need replacement; their building envelope needs tightening; and, their interiors, damaged by the inadequacy of aging building systems, need repair.



The nature of the target market - unsophisticated owners and complex public programs.


How do we reach the private owners of the older multifamily stock and induce their participation in preservation programs?   Most public programs for building renovation focus on solving the problem of affordability, and largely neglect the problem of marketing the programs to existing building owners. Perhaps this neglect stems from a distaste for those who own “slum” buildings and a concern of the political cost of directing public funds for their use.   Yet, any meaningful scale of redevelopment depends on inducing the wide participation of these owners.


             A more objective view of these owners is that many are inexperienced and have limited financial resources, and are caught in a situation where the fragile economics of their buildings is inadequate to cope with its repair and replacement needs. Family members often perform many of the tasks in operating their properties out of necessity for keeping costs down. They have little knowledge of renovation. They are unaware of, or unable to cope with the bureaucracy of governmental programs designed to assist these properties.   In a city like New York, many owners are immigrants and have little experience with government or institutional lenders. In turn, many institutional lenders would not look to this group of owners as a viable lending market.


Confronting these inexperienced owners is the complexity of preserving affordable housing. First, there is an array of public programs to assist this process including below market loans, tax credits, real estate tax abatements, rental subsidies, grants, mortgage insurance (more will be said about this later), etc. Each addresses separate problems, each has its own requirements, and often each is administered by separate agencies. Next comes the difficulty of obtaining private construction and permanent financing: loans are relatively small; loan feasibility usually requires the incorporation of the benefits of public programs into their underwriting; and long and short term lending requirements must be coordinated. The construction process itself is rife with problems: knowing what work to do, which contractors to select, and what price to pay. Additional complications are inherent in preservation, as renovation is often done while tenants remain in-occupancy.


With such a complex system, it is not surprising that relatively little building-wide rehabilitation is done. When it does occur, the participants tend to be specialists, whose primary skill seems to be in obtaining access and navigating among the varied public programs supporting upgrading. It is also not surprising that this distorts the cost, and that publically assisted renovation is done at a substantial premium over comparable private efforts. This high cost of restoration reduces the numbers of properties that can be preserved, and dissipates the impact of public programs, as most costs are paid with public funds, and relatively small amounts financed with private capital.


Organizing the preservation process: the “one stop shop” – high volumes at low costs.


Is there a way to change this and induce high volume redevelopment? One model that accomplished this was CPC’s preservation efforts in the late seventies and early eighties in New York City. In the mid-seventies, the City was in economic crisis. Privately owned apartment buildings were deteriorating and being abandoned at an rate reaching 25,000 units a year. There was a recognition that government by itself could not reverse this situation, but that large scale private investment was needed to supplement public funds. In this spirit, the banking community established CPC to work with government to organize various governmental programs supporting renovation to effectively leverage private financing. The focus was to direct public and private resources to upgrade deteriorating, but still habitable buildings, before they reached the point of being abandoned. Two areas of the City, with concentrations of viable, yet vulnerable older apartment buildings, were selected to demonstrate the viability of this approach.  


The “one stop shop” that resulted from this collaboration was accomplished through certain delegations of authority for critical public programs to CPC. As a condition for such delegation, agreement was obtained on a range of issues, including underwriting standards, loan documentation, construction standards, and others. In effect, CPC became the agent for various City programs that supported housing preservation. This enabled CPC to provide private construction and permanent financing, and public subsidy in one stop. Added to this, CPC found it necessary to give technical guidance to property owners in the renovation process. In effect, this very complicated process was organized in a way to make it accessible to the inexperienced owners in the target neighborhoods.


The results were impressive. In a period of seven to eight years, tens of thousands of apartments were physically and financially overhauled in vulnerable neighborhoods. The restored units provided sound, stable housing for another generation of use. Remarkably, almost all of the local owners who participated in the rebuilding process had virtually no prior experience with the major governmental housing programs. Equally remarkably, the restorations were done at up to half the cost of comparable public efforts. The relatively low development costs meant that public subsidies were used in a highly efficient manner. To this day, almost twenty years later, the default rate of the private debt on these properties has been less than one half of one percent.


What in effect happened is that the simpler process brought new players into the redevelopment market and introduced price competition into a relatively small and closed industry. These new developers included not only small owners, but also building managers, contractors and others who gained experience in the preservation process. These new developers became the engines for redevelopment in their communities, and many went on to become a mainstay for future public/private housing efforts.


Can this high volume, low cost redevelopment be replicated? CPC’s experience is that when there is a strong alignment of interests and priorities between public and private sectors, such a system can be established. Public entities must be willing to cede certain authorities with reasonable oversight to private lenders, and private lenders must be willing to abide by the conditions set by the public sector. If adopted, the potential for private/public partnerships to organize the rebuilding process can be fully realized.         


Financing the preservation process: the creation of local mortgage insurance .


       How can a finance system be created to support this organized preservation effort? Can we access the private markets through the development of a secondary market?   Three factors are critical in this regard: historical information on loan performance, standardization and volume.


Better data can take much of the mystery out of this area of housing. However, we should not be unrealistic about what that data might reveal. Low and moderate income households are typically more vulnerable to the vicissitudes of the economy than others, and the history of the properties in their communities may point to difficulties.[1] If priced accurately against this backdrop, financing costs might be so high as to be effectively unavailable without subsidy.


. The search for standard loan products may be elusive in this market. The affordable housing market, particularly in the multifamily area, often needs some public help to make it work. This means a variety of non-standard features, including secondary debt, income restrictions, time limited subsidy contracts, real estate tax abatements and exemptions, etc., or often a combination of such features. While these subsidies are necessary to make financing feasible, they often impose conditions that run counter to the uniformity needs in the marketplace.


To remove these obstacles, public mortgage insurance could be established. It would perform three functions.   First, the program can establish underwriting standards for insured mortgages that are sound, but flexible enough to meet the diversity of local needs. It has proven very difficult for national lenders to understand local conditions and underwrite local risks. Second, it would overcome the lack of uniformity in individual transactions by substituting for it uniformity in the credit enhancement. Third, by offering sufficient top loss insurance, it would realistically offset the social risk of investing in low and moderate income multifamily housing;


A model for such mortgage insurance is provided by New York State and New York City. Parallel with the creation of CPC, the City, and then the State, established programs to induce private mortgage investment in distressed neighborhoods. Initially, the insurance covered only the permanent financing used as take-outs for construction loans which financed the renovation needs of deteriorating, but often still occupied multifamily housing. The requirements of the program were woven into CPC’s “one-stop-shop” approach so as to be usable to private property owners in the target low and moderate income communities.


The insurance program initially attracted long term investments by thrifts and commercial banks acting through CPC. As the soundness of the investments and the insurance was demonstrated, additional investors, including the large city and state public pension funds, joined the redevelopment efforts, After about 10 years of experience, the State system received a “AA” rating from two top rating agencies, and the City received slightly lower ratings, but still investment grade.


Buoyed by this success, the State program expanded its mandate beyond multifamily renovation to support other community development needs. This included insuring debt on newly constructed housing, underlying debt on cooperatively owned housing, tax exempt debt, debt on special needs housing, retail facilities, health facilities, and manufactured housing. It is currently considering insuring financing for day care facilities and non-profit office space.


Financing preservation: a national system of local mortgage insurance.                                                                                           

The system which has brought billions of dollars into New York’s older multifamily stock and into other distressed areas could be adopted by other governmental jurisdictions around the country. A mortgage insurance program requires three essential elements: proper top loss coverage; proper capitalization of loss reserves; proper claim payment mechanisms.   For the most politically difficult element in such a program, the capitalization of the loss reserve, New York offers two alternatives. The State program enacted a one-quarter point surcharge on the mortgage recording tax to support the reserves.   This has created substantial funds and a renewable funding stream to support a large volume of investments for a broad range of community development needs. The City program supports its reserves from dedicated amounts of funds from the surpluses of its housing finance agency. These more modest sums support a more modest program than the state’s.


Nationally rated organizations, such as Fannie, Freddie, the Home Loan Bank and other large properly rated financial institutions can play a crucial role in inducing the creation of local mortgage insurance programs. They can provide reinsurance if local programs are structured in accordance with standards they establish, e.g., how much top loss insurance on individual transactions, what ratio of reserves to insured risk, what mechanism for claims payment, and criteria for selecting originators. (One standard that the national organizations must not insist upon is their own requirements for their individual housing transactions. To the extent that local needs vary 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, lead paint, etc.


Reinsurance can accomplish two objectives. First, it can provide standardization among insurers that might lead to the securitization of locally insured debt. Second, it can provide a short cut for local programs to obtain investment grade ratings. All will gain. Localities can obtain sufficient capital for their unique housing needs and national investors can create new markets that promote community development.

Finally, to achieve sufficient volumes, the process for obtaining mortgage insurance must be effectively integrated into the “one stop shop” approach.   Each element in a preservation system should strive to be sensitive to the end user, lest the complexity retard the scale of restoration efforts. The ongoing goal for the system is to routinize both the origination of loans for preservation and their subsequent purchase by institutional investors.



                                                     The regulatory environment.


The rehabilitation of low and moderate income multifamily housing is highly sensitive to changes in the governmental and economic environment. Changes in entitlement programs raise many questions. Will changes embodied in welfare reform affect the income of individual properties housing low- and moderate- income households? What will happen to rents and collections as the full impact of these changes are realized?


Can new technologies offer new opportunities for housing in these neighborhoods? What will be the effect of energy deregulation? Can communication technologies generate new income as phone, cable, and internet providers seek new markets?


If communities shift to user fees from income or property taxes to pay for municipal services, what will be the impact on affordable housing? For example, New York City recently examined the feasibility of basing water and sewer charges on usage as opposed to a largely fixed price method.   While the argument for usage focused on the needs of conservation, it ignored the fact that more than 80 percent of the cost of the system was fixed (e.g., debt service, payroll). Plagued with plumbing problems and over occupancy, low-income properties would have paid a disproportionate amount if user fees were adopted. Understanding this, the City chose a less regressive plan for funding the system.


Similarly regressive effects might follow a variety of regulatory mandates. Among those of concern is the costliness of lead paint remediation standards. Can standards be developed which balance health concerns with the realistic economic limits of low and moderate income housing?


Whether these issues can be resolved in a way that can encourage reinvestment is uncertain. The private owners of nonsubsidized low- and moderate-income housing have a weak voice in setting housing policies, and their interests are rarely integrated effectively into the broad range of housing issues. Indeed, they are often demonized, as some advocates try to put an unsympathetic face on the plight of this housing. Policies seeking to encourage broad-scale reinvestment must carefully weigh the impact of various mandated costs on the economic limitations of this type of housing.




In sum, aging privately owned multifamily housing form the core of many of our nations’ urban areas. Preserving this housing through renovation is the most viable option to maintain their affordability to their low and moderate income residents. To accomplish preservation, a system must be organized that integrates private financing and public support that is accessible and can assist owners of these properties. This means unprecedented cooperation between the public and private sectors for the creation of “one-stop-shops.” In this way, rebuilding of the older stock can be done in large volumes, and subsidies can be more effectively used. The organization of local mortgage insurance, reinsured by nationally rated financial institutions, can assure adequate flows of private capital to support the preservation system. This system also needs a supportive regulatory environment that is sensitive to the impact of various requirements to the economic viability of low and moderate income housing.




[1]While CPC’s 27 year lending record demonstrates few losses, there were many losses of institutional debt on multifamily properties in the same neighborhoods if one looks at a slightly longer time horizon.

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