A Year into the Pandemic: Affordable Housing Faces Challenges, Old and New
As we all continue to deal with the fallout from the pandemic, UNHP has been monitoring the effects on the multifamily housing world. In April of last year, we published a few posts and held a well-attended Affordable Housing Webinar hypothesizing about what we thought might happen in the multifamily affordable housing sphere. Now, we are taking stock of how our portfolio has been affected - what has helped us weather unexpected financial challenges and what is concerning us as we move forward. This post is the first in what will be a three-part series called A Year Into Covid: Views from the Northwest Bronx. The next two posts will be an update from 2020 about Multifamily Finance and the Impact of Covid-19 on Bronx community residents.
With the recent passage of the state budget, landlords and tenants are waiting to hear how the long-awaited rent relief measures will be implemented. There are many different opinions on how this $2.4 billion pot for rental assistance should be distributed at the state level. Our fear, as a community-based owner and developer of affordable housing in the Bronx, is that over-regulation out of fear of fraudulent applications and stringent eligibility requirements - which plagued the previous Covid rental assistance program - will prevent families from getting what they desperately need yet again.
Though few details on the rollout of the rental assistance program are known, we do know that the funds will be restricted to tenants who have lost income due to the pandemic, earn less than 80% of the area median income, and will allow for tenants to self-attest these requirements. The relief will not be restricted based on immigration status and will extend the eviction moratorium, currently scheduled to expire on August 31, 2021, for one year to protect all households that receive relief. Relief can cover up to 12 months back rent and 3 months of future rent, though applicants seeking future rent payments will have to demonstrate that more than 30% of their income is going towards rent. In addition to a yearlong extension of eviction protections, late fees that have accrued will be waived, and rent will not be raised for one year from the relief application.
According to figures from State Assemblymember Zohran Kwame Mamdani, only $47 million of the $100 million allotted for the first two rounds of the rental assistance program was actually paid out, and we must learn from that experience. To over-restrict these new funds is counter to the mission and intention of addressing the growing balance of rent hanging over the heads of thousands of New Yorkers. The expected wave of evictions once the moratorium is lifted can only be slowed down by a sweeping effort to make tenants who have fallen behind on rent in the past 12 months eligible for relief.
In addition to stringent requirements that shut applicants out from the first two rounds of rental assistance, we believe this under-utilization is also connected to a system predicated on online, resident-submitted applications. When relief rests on a resident’s ability to navigate an online application, it’s no surprise people are being shut out - the growing tech-divide in low-income communities has become more apparent than ever throughout the past year of Zoom gatherings, scheduling Covid-19 testing and vaccine appointments. The UNHP Northwest Bronx Resource Center spent countless hours walking residents in the community through the previous rental assistance application, only to see applications denied based on previous income; unemployment income; or inability to collect, scan, and submit documents throughout the process.
Tenants can apply for relief on their own or together with a landlord, which means that landlords have an important role to play in making sure their residents in arrears are aware of the relief. However, it is plausible that a private landlord may weigh their options and decide that they can write off the bad debt as a loss for 2020 and 2021, and take their chances with housing courts once the eviction moratorium has ended. The 2019 Housing Stability and Tenant Protection Act allows only minor rent increases and contains very strong protections for tenants in place, but landlords have many more options to increase the rent on a unit once-vacant - either through renovation, getting rid of previously preferential rent, dividing units, etc.
We hope that in the majority of cases, landlords will be willing to participate in the process, but if they are not, it should not be the tenant who suffers down the line via an eventual eviction or rent increases they can scarcely afford. Crucially, though, if a tenant does apply and receives relief and the landlord refuses to accept the funds for a full year after they are offered, it will be assumed the landlord has waived that amount of rent and will be prevented from initiating a judgment for nonpayment of rent in the amount offered in the future.
Taken together, while this new round of rent relief seems less burdensome and better thought out than previous iterations, we at UNHP still have concerns that a system that relies on tenants proactively applying will be both accessible and widely understood to the degree that it needs to be. To get the word out there, much is riding on the goodwill of landlords and the ability of public agencies and nonprofits to disseminate clear and timely information. Through our work overseeing a portfolio, as well as experiences with clients at our Northwest Bronx Resource Center, we will have multiple avenues to make sense of how the relief unfolds, both from the perspectives of tenants and owners.
In order to take a closer look at what we suspect is a very common scenario occurring in affordable housing over the last year, we are going to analyze a former Low Income Housing Tax Credit Project owned and operated by UNHP, The Wilton HDFC. The Wilton HDFC is a registered 501C3 tax-exempt nonprofit organization on the corner of Tremont and Anthony Avenue in the Bronx. The project consists of two side-by-side five-story walk-ups containing 32 Residential units and 6 Commercial Stores. The building contains some homeless units, rent-stabilized units, and rent-controlled units - the tenants in all of which may not exceed 60% Average Median Income at move-in as per the regulatory agreement. The annual Rent Roll is about $600,000, roughly 1/3 of which is commercial income from a pharmacy, phone store, bodega, hair salon, multi-service (tax prep), and a check cashier.
As we take stock of the loss of income in the Wilton HDFC over the past year, it is difficult to wrap our heads around the frequent reporting of normal collections in rent-stabilized housing by lenders and investors alike. Tenants in the WIlton HDFC are clearly struggling, and many similar buildings are often home to households with higher rent burdens than the income-restricted Wilton tenants, meaning they were likely in even more precarious positions over the past year.
Across the Bronx and citywide, buildings like the Wilton - old-stock, unsubsidized but rent-regulated - remain the most important piece of affordable housing in NYC. We at UNHP are concerned that this set of buildings - particularly the privately owned subset, too often overleveraged and with long-deferred maintenance and upkeep to cover that debt - will fare worse than the Wilton HDFC in the coming months and years.
Collections for The Wilton were almost 100% overall in March 2020, but the project was already carrying a larger than usual unpaid rent balance of roughly 2.5 times the monthly rent roll. By April of 2020, collections had dropped to roughly 60% and never stabilized in the year following. By February of 2021, the rent debt of both commercial and residential tenants had increased to roughly 5 times the monthly rent roll or $249,000. A significant portion, roughly 30% or $74,000 of this rent balance is attributed to the commercial stores, with the remaining $175,000 resting on the building’s residential tenants.
We continue to be hopeful that the rollout of vaccinations to all age groups and the easing of restrictions on businesses will allow commercial stores to do more business and catch up on back rent, but the timeline of that is unclear. In recent months, some stores have resumed regular monthly payments but have not made clear any intention of paying down balances. With commercial rent making up over 30% of the project’s billable rent, these 6 stores are the financial equivalent of about 16 apartments.
Again, the state rent relief program has the potential to significantly reduce the burden of at least the residential back rent hanging over the heads of tenants in the Wilton, but only if it is rolled out in a way that is accessible and not overly burdensome to tenants. In the case of the Wilton, the project welcomes the opportunity to raise awareness about the available relief funds and work with tenants to submit documents, but not nearly enough residential buildings in NYC are owned and operated by mission-driven organizations who prioritize keeping tenants in place over opportunities to increase their rent roll.
Thankfully, the Wilton has been able to meet financial obligations throughout the pandemic including the required reserve contributions, escrow payments, mortgage principal, and interest payments over the course of the last year. In-unit repairs and maintenance costs were reduced by roughly 35% from 2019 to 2020, about $40,000. This was largely due to the fact that management was instructed to prioritize emergency repairs for a large portion of the pandemic and defer non-emergency repairs, like paint jobs, until infection rates were low enough to ensure the safety of contractors and tenants. While this strategy was broadly adopted by landlords of all types in 2020, the reality is that repair and maintenance costs are projected to increase significantly in 2021 when non-emergency repairs are expected to fully resume.
Insurance costs in NYC have been increasing significantly for the last 5-7 years and have quickly become one of the largest annual operating expenses a project has often ranging from $1,000 to $1,500 per unit. The property and liability insurance premiums at The Wilton increased by over 10% from 2019 to 2020, and show no sign of slowing down with an even larger increase expected in 2021. This is an issue UNHP has been studying over the past year with many of our nonprofit and for-profit partners.
We have been analyzing and comparing the carrier options, coverage, and premiums of Bronx housing portfolios looking for trends in an effort to make sense of these burdensome increases, and hope to share more information on that front in the near future. As the below chart shows, 2020 insurance premiums rose sharply, especially the umbrella component. This is particularly concerning for affordable building portfolios, in which umbrella coverage is a requirement of public financing.
Importantly, we believe that rising insurance costs should be met with an effort to bring down premium costs and not, as some in the real estate sector might be advocating for, through rent increases. While much has been written on rising costs as of late, there is still work to be done to understand the roots of this trend and propose solutions that keep premiums reasonable without shifting the burden to tenants.
At the same time, water costs have risen steadily over the last 10 years. There are two programs aimed at helping keep water costs down for multifamily buildings. The first is DEP’s Multifamily Conservation Program (MCP). Buildings with 4 or more units that meet water efficiency standards are automatically enrolled in the program and billed at a flat rate per unit. Buildings in the MCP program as well as buildings assisted by HPD/HDC can apply for further cost reductions via the Multifamily Water Assistance Program (MWAP) administered by DEP and HPD. This program provides buildings with a $250 credit per unit.
These programs have provided large savings for the UNHP portfolio. As the graph above shows, the MCP program has buffered the portfolio from the continual increases in metered pricing. In 2020 the average metered cost per unit was nearly $1,500 during a time when families stayed at home - median consumption per unit increased by nearly 6,000 gallons from 2019. However, with the flat rate billing water costs remained stable at $1,052.29 per unit.
The Wilton has qualified for the MWAP credit since 2017. Due to the savings associated with the credit, the mortgage holder released $20,000 from the overfunded water escrow to the building’s general operating account at a time when collections were at an all time low. While that may seem small in certain respects, these funds were a huge lift to a struggling building.
As a longtime advocate for affordable water rates, UNHP and a number of other concerned community-based organizations have been closely following the recently kicked-off water rate study which DEP contracted out to Stantec. Stantec has been tasked with “conducting a holistic rate structure study that builds upon past analysis and achieves a number of objectives around affordability, revenue, billing, equity, and investment.” It is our hope that at a minimum, affordable housing continues to be eligible for the MWAP credit and that Homeowners and Seniors are able to pay a fairly calculated rate relative to their individual situation. DEP has stressed that interested community-based organizations like UNHP will be able to communicate with Stantec as findings are released and new ideas are implemented.
Property Tax Abatements
It’s worth noting that The Wilton has a 420-c real estate tax abatement which requires only minimal property tax payments on the commercial stores in the two buildings. The property tax abatement has been crucial to meeting the project’s financial obligations since inception and even more so over the past year.
In what appears to be a response to landlords renewed interest seeking tax abatements in exchange for rent affordability, New York City HPD released updated guidelines for the popular Article XI tax abatement program this month. The program offers 40 years of varying levels of tax exemption for affordable housing in good physical condition that does not otherwise require an HPD Loan. Projects would enter into a regulatory agreement for the life of the tax abatement which would include homeless set-asides, income restrictions, and rent restrictions. In April 2020, UNHP released a series of blogs, one of which advocated for a revamped Article XI tax abatement program. We suspected it may be an opportunity to preserve vulnerable housing stock owned and operated by private landlords, especially those who have purchased properties based on speculative pricing and may not have previously considered entering into an affordability agreement with NYC HPD. We hope the program will be highly utilized in the coming months as properties that we believe were acquired at inflated values in recent years are now dropping in value forcing owners to refinance heavy debt burdens to meet rising expenses.
Overall 2020 was a truly unpredictable year, as tenants were unprepared for the dramatic loss of income that resulted from the pandemic and the need to stay at home and building operators were unprepared for the drop in collections. We predict that 2021 and 2022 will be difficult for many Bronx apartment buildings and their residents as operators manage rising operating costs following a year of reduced collections. Timely rental assistance will be crucial for buildings. For UNHP, programs that help reduce water costs and property taxes have been key to keeping our buildings stable as we face increases in both insurance and maintenance costs. As a community-based developer, UNHP is committed to keeping households in place especially during this time of economic uncertainty. We will continue to use the programs available to maintain affordability and connect our tenants to resources that can help them recover from the pandemic.