The Ongoing Disaster Of NYCHA: Why It's A Mistake Ever To Start Down The Road To Socialism

NYCHA — the New York City Housing Authority to local cognoscenti — has been one of my favorite topics over the years. For a sampling of prior posts see here, here, here and here.

Multiple factors make NYCHA a core subject matter for this blog. First, it is one of the most prominent and largest examples in the U.S. of a major enterprise that operates on a very pure socialist model, with full public ownership of the assets and distribution of the “benefits” (deeply discounted housing units) on the basis of perceived “need.” Second, NYCHA has failed catastrophically, and for all the reasons that socialist endeavors are always doomed to inevitable failure. Third, NYCHA has demonstrated an ability to coerce for itself one taxpayer-funded rescue after another, making it an excellent illustration of the seeming inability to ever get rid of, or even scale back, a socialist failure, no matter how obvious or how disastrous it may be or how much it costs to keep it going. And finally, NYCHA illustrates the exploitation of ongoing failure as a way to enrich the well-connected cronies of politicians.

Previous posts here have reported how, after a few decades of incompetent and/or deferred maintenance and upgrades, NYCHA had managed to dig itself into a huge financial hole. In 2015 NYCHA came out with a report admitting that it had an immediate need for about $17 billion to fix its buildings, and no way to collect that from tenants through rents. With around 170,000 apartments, this would be around $100,000 per apartment. But then the $17 billion started to grow, first to $25 billion, and then to $32 billion, and in the most recent iteration to about $40 billion. Now we are at well over $200,000 per apartment. I have seen reports that Senator Schumer has inserted a $40 billion earmark into the so-called “Build Back Better” reconciliation bill to cover this full amount. But that massive giveaway may or may not ever pass.

So now for the latest: A week ago, on December 1, New York City announced a deal with two developers to do a comprehensive rehabilitation and upgrade of two specific large NYCHA projects in the West Chelsea neighborhood of Manhattan. The two NYCHA projects in question are the Robert Fulton Houses and the Chelsea-Elliott Houses. The headline of the City press release reads: “THE NEW YORK CITY HOUSING AUTHORITY AND RESIDENT LEADERS ANNOUNCE THE SELECTION OF ESSENCE DEVELOPMENT AND THE RELATED COMPANIES TO PROVIDE APPROXIMATELY $366 MILLION IN COMPREHENSIVE REPAIRS AND INVESTMENTS FOR 2,054 APARTMENTS IN THE CHELSEA SECTION OF MANHATTAN THROUGH THE PACT PROGRAM.”

Wow! That sounds great. What’s not to like? Actually, everything about this deal is terrible for the City and its taxpayers. Nor is the deal anything good for the residents of the projects, but that is another issue — they have been bought into permanent dependency. Nevertheless, in the real world, I will probably be the only person speaking out against this.

First, some background that will be particularly informative for readers not familiar with Manhattan. The Chelsea neighborhood is on the West Side of Manhattan from about 14th Street to 34th Street. It was developed in connection with the commercial port activities that were the dominant industry in New York in the 19th and early 20th centuries. After World War II, the port went into rapid decline, as did the associated businesses and buildings in the blocks near the Hudson River. By the 1960s — that’s when the Fulton and Chelsea-Elliott Houses were built — the area was a mostly-derelict backwater.

But at some point Chelsea became increasingly fashionable. The older buildings got upgraded, and fancy new condos got built. Today, you would be hard-pressed to find a two bedroom apartment in Chelsea for under $3 million to buy, or $4000/month to rent. Diagonally right across the street from the Fulton Houses at 9th Avenue and 16th Street we have the New York headquarters of Google (previously the very largest of the warehouse buildings of the area, built by the New York Port Authority).

According to this website covering New York City commercial real estate, the assessment of this building is over $1 billion (market value would probably be well over $2 billion), and the property taxes on this one building for the 2021-22 year come to some $48.5 million. If you used Google today, I thank you as a New York City taxpayer.

And then, literally right across the street, we have the Fulton Houses. This morning I wandered over there (it’s about a 10 minute walk from where I live) and took this picture of a part of the complex:

Aside from being painfully ugly and in poor condition, the most remarkable thing about this project is that it has no value. And by no value, I mean zero. Hey, this is socialism. Apartments there cannot be bought or sold for any price, but instead get handed out by government functionaries according to some socialist concept of fairness. (Go through a 25 year waiting line, or alternatively try to jump the queue by making yourself homeless.) While Google pays nearly $50 million in property taxes per year for its 3+ acres across the street, these buildings (along with Chelsea-Elliott), sitting on as much or more land, pay no property taxes at all, and instead have a declared need for almost $400 million in rehabilitation that must be paid by someone else. Rents from existing tenants won’t pay any meaningful part of that.

And thus the newly announced deal. Two developers have been “selected” through a politicized process to rehabilitate the buildings. The cost is said to be $366 million for a little over 2000 apartments — more than $180,000 per apartment. The developers will do the renovations, and after those are completed, will manage the projects.

The lead developer is Related Companies, one of the City’s biggest, and best-connected, developers. The other developer is an MBE (Minority Business Enterprise) that Related cleverly brought into the process.

Are the developers putting in even a dime of their own money? Funny, but nothing in the press release mentions a thing about that, or about where the money is coming from, other than that this is part of the New York City PACT (“Permanent Affordability Commitment Together”) program. Here’s an article from Real Estate Weekly on December 1 with some more information. Again there is no suggestion that the developers are putting up any of the $366 million. Instead, that will come from City and federal funds:

New York City Housing Development Corporation (HDC), the local housing finance agency, will assemble the financing and provide asset management and compliance for the PACT transactions. The balance of the repair bill will come via PACT through the federal government’s Rental Assistance Demonstration program, or RAD, an Obama-era program that allows private companies to manage public housing, giving them responsibility for maintenance, repairs and rent collection.

So Related puts up nothing, and undoubtedly gets fees for the rehab, plus an ongoing management contract. Oh, and then there’s the right to put up a new building, and potentially several more such, on the NYCHA land.

Once the work is done to the tenants’ satisfaction, the developers will get to build a new 100-unit apartment building on West 27th Street . . . While today’s announcement only confirmed one new ground-up building that will rise on 27th Street, NYCHA has said in the past that potential new developments could add up to 700 units to the four sites that make up the complexes, half of which, under the deal, would be income-restricted affordable housing.

And what about property taxes on the new building(s)? Funny, there’s no mention of that either. Draw your own conclusions. These people from Related are very well-connected, and they are not stupid.

So Related puts up nothing and makes out like a bandit. New York has lost for at least another generation the opportunity to get rid of these eyesore buildings and use this very valuable land for some productive economic purpose. And a few thousand people get to live a deeply-subsidized life in one of the wealthiest neighborhoods in the country, but as permanent dependents of the state.

The subsidy to the existing tenants, if measured by the prices of comparable rental apartments in the neighborhood, would come to at least $50,000 per year per apartment, or $100 million per year for the 2000 apartments in question. Between that loss and the foregone property taxes, there would be plenty of money here to buy out all the existing tenants at prices they would be happy to take, and remove them from state dependency. Maybe buy each of them a fully-paid no-mortgage house in a low cost market like upstate Syracuse or Utica.

But that’s not how it works here. For us, it’s a moral imperative to provide “permanently affordable” apartments at enormous cost in ridiculously expensive neighborhoods. Why? I don’t know.

Even the New York Post this morning was on board with praising this deal:

The deal is a definite “win” for the tenants at Fulton-Chelsea Houses and another success for [NYCHA head] Russ as he strives to save NYCHA . . . .

What about this is worth saving?