Skyscraper’s Future up in The Air

skyscrapers

The New York Law Journal quoted me in Upper West Side Skyscraper’s Future Uncertain After NY State Court Ruling. The story opens,

The development at 200 Amsterdam Ave. in Manhattan is slated to be the tallest building on the Upper West Side, with its 51 stories rivaling the skyscrapers located further downtown.

But whether this will ever happen has now become questionable, after a state court ruling that found city officials were wrong to follow an interpretation of city zoning law used by the developer to achieve the project’s awesome height.

Supreme Court Justice Franc Perry of Manhattan sided with local community groups looking to halt the building underway at the site. The plaintiffs—the Committee for Environmentally Sound Development and the Municipal Arts Society of New York—were joined by numerous local state and city elected officials in opposing what they say is not only an out-of-character monster development in the Manhattan neighborhood, but one that relied on a faulty zoning law interpretation to move forward.

“It is finally a declaration that zoning law means something and developers can’t make it up as they go along,” said Emery Celli Brinckerhoff & Abady name attorney Richard Emery, who represented the plaintiffs.

Since 1978, developers and city buildings officials have relied on the so-called Minkin Memo, named after the former head of the city’s Department of Buildings’ Irving Minkin, for guidance on what experts call an ambiguity in the city’s zoning law towards so-called tax lots. These are additional subdivisions of city real estate, which can overlap with or be included inside a zoning lot.

Under the Minkin memo, developers have been able to pull together extra vertical building rights that nearby property owners aren’t using, offering the opportunity to boost the size of a project such as 200 Amsterdam beyond what would normally be allowed.

“The zoning resolution is ambiguous about when a zoning lot can be formed from partial tax lot; it never deals with that problem,” said Stewart Sterk, the Mack Professor of Real Estate Law and director of the Center for Real Estate Law & Policy at the Cardozo School of Law.

Initially, city officials had no problem with the move. DOB issued a permit to the developers for a residential and community facility building at the site of the Lincoln Towers condos on the Upper West Side. The developers relied on the Minkin memo as the basis for the acquisition tax lots that combined partial and whole lots to provide the developers with the vertical building rights needed for their skyscraper.

Shortly after DOB green lighted the project, the Committee for Environmentally Sound Development challenged the DOB’s decision. The challenge snowballed, and soon seemingly every local elected official, from state Assemblyman Richard Gottfried to borough president Gale Brewer, were opposed to the plan. The project’s permit was appealed by both CESD and the Municipal Arts Society to the city’s Board of Standards and Appeals.

In March 208, DOB made an official about-face on the project. In a letter from assistant general counsel to the BSA, the department said the Minkin memo provided an incorrect interpretation and that zoning regulations did not in fact intend for zoning lots to consist of partial tax lots.

The BSA was not persuaded by the arguments and in July 2018 voted 3-1 not to grant the appeal, with one board member abstaining. The plaintiffs soon after pursued a review of the BSA’s decision in state Supreme Court.

In subjecting the developers’ permit to further review, Perry pointedly took issue with BSA view of the process.

“BSA found that the Subject Zoning lot is ‘unsubdivided,’ within the meaning of the [New York City Zoning Resolution], simply because Developer has declared it to be so,” the judge wrote.

Noting that the referenced law states that a zoning lot is defined by being “unsubdivided” within a single block, Perry said BSA’s interpretation would render the term “superfluous,” and run “afoul of elementary rules of statutory construction.”

Since DOB saw the light on the Minkin memo during the appeal process, the court said the department’s statutory basis for the issuance of the permit to begin with was undermined. BSA’s decision was nullified and vacated, and the board was directed to review the project’s permit application “in accordance with the plain language” of the zoning regulation and Perry’s order.

As Cordozo’s Sterk noted, the development at 200 Amsterdam was far from the first to use the Milkin memo to justify partial tax lot usage in a building plan. Perry’s decision has the ability to throw uncertainty around zoning and building issues into a business sector highly adverse to such things, Sterk said.

But just as important for Sterk is the question now of when a government agency becomes estopped from changing its mind after it’s already induced people to rely on its existing interpretation.

“That’s a big problem in this case, because clearly developers have put millions of dollars into this project in reliance on an existing interpretation,” he said.

Brooklyn Law School professor David Reiss, who is the research director of the school’s Center for Urban Business Entrepreneurship, said he saw the case as less of a “good guy vs. bad guy” dynamic as much as one of whether the assurances of government officials can be binding.

“There’s a reliance on government statements and government permissions,” Reiss said, while noting the project has already commenced.

Should the case stand, he predicted it would serve to rattle developers’ confidence in their dealings with the city going forward.

“It’s more uncertainty in a process that’s already pretty uncertain,” he said.

Luxury Rental Turned Into College Dorm

photo by Ann Larie Valentine (no changes made) https://creativecommons.org/licenses/by-sa/2.0/

Realtor.com quoted me in ‘Help! My Luxury Rental Was Turned Into a College Dorm’. It opens,

Finally! After years of scraping by in cramped apartments in sketchy neighborhoods, you’ve made it—into a luxury rental with a doorman, concierge service, gym, bike room, and other posh amenities. It seems perfect.

Then you meet your neighbors, sunning themselves on the roof deck. Topless.

Sound like the opening to a Skinemax flick? On the contrary, it’s a reality for residents at The Azure, a new high-end apartment building in Brooklyn, NY.

“There were girls sunbathing topless up there,” one tenant with a child told the New York Post. “My wife was, like, ‘WTF?!’ There are a lot of families [here].”

You see, The Azure was facing significant vacancies, so the management company decided to rent out 30% of its units to King’s College, a liberal arts school in lower Manhattan. The result? Families who paid top dollar to live in a building with a business center, cold storage space for grocery deliveries, and other luxe features suddenly found themselves in what felt like a college dorm. A “dormdominium”! And you know what that probably means: late-night parties with eau de weed wafting through the halls and, um, some awkward bump-ins during rooftop barbecues with bikini-clad (or unclad) residents. And noise. Lots of noise.

“We bought into the luxury experience of the nice rooftop,” another tenant lamented. “We didn’t expect it to be packed with 18-year-olds.”

When luxury apartments turn into dorms: Why it happens

This rude awakening for well-heeled renters isn’t as unusual as you might think. It’s just what many luxury developers may find themselves doing now that the high-end rental market is softening, leaving empty apartments that must be filled to make ends meet.

“Building owners stuck with vacant properties will try to rent them to whoever they can within reason,” says Aaron Shmulewitz, a real estate attorney with Belkin Burden Wenig & Goldman in New York City. “When the economy goes bad, building owners have to scramble.”

Part of the problem is that a few years ago, the housing market was going so strong, developers got bullish on building—only to find themselves in a more sluggish market once their structures were complete.

“Opening a residential building is a many, many-year process,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “You have to acquire the site, you have to get financing, perhaps you have to get zoning approvals, you have to get your plans approved … then you have to build it and then you have to market it. You’re talking about years of work.”

Many of these builders were likely banking on the possibility that rental demand would just keep going up and up—but they bet wrong.

“We have a large amount of supply that came into the market within a fairly short period of time,” says Edward Mermelstein, a real estate attorney with One and Only Holdings in New York City. “At the same time, the demand has waned substantially.”

How do college kids afford a luxury rental, anyway?

While luxury rentals in any other city might be hurting right about now, New York is well-positioned to solve this problem, thanks to its high student population and limited dorm space.

“Renting to college students in Manhattan or Brooklyn has always been a trend, as there’s a total of almost 250,000 active students on this small island,” says Michael Jeneralczuk, a real estate agent with REAL New York. “With that said, luxury apartments are usually outside of student budgets.”

While a luxury rental might be outside of any individual student’s budget, a larger group of students can make it work. According to the Post, the King’s College students are paying a combined $6,000 per month for a two-bedroom apartment housing four people, which comes to $1,500 per person. This is more affordable than trying to rent alone; even a studio apartment at The Azure starts at $2,399 per month, according to the building’s website.

Meanwhile, the nonstudent rate for a two-bedroom apartment at The Azure starts at $3,391 per month. So by renting to King’s College students, the building is also making almost twice as much per apartment. So, at least for these two parties, it’s a win-win.

“It’s an opportunity to fill vacant apartments and collect rent,” says Becki Danchik, a real estate agent with Warburg Realty in New York City.

Given that the luxury rental market is slowing down nationwide, does this mean renters across the country might expect college-aged neighbors soon, too?

According to Reiss, it depends on development levels. In Los Angeles, construction has stalled, so apartments are filling up. Seattle, on the other hand, is facing similar issues as New York City.

“Seattle has had a construction boom, which means there are a lot of empty apartments,” says Reiss. “You face a similar situation where landlords are going to look to find some way to rent those out and make their money back.”

 

Protecting Small Businesses

Detail from Netherlandish Proverbs, Pieter Brueghel the Elder

Students in my Community Development Clinic and I have a column in the New York Law Journal, Small Business Jobs Survival Act May Have Opposite Effect. It reads,

The New York City Council is considering a bill, the Small Business Jobs Survival Act, that it claims will protect small businesses even though the Act contains no protections tailored to them. Instead, the Act would implement a new lease renewal arbitration system that treats all commercial tenancies the same, allowing businesses as large as Amazon to benefit.

The Act would create a bureaucratic process that works contrary to its stated goals. The Act is meant to “create a fair negotiating environment, which would result in more reasonable and fair lease terms to help small businesses survive and encourage job retention and growth.” The Act actually creates a system under which big businesses will benefit the most. Furthermore, the process is overly complex for mom and pop businesses owners who are not familiar with the legal system. To avoid exacerbating the advantages that big businesses currently enjoy in the rental market, the City should consider policy alternatives that are tailored to the needs of small businesses.

Although the Act is supposed to protect small businesses, it does not define what a small business is. By not distinguishing between big and small tenants, the Act gives businesses of all sizes the same rights to negotiate a lease renewal. For large businesses like Amazon with an in-house legal department, the new system is business as usual. Amazon does not need to worry about additional costs to negotiate a lease renewal. For mom and pop business owners, the system starts to feel like a tax simply to stay in business because they will need to increase their costs relative to big businesses.

The Act’s arbitration provision sets forth about a dozen factors that an arbitrator must consider when setting the rent. Those factors can then be supplemented by “all other relevant factors.” Such a complex and vague standard will lead to inconsistent and unpredictable results. Two arbitrators determining rents for similar businesses located near each other are likely to arrive at different rents for these businesses because of the broad set of criteria they can consider. Additionally, an arbitrator’s decision would be final and non-reviewable.

The City’s property tax system offers a cautionary tale. The system is complex, many of its decisions are unreviewable, and its results are arbitrary and unfair. One consequence has been that property owners in wealthier neighborhoods often pay lower property taxes than those in less affluent neighborhoods, a state of affairs leading to a high-profile lawsuit and a Mayoral push to reconsider the entire system.

In addition to a costly process, the proposed lease renewal system is not easily navigable for mom and pop business owners. These mom and pop shops would face a new world of legal processes not familiar to them and that have nothing to do with their businesses. The Act almost requires that small commercial tenants hire lawyers to guide them through a system that might begin to feel like the soul-crushing New York City Housing Court, where tenants and landlords spend countless hours and often obtain results as perplexing as the problems that brought them there in the first place. Unrepresented tenants, in particular, face steep odds against the confusing and impersonal system. They are often unaware of their rights and how the system works, leading to temporary relief that does not do much more than postpone the date of their eviction. If the Act is enacted, small business tenants who either can’t or don’t hire lawyers would face as many, if not more, obstacles than they do in the current system.

Given that the Act in its current form does not serve its intended goals, the City should consider policy alternatives like formula business restrictions, which may be a more effective way of targeting and protecting small businesses. The formula business restriction serves to prevent retail and fast food chains from operating in particular neighborhoods in order to protect their social fabric. These restrictions aim to protect the unique character of city neighborhoods that have yet to feel the full effects of gentrification and mall-ification. These restrictions will incentivize leasing to new small businesses while protecting existing ones that are at risk of losing their space to commercial chains.

Companies like Amazon should not be the principal beneficiaries of a “Small Business Jobs Survival Act.” Rather, the City should focus on targeted approaches like formula business restrictions that assist new and existing small businesses more directly.

David Reiss is a Professor at Brooklyn Law School, the director of the Community Development Clinic and the research director of the Center for Urban Business Entrepreneurship. Areeb Been Khan, Robert Levy and Juliana Malandro are legal interns in the Brooklyn Law School Community Development Clinic. They were recently invited to testify at a New York City Council hearing regarding the Small Business Jobs Survival Act.

 

Cities With the Worst Rent

photo by Alex Lozupone

Realtor.com quoted me in Cities With the Worst Rent: Is This How Much You’re Coughing Up? It opens,

Sure, rents are too dang high just about everywhere, but people living in Los Angeles really have a right to complain: New analysis by Forbes has found that this city tops its list of the Worst Cities for Renters in 2018.

To arrive at these depressing results, researchers delved into rental data and found that people in L.A. pay an average of $2,172 per month.

Granted, other cities have higher rents—like second and third on this list, San Francisco (at $3,288) and New York ($3,493)—but Los Angeles was still deemed the worst when you consider how this number fits into the bigger picture.

For one, Los Angeles households generally earn less compared with these other cities, pulling in a median $63,600 per year. So residents here end up funneling a full 41% of their income toward rent (versus San Franciscans’ 35%).

Manhattanites, meanwhile, fork over 52% of their income toward rent, but the saving grace here is that rents haven’t risen much—just 0.4% since last year. In Los Angeles, in that same time period, rent has shot up 5.7%.

So is this just a case of landlords greedily squeezing tenants just because they can? On the contrary, most experts say that these cities just aren’t building enough new housing to keep up with population growth.

“It is fundamentally a problem of supply and demand,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “Certain urban centers like Los Angeles, San Francisco, and New York are magnets for people and businesses. At the same time, restrictive local land use regulations keep new housing construction at very low levels. Unless those constraints are loosened, hot cities will face housing shortages and high rents no matter what affordable housing programs and rent regulation regimes are implemented to help ameliorate the situation.”

The Missing Piece in The Affordable Housing Puzzle

The National Low Income Housing Coalition has posted The Gap: A Shortage of Affordable Homes. The report opens,

One of the biggest barriers to economic stability for families in the United States struggling to make ends meet is the severe shortage of affordable rental homes. The housing crisis is most severe for extremely low income renters, whose household incomes are at or below the poverty level or 30% of their area median income (see Box 1). Facing a shortage of more than 7.2 million affordable and available rental homes, extremely low income households account for nearly 73% of the nation’s severely cost-burdened renters, who spend more than half of their income on housing.

Even with these housing challenges, three out of four low income households in need of housing assistance are denied federal help with their housing due to chronic underfunding. Over half a million people were homeless on a single night in 2017 and many more millions of families without assistance face difficult choices between spending their limited incomes on rent or taking care of other necessities like food and medical care. Despite the serious lack of affordable housing, President Trump proposes further reducing federal housing assistance for the lowest income households through budget cuts, increased rents and work requirements.

Based on the American Community Survey (ACS), this report presents data on the affordable housing supply, housing cost burdens, and the demographics of severely impacted renters. The data clearly illustrate a chronic and severe shortage of affordable homes for the lowest income renters who would be harmed even more by budget cuts  and other restrictions in federal housing programs. (2, citations omitted)

The report’s key findings include,

  • The nation’s 11.2 million extremely low income renter households account for 25.7% of all renter households and 9.5% of all households in the United States.
  • The U.S. has a shortage of more than 7.2 million rental homes affordable and available to extremely low income renter households. Only 35 affordable and available rental homes exist for every 100 extremely low income renter households.
  • Seventy-one percent of extremely low income renter households are severely cost-burdened, spending more than half of their incomes on rent and utilities. They account for 72.7% of all severely cost-burdened renter households in the United States.
  • Thirty-two percent of very low income, 8% of low income, and 2.3% of middle income renter households are severely cost-burdened.
  • Of the eight million severely cost-burdened extremely low income renter households, 84% are seniors, persons with disabilities, or are in the labor force. Many others are enrolled in school or are single adults caring for a young child or a person with a disability. (2, citations omitted)

While the report does show how wrongheaded the Trump Administration’s proposed cuts to housing subsidies are, I was surprised that it did not address at all the impact of local zoning policies on housing affordability. There is no way that we are going to address the chronic shortage in affordable housing by subsidies alone.

The federal government will need to disincentivize local governments from implementing land use policies that keep affordable housing from being built in communities that have too little housing. These rules make single family homes too expensive by requiring large lots and make it too difficult to build multifamily housing. We cannot seriously tackle the affordability problem without addressing restrictive local land use policies.

Zoning and Housing Affordability

Vanessa Brown Calder has posted Zoning, Land-Use Planning, and Housing Affordability to SSRN. It opens,

Local zoning and land-use regulations have increased substantially over the decades. These constraints on land development within cities and suburbs aim to achieve various safety, environmental, and aesthetic goals. But the regulations have also tended to reduce the supply of housing, including multifamily and low-income housing. With reduced supply, many U.S. cities suffer from housing affordability problems.

This study uses regression analysis to examine the link between housing prices and zoning and land-use controls. State and local governments across the country impose substantially different amounts of regulation on land development. The study uses a data set of court decisions on land use and zoning that captures the growth in regulation over time and the large variability between the states.

The statistical results show that rising land-use regulation is associated with rising real average home prices in 44 states and that rising zoning regulation is associated with rising real average home prices in 36 states. In general, the states that have increased the amount of rules and restrictions on land use the most have higher housing prices.

The federal government spent almost $200 billion to subsidize renting and buying homes in 2015. These subsidies treat a symptom of the underlying problem. But the results of this study indicate that state and local governments can tackle housing affordability problems directly by overhauling their development rules. For example, housing is much more expensive in the Northeast than in the Southeast, and that difference is partly explained by more regulation in the former region.

Interestingly, the data show that relatively more federal housing aid flows to states with more restrictive zoning and land-use rules, perhaps because those states have higher housing costs. Federal aid thus creates a disincentive for the states to solve their own housing affordability problems by reducing regulation. (1)

This paper provides additional evidence for an argument that Edward Glaeser and others have been making for some time now.

Local governments won’t make these changes on their own. Nonetheless, local land-use decisions have a large negative impact on many households and businesses who are not currently located within the borders of the local jurisdictions (as well as some who are). As a result, the federal government could and should take restrictive land use regulation into account when it allocates federal aid for affordable housing.

The Obama Administration found that restrictive local land-use regulations stifled GDP growth in the aggregate. Perhaps reforming land-use regulation is something that could garner bipartisan support as it is a market-driven approach to the housing crisis, a cause dear to the hearts of many Democrats (and not a few Republicans).

Evidence and Innovation in Housing

Lee Anne Fennell and Benjamin Keys have posted the Introduction to their new book, Evidence and Innovation in Housing Law and Policy, to SSRN. It opens,

No area of law and policy presents more important and pressing questions, or ones more central to human well-being, than that of housing. Yet academic discourse around housing is too often siloed into separate topical areas and disciplinary approaches, while remaining distanced from the contentious housing policy debates unfolding in communities across the nation. In June 2016, the Kreisman Initiative on Housing Law and Policy at the University of Chicago Law School convened a conference in downtown Chicago with the goal of breaking down these barriers and forging new connections – between different facets of housing law and policy, between different disciplinary approaches to housing issues, between academic inquiry and applied policy, and between the lessons of the past and adaptations for the future.

This volume is the product of that conference and the dialogue it provoked among academics, practitioners, and policy makers. Its baker’s dozen of contributions comprises cutting-edge interdisciplinary work on housing and housing finance from leading scholars in law, economics, and policy. The pieces individually and collectively showcase how research and policy can come together in the housing arena. We hope the end result will have lasting relevance in setting the course – and identifying the obstacles – for housing law and policy going forward.

This book is organized around two interlocking roles that housing serves: as a vehicle for building community, and as a vehicle for building wealth. These facets of housing carry implications both for the households who consume residential services and for the larger economic, political, and spatial domains in which housing plays such a primary and contentious role. Cumulatively, the pieces here confront, and respond innovatively to, the dilemmas that these two facets of housing create for law and policy at different scales of analysis. (1)

This collection of papers brings together an all-star cast of housing nerds. While the papers are an eclectic mix, they are pretty consistent in that they ask important questions about housing policy. Even better, the Introduction contains links to open access versions of each paper. They are listed below:

Part I – Housing and the Metropolis: Law and Policy Perspectives

1 – The Rise of the Homevoters: How the Growth Machine Was Subverted by OPEC and Earth Day By William A. Fischel

2 – How Land Use Law Impedes Transportation Innovation By David Schleicher

3 – The Unassailable Case against Affordable Housing Mandates By Richard A. Epstein

Part II – Housing as Community: Stability, Change, and Perceptions

4 – Balancing the Costs and Benefits of Historic Preservation By Ingrid Gould Ellen & Brian J. McCabe

5 – Historic Preservation and Its Even Less Authentic Alternative By Lior Jacob Strahilevitz

6 – Losing My Religion: Church Condo Conversions and Neighborhood Change By Georgette Chapman Phillips

7 – How Housing Dynamics Shape Neighborhood Perceptions By Matthew Desmond

Part III – Housing as Wealth Building: Consumers and Housing Finance

8 – Behavioral Leasing: Renter Equity as an Intermediate Housing Form By Stephanie M. Stern

9 – Housing, Mortgages, and Retirement By Christopher J. Mayer

10 – The Rise and (Potential) Fall of Disparate Impact Lending Litigation By Ian Ayres, Gary Klein, & Jeffrey West

Part IV – Housing and the Financial System: Risks and Returns

11 – Household Debt and Defaults from 2000 to 2010: The Credit Supply View By Atif Mian & Amir Sufi

12 – Representations and Warranties: Why They Did Not Stop the Crisis By Patricia A. McCoy & Susan Wachter

13 – When the Invisible Hand Isn’t a Firm Hand: Disciplining Markets That Won’t Discipline Themselves By Raphael W. Bostic & Anthony W. Orlando