Hudson’s David Kramer Assesses LA Skid Row Housing Trust’s Collapse

David, decades ago, after your tenure as TPR’s inaugural editor, you worked, for the then newly incorporated Skid Row Housing Trust. What attracted you to that opportunity and what promise did that start-up Community Development Corporation have in terms of producing both shelter & low-income affordable housing?
 
David Kramer: Let's set the scene. It's 1990 and the Low-Income Housing Tax Credit is just beginning to take hold as a funding source. It was birthed in the 1986 Tax Reform Act, so by 1990, people are beginning to appreciate the program. Every neighborhood in America then created a community development corporation which could access Low-Income Housing Tax Credits distributed by each state agency to support affordable housing. In the case of high-cost areas like LA and New York, you had to combine tax credits with city and state subsidies.
 
Just to give you a sense, the early tax credits were syndicated at Skid Row Housing Trust at a rate of 37 cents on the dollar, which made it a terrible program for America's taxpayers at the time. What 37 cents means is that for every dollar not collected by the US Treasury, a project was getting 37 cents of subsidy. That was an incredibly inefficient system at first. The tax credit rate increased consistently over time and peaked at $1.26. Right now, it's about $1.04 for our projects in New York, but back in the good old days of 1990, the tax credit program was enough incentive for every group to start a Community Development Corporation.
 
Back in 1990, you could probably BS your way into a job in affordable housing because the industry was not that mature. There weren't a lot of people running around saying that they had experience as a project manager in affordable housing. Today when Hudson hires a project manager for an entire project, they have a graduate degree and five years of experience. I was excited to be part of that start-up world.
 
Let’s jump ahead. How would you explain the Skid Row Housing Trust’s recent financial collapse? What was predictable about it, if it was predictable, and what were the lessons that the invested in like community development corporations learn?
 
There are a lot of lessons. To some extent, there was a COVID element to this. I have very healthy affordable projects in New York City that have struggled tremendously in the post-COVID era. In New York City, when there was an eviction moratorium, that was widely interpreted by many tenants as a rent moratorium. This combined with the inability of the court system to function properly meant that an environment of accountability in rent payment was severely undermined.
 
We've had some projects where collections decreased from  95% to 78%, and it's catastrophic because these project cash flows are not luxurious to begin with. If you have that kind of loss of revenue, it can be a real problem for maintenance or staffing the project as well as you should.
 
From what I've read about Skid Row Housing Trust, a part of it went downhill fast after COVID. There were also certain parts of it that I could have predicted 30 years ago. These projects are very expensive to underwrite. There's a huge amount of pressure on municipalities to deliver as many units as possible. If you really allocated the amount of resources necessary to make sure that an affordable housing project would have a solvent, well-maintained future, it would just be that much more in subsidies that municipalities are not thrilled to have to commit to per unit.
 
If you take an environment like Skid Row, you are piling on more challenges. All of the Skid Row Housing Trust tenants were formerly homeless on public assistance. This is not just an issue about rent, but it also has to do with how hard the buildings are used and how much social services are necessary to invest in the project. SRO’s also have common bathrooms, which lead to more operating expenses and oversight.
 
If there's any crack in the system, over time it can have real implications for a project’s ability to flourish.  I was the project manager for the Sanborn Hotel. When we finished, it was a beautiful project, well-designed and well-maintained. But that was 30 years ago. All you need is for a few things to go wrong. When there's less rent collected and you can't afford the overtime security guard, it's a pretty quick road from control to chaos. When you have buildings that have a challenging tenant base, the subsidies are insufficient, and court systems and legislatures aren’t requiring tenants to pay rent, then you're going to have issues like this.
 
When I was at Skid Row, it was clear that we could not manage the buildings with the resources we had. Our developer fees from future buildings were supporting the operating costs of the existing buildings. Basically, we were using tomorrow's fees to pay for today’s property management, but these fees are just creating new buildings with future needs and pressures that also need to get funded.
 
For years, the Skid Row Housing Trust very skillfully navigated pursuing more resources in operating subsidies. I think in 2017-2018 things were pretty hunky dory, but in general, I don't think any of the housing agencies really appreciate how much of a cushion you need to have for a project even if nothing goes wrong. Over the course of many nonprofits and many funders, something is going to go wrong.
 
By way of example, in New York City, the housing department has metrics for how much operating expenses should be in a pro forma because they don't want to be the agency that overpays. These projects tend to get underwritten within an inch of their lives. They're all underwritten at 3 percent annual escalations, but we've seen 20-30% annual increases in insurance alone. It just came out recently in New York City that a bunch of insurance companies don't even want to provide insurance policies if they know there’s subsidized housing.
 
Is the current model in need of modification? What needs to change, if anything?
 
I mean, there are so many flaws in the system that can be improved on. I saw The Planning Report article about a group that, without any sort of regulatory barriers, was able to deliver housing at a fraction of the cost. My bet is that the afore mentioned projects were not required to pay prevailing wage, which can increase costs 20 percent.
 
What you end up having to do is double down and budget more investment. Mayor Michael Bloomberg shifted resources so that New York City's money was not allocated solelyjust to new construction, and they wanted to invest in preservation, which is also less expensive per unit than new construction. Now, New York City has a very healthy preservation budget. It recognizes that this is not a one-time investment where you’ll enjoy 50 years of beautifully-maintained affordable housing.
 
In the tax credit world, the compliance period is 15 years. In New York City, there are such things as year 15 deals, where after the tax credit compliance period is done, it's time to do it again.
 
If you think that in residential taxation, depreciation is a 27-year period, you have to assume that in affordable housing, you have to have the resources to constantly reinvest in projects. I've had some annual budget meetings where my strategy is to cross my fingers and hope that we don't need a new roof or a new elevator because we don't have the funds.
 
There’s a reason there's an affordable housing industry. People are socially minded and want to do the right thing. I came out of the nonprofit world, and my company, Hudson Companies, still does a lot of affordable housing. There are a lot of reasons we want to do this work, and there's a fee that we earn for doing the project successfully. However, there is a reason we’re not competing against Blackstone and 70 other companies: there's much more of a barrier to entry because there's so much brain damage involved in developing these projects.
 
David, your honesty is appreciated. But given the basic project financing model of most community affordable housing projects is viewed as “flawed”, could you address how it might be reformed?
 
Nobody's pleased.
 
What are they not pleased with?
 
How much time do we have?
 
In New York City, as an example, if you come to the city and say, “Hey, I have a site. I made a joint venture with the private owner, and we want this to be affordable housing,” the city would basically say, “That's great. You're in the pipeline. We'll probably fund you in five years.”
 
There are limited resources, and from a business stance, it's very hard to have a handle on your business model if you never quite know when you're going to close.
 
Part of having done this as long as we've done it, there's nothing more public-private than being a housing developer. You're dealing with the city's housing department, the building department, transportation department, housing bonds, city planning, and on and on and on. For those of us who do this, it turns us into libertarians at some point.
 
There's a whole model that's the equivalent of school vouchers. The city has X dollars to subsidize the less affluent members of the community, and there are manydifferent ways you can go about it.
 
The basic challenge is that the market rate costs of land, materials, and labor exceed the spending capacity of much of that city's population. If you saw the Times cover about Gen-Z giving up hope on owning a house because they're all spending 60% of their income, you know that incomes haven't kept up with costs.
 
There are a lot of different ways to respond. Cities should be thinking about ways to incentivize the broader housing market to provide affordable housing, lower case “a”, and be more efficient with their investments.
 
Ok, clearly local jurisdictions need to find new sources of revenue to meet the financial challenges you have described. But, in Los Angeles, we have Measure ULA, which is a real estate transfer tax for residential units over $5 million. It passed and is now engaged in Court challenges. What is your view of such efforts to raise the money needed to deal with both the real world project and market challenges?
 
I find the number $5 million a little arbitrary. I'm curious about how much money it's actually going to raise. That's an initiative that feels very good emotionally to the people who put it together. NYC actually has a version of that called the mansion tax, which starts at any sale over a million dollars. I think it’s okay, but it's just one drop in the bucket, and the tax starts at 1%. I think the LA tax at 4% feels very expensive, and there’s a real risk that buyers will pivot to Santa Monica and Beverly Hills.
 
How does New York, its Economic Development Corporation, and its constellation of public agencies collaborate to better address the challenge of building shelter & affordable housing? Are there lessons for LA to learn from New York?
 
The main difference between LA and New York is that New York has such a higher investment in this world than LA. And the perfect example is the homeless issue. How many shelter beds does Los Angeles have? New York houses 60,000 with its homeless shelters.
 
One advantage is it's one contiguous city, five boroughs, with a lot of money. There's no pointing the finger elsewhere if you see homeless people on the street and every mayor knows that if they want to get reelected, they’ve got to keep the homeless off the streets.
 
In Los Angeles, you think about Venice versus West Hollywood versus Santa Monica. Jurisdictions are not pooling their resources to build shelters, because if you're in Santa Monica, why would you spend funds on a homeless shelter to house the homeless from Venice.  So the jurisdictional issue, I think, is a big handicap for LA.
 
If you look at the billions invested by New York City, we have 60,000 shelter beds which, until the migrant crisis, was enough to keep all but the most mentally ill off the streets. New York has a consent decree that there is a right to shelter. Anybody can come to New York City and request a roof over their head. In fact, Mayor Adams just came out and said that the consent decree doesn't apply to migrants. I think the main frustration if you're in LA and you see homeless encampments at every freeway exchange is that LA, as scattered municipalities, is not aggregating its investment bulk to seriously commit resources to it.
 
Let’s close, David, with a provocative question. You have spent time on both coasts involved in both housing production and civic affairs . This year, many mayors in large metropolitan cities have prioritized providing affordable housing as a means of addressing both homelessness and inequality of opportunity. What's your opinion as to the political consequence of making such housing a Mayor/ City’s number one priority? Is it a winning agenda?
 
Right now, Hudson Companies is building three homeless shelters in New York City, and when we finish the homeless shelters, we hand the keys to a nonprofit organization to operate the space. As a for-profit company, we're no longer involved. A nonprofit runs the homeless shelter supported by the city.
 
Every time we complete one of these shelters, the city's going to save a lot of money, because they're no longer beholden to make a deal with some slumlord hotel owner near LaGuardia Airport with some shitty building they're leasing at exorbitant rates. That's New York City being smart about making an investment in a homeless shelter while reducing their own costs. .
 
It's just a question of supply and demand and the level of investment. How much money is the city of LA spending on building homeless shelters?
 
And, speaking of New York & LA Mayoral challenges, do have a view of how either should be addressing the bussing of immigrants to their cities by Red State Governors?

It’s a huge problem that shouldn't be New York's cost to bear. I loathe no two individuals more than the Texas and Florida governors, but this sort of brilliant slash evil move on their part is exposing the fact that this shouldn't just be a problem for the border states. Not only do the Democrats not have much of a coherent response to the 60,000 migrants to arrive, but Biden, Hochul and Adams are all tearing each other apart in the process.