(Bloomberg) -- Mayor-elect Bill de Blasios plan to pump $1 billion of New Yorks $144 billion in pension assets into apartments for poor and working-class residents faces constraints including competition from banks and declining federal aid.
Trustees of New Yorks five retirement plans have a fiduciary responsibility to maximize returns for beneficiaries. That means they cant provide below-market financing to help de Blasio achieve his goal of creating or preserving 200,000 affordable units in 10 years, said advocates such as Moses Gates of the Association for Neighborhood and Housing Development.
A state mortgage agencys cap on the insurance it provides for loans funded by city pensions may also limit the potential benefits of new capital commitments.
Theres a big difference between adding more market capital funding sources and adding more subsidy, said Gates, a director at the Manhattan-based nonprofit. In order for it to generate affordable units, youre also going to have to add some kind of subsidy.
De Blasio, a 52-year-old Democrat, won election in November vowing to close the growing gap between wealthy New Yorkers who enjoy a life of luxury and the poor and middle class. One- third of the citys rental households pay at least half of their income on rent, according to the Rent Guidelines Board. In November, the median rental price for an apartment was $3,100 in Manhattan and $2,800 in Brooklyn, according to brokerage Douglas Elliman Real Estate.
Under Mayor Michael Bloomberg, New York financed 50,000 new affordable units and preserved almost 110,000 others, spending $5.3 billion in city funds to leverage another $18.3 billion in private and other government investment. More than 80 percent of the new units are targeted to households earning 40 percent to 80 percent of the area median income, according to the city Housing Preservation and Development Department. New Yorks level for a family of four is $85,900.
The mayor is the founder and majority owner of Bloomberg News parent Bloomberg LP.
De Blasios plan calls for building 50,000 new units through a policy called mandatory inclusionary zoning. Real estate developers would be required to create residences for low- and middle-income families in order to build in neighborhoods rezoned for higher density. Directing $1 billion in pension fund money to affordable housing would create an additional 11,000 units over eight years, according to de Blasio.
Since the 1977 passage of the federal Community Reinvestment Act, which required regulators to assess how banks have met the credit needs of communities, lenders have been more willing to target investments in low- and moderate-income areas, Gates said.
New market-rate capital is the easiest piece of the puzzle; the harder piece is the subsidy, he said.
Affordable housing in New York is subsidized by a variety of sources, including low-income housing tax credits, tax-exempt bonds and city, state and federal money.
In fiscal 2012, the U.S. government cut the citys allocation of Home Investment Partnership money by 45 percent, and Community Development Block Grant funds by 8 percent, according to the citys Independent Budget Office.
Using pension money to revitalize neighborhoods isnt a new idea. New Yorks pensions for police officers, firefighters, teachers, school administrators and civil employees have been investing in affordable housing and economic development since 1981.
The Economically Targeted Investment program had a 10-year annualized return of 5.85 percent after fees, compared with a 4.52 percent return for its benchmark, the Barclays U.S. Aggregate Bond Index, according to city records.
De Blasios plan requires the support of incoming Comptroller Scott Stringer, a Democrat, and more than 40 trustees representing public employees and borough presidents.
The comptroller serves as investment adviser to the pensions, which had $1.2 billion, or 0.8 percent of their assets in the program, with an additional $424 million committed at the end of fiscal 2013. The pensions target is to have 2 percent of their assets in the category.
Josh Getlin, a spokesman for Stringer, didnt respond to an e-mail request for comment.
The pensions biggest investment in that area is the Public Private Apartment Rehabilitation Program. Since 1982, the city pensions have pumped more than $850 million into the program, which offers fixed-rate 30-year mortgages insured against default by the State of New York Mortgage Agency. Working with nonprofits and banks, including JPMorgan Chase & Co., the program has financed the preservation or construction of more than 30,000 units of affordable housing.
The nice thing about the product is the reasonable cost of setting the interest rate in advance for the long-term mortgage that takes out the construction loan, said Mark Willis, a research fellow at New York Universitys Furman Center for Real Estate and Urban Policy.
The ability to project debt-service costs in advance has made it easier to finance affordable housing and helped moderate the amount of city subsidy required to make the housing affordable, he said.
The targeted-investment program is subject to the agencys capacity to guarantee mortgages, and adding $1 billion in loans would require additional capacity, said Sadie McKeown, chief operating officer of the nonprofit Community Preservation Corp., one of the lenders. The pension funds are also constrained by their ability to administer the program, she said. The comptrollers office would have to add staff to manage the additional lending, McKeown said.
In the last four fiscal years, the pensions increased their investment in the program by an average of about $56 million annually, according to annual reports from the comptrollers office.
Demand for affordable housing and for capital is sufficient to soak up financing from the pensions, she said. The money could be used to finance smaller deals that dont require subsidies and that might otherwise be ignored by banks, McKeown said.
Just to be able to provide capital to smaller owners to reset their mortgages and fix their rates for 30 years and give them some money to do renovation of their property is incredibly valuable, she said.
For example, Community Preservation Corp. is using pension money to offer long-term financing for the owners of the Dorie Miller co-operative in Corona, Queens. The co-op, former home of jazz great Nat Adderley and current home of saxophonist Jimmy Heath, used the money to restore its façade, repair the roof and get new boilers to become more energy efficient, McKeown said.
The pensions have also invested almost $600 million in the AFL-CIO Housing Investment Trust, a $4.6 billion mutual fund that buys multi- and single-family mortgages. Since 2002, the trust has invested $800 million in 36 projects to build or preserve almost 30,000 affordable units. Its biggest investment was $134 million for the 2,820-unit Penn South co-operative, which was dedicated by President John F. Kennedy in 1962 on the west side of Manhattan between 8th and 9th Avenues and 23rd and 29th streets.
The trust expects to invest $250 million in New York projects next year, creating thousands of union constructive jobs while allowing it to earn a competitive return, said Ted Chandler, chief operating officer. Chandler, who declined to name the projects, said they were on a similar scale to Penn South.
Were seeing some large deal sizes and they just appear to be getting bigger, he said.