Tuesday, April 17, 2007

Billion-Dollar Housing Sale and the Takings Clause

I want to thank Ben and Al for welcoming me to PropertyProf.  I’ve long been a fan, and hope to have an interesting post or two to add from time to time.  So, here goes…

The New York Times reported over the weekend on the latest development in a proposed $1.3 billion sale of Brooklyn’s Spring Creek Towers, better known as Starrett City.  Back in February, Clipper Equity submitted the winning bid to purchase Starrett City, the nation’s largest federally subsidized housing development, with nearly 6,000 units in 46 buildings housing roughly 14,000 people.  In March, HUD rejected the initial proposed structure for the sale, and the New York State Division of Housing and Community Renewal rejected a subsequent proposal.  According to the Times, however, the sale may still go through.

This transaction raises a number of important policy questions, but in particular is emerging as a poster child for the issue of housing preservation—how to keep units that house low- and moderate-income residents developed with public subsidies from moving to market-rate (and, in places like New York, high-end) housing.   As the Urban Prospect has noted, Starrett City was developed with a combination of federal subsidies under the Section 236 program as well as with rent subsidies under the Rental Assistance Program, a precursor to the current project-based Section 8 program.  Starrett City also received state subsidies under New York’s Mitchell-Lama program, and city real estate tax abatements. 

The great irony of the myriad attempts to block the sale is that Starrett City’s current owners appear to have the right to exit from the federal and state programs that helped build the development.  Legislation recently introduced in New York would extend rent stabilization to projects like Starrett City upon exit from the Mitchell-Lama program, but the owners have much flexibility, especially over the long run, to shift Starrett City away from its original purpose.  (Clipper Equity has signaled a commitment to affordable housing at Starrett City, but the question remains whether that commitment is binding.)

From a property law perspective, these tussles over whether Starrett City will be sold and the fate of its 14,000 tenants echo an earlier round in housing preservation policy that implicated the Takings Clause.  In Cienega Gardens v. United States, 331 F.3d 1319 (Fed. Cir. 2003), the Federal Circuit reviewed claims that two federal statutes – the Emergency Low Income Housing Preservation Act of 1987 and the Low-Income Housing Preservation and Resident Homeownership Act of 1990 – had abrogated exit rights that owners had under both the Section 236 program (used at Starrett City) and a similar federal program, Section 221(d)(3).  Both programs originally allowed owners to prepay their subsidized mortgages after twenty years and thus lift affordability requirements, but the 1987 and 1990 legislation required HUD approval to exercise that exit right.  The Federal Circuit held that this limitation on prepayment constituted a taking under the Fifth Amendment.  As a result, preservation strategies have shifted—as the legislation currently pending in Albany would do in part—towards creating incentives for owners and developers to remain voluntarily in the programs that created the housing in the first place.

The Starrett City controversy highlights one underlying fact in housing policy:  designing housing subsidies with built-in expiration dates seriously risks the significant public investment that has gone into the stock of affordable housing.

Nestor Davidson

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I'm curious about why the expiration dates/exit rights were included in the first place. I presume the subsidies were intended to induce private developers to build low-income housing. Maybe the developers would not have done the projects, or done the projects at the same price, if the exit rights hadn't been included?

Posted by: Ben Barros | Apr 18, 2007 7:48:27 AM

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