nyc

Forget the $1 Million Prize, Here’s How to Fix the NYC Subway for Free

Delays expected (huffingtonpost)

Delays expected (huffingtonpost)

The A Train derailed last week, injuring 25 passengers.  This incident is just the latest problem facing the Metropolitan Transit Authority (MTA) during the “Summer of Hell” for transit commuters.  As the subways deteriorate before our eyes, the agency, and Governor Cuomo (who runs it), are under immense pressure to provide relief. 

As a result, on Thursday, the Governor declared a state of emergency for the system.  Additionally, he created a $1 million “genius challenge” in three categories to improve the system.  The three categories are: “Modernize Signal Technology,” “Deploy New Cars Faster,” and “Increase Communications.”

I see the value of the first two more than the last (Gov. Cuomo seems to be an unhappy victim of greater Wi-Fi access for riders already) but the challenge falls comically short of addressing the structural challenges facing the MTA: overcrowding, maintenance, and waste. The only real solution to these problems is fixing the politics around the MTA – but there doesn’t seem to be a category for that.

Overcrowding

In a basic sense, the strain on the subway is a sign of its success.  NYC has grown by over half a million people over the last 20 years and there are now over 6 million daily riders on the system, up from 3.6 million during the same period.   Tourism has also grown considerably during this period from 22 million in the early 90s to over 60 million today (although its dipped). People want to live and work and visit NYC in record numbers, which is great, obviously.

Growth in riders hasn’t been matched with additional capacity, which isn’t great.  In 1990, there were 5,255 subway cars for 1 billion annual riders. Today there are 5,282 subway cars for 1.8 billion riders.  This causes delays as people get on and off trains, which backs up the entire system (overcrowding accounts for the biggest reason for delays.)

Some of the increase in subway rides is at the expense of the bus system, which has seen a significant decline in ridership recently.  How much is caused by ride-share apps like Uber and Lyft is a matter of debate (do more cars on the road harm bus service enough to have people skip it?) but addressing this is a major under-discussed issue as well.

For a system that is over 100 years old in parts, handling that capacity at all is a stunning achievement, though it is clearly at its breaking point. But you can’t fix overcrowding until you fix how the system is maintained.

Maintenance

The NYC subway system is really old.  Infamously, many of the signals that monitor where individual trains are on various lines (which controls their frequency) date back to the 1930s and have ceased to be available on the market.  This means that MTA workers must rely on small-scale ingenuity to keep the system working.  It would be difficult enough to do this work without the additional ridership. But there is no helping overcrowding without adding more trains, and they can’t add more trains without better signals.

It’s been fairly obviously that the system needs new signals for a number of decades, but over that period, particularly during the fiscal crisis in the late 1970s, the system had bigger challenges.  And when the city rebounded, political focus turned to adding new lines like the 2nd Avenue Subway.   

Superstorm Sandy compounded this issue when it did considerable damage to the subway system five years ago. Since then, the recovery has eaten up a lot of capacity for maintenance, setting back a number of initiatives.  It’s partly why the L Train will be shut down for at least 18 months starting in 2019. But you can’t improve maintenance, or the MTA’s credibility on it, without improving the culture of waste in the MTA.

Waste

People that rely on the L Train (including this writer) are understandably freaking out about losing the entire line, not least because the MTA has very little credibility with commuters.  Everything the MTA does costs way more and takes way longer than they estimate. 

The 7 Train Extension cost $2.1 billion and took an extra 2 years (and was only close to budget by dropping a planned second station on 10th Ave).  The three stops on the 2nd Avenue Subway cost $4.5 billion (an overrun of $700 million) and took an extra 3 years (or 70 depending on your perspective.)

It’s impossible to look at the MTA and not see considerable waste.  Some of this seems to be a blood feud between the operational and capital sides of the agency.  Some of it is the complexity of doing business in NYC.  But a lot of it is simply poor planning and execution resulting in a flabby operation.

I’m not blaming the labor union here, either.  Many criticize the salaries of MTA workers, their healthy benefits, and their pensions.  Certainly there were some bad contracts negotiated over the years that have given rise to some egregious behavior, but providing living wages and reasonable benefits should be a basic standard in all employment.  You can absolutely improve some of the marginal human costs, but the larger principle matters here.

Politics is the Problem and the Solution

All of these issues come back to the central problem that must be fixed.  Poor leadership with poor accountability explain why an agency that has an operating budget of $15 billion and a 5-year capital plan of $32 billion (half for the subway) still can’t address these three issues. 

Notice I haven’t listed money as a problem. It isn’t with the MTA. They have had access to funding through direct state subsidies, in-system revenues, or the bond market, and aren’t strapped for cash.

The issue is the structure of the MTA and how it tries to do too many things with too many people having small pieces of it.  Since it was formally created in 1968, the MTA has run the subway, the buses, bridges and tunnels, the LIRR, Metro-North, and Penn Station.  Though most of their operational portfolio involves transit, it’s easy to see how such a wide range of sub-units and constituencies makes it difficult to focus on the subway even though it’s the largest entity by far (72% of all subway rides in the US are in NYC and half of the MTA’s budget.)

The Board of the MTA consists of 9 members, 5 of which are appointed by the governor giving him/her de facto control over the MTA.  This is why Governor Cuomo has been roundly mocked for pretending not to be in charge of the MTA.

Living in a democracy, we must accept a certain imperfection in our systems.  Politics are always going to be messy and frustrating.  However, the structure of the MTA leaves the politics of transportation in the metropolitan New York area fatally flawed.

Challenge #4: How to Fix the MTA

Some have argued to return the control of the subway and bus systems to the city and I would love to see that (and more home-rule in general) but that’s not going to happen.  Partly because no Governor would voluntarily surrender that amount of power, partly because the level of debt within the MTA makes it hard to see how you could restructure that with independent agents (or how an independent subway/bus system could borrow at the same rates on its own.  Admittedly I don’t have much background on this.)

Mostly though, we need to have a regional approach to transportation. We need to tax cars and trucks for using our bridges, tunnels, and streets to subsidize public transit.  We need to further tax rider-sharing apps like Uber and Lyft beyond just the regular 8% sales tax to subsidize public transit.  We need to charge congestion pricing for our busiest streets.  We need to incorporate NJT and the PATH to the greater NYC system. We certainly can’t do this if we Balkinize the subways and buses. 

I propose creating a Metropolitan Transportation Authority that has dominion over the roads, rails, bridges, and tunnels of the metropolitan area spanning NYC, northern NJ, LI, Westchester/Rockland, and the Metro-North commuter shed.  This agency would have a board appointee from each state’s governor and two from the Mayor of NYC.

Every form of transportation, every type of commute impacts the other.  Every commuter in the metropolitan sphere would be supporting the system whether they drive or ride.  The only way to organize this is to stop fragmenting it around artificial state-lines and even more artificial political lines. 

I don't know what optics the Governor is looking for with this challenge, but presumably enough to declare victory as he leads up to his re-election.  Just as Governor Christie in NJ failed commuters and citizens of NJ by canceling ARC in 2010, Governor Cuomo risks his legacy by neglecting transit and by failing to think bigger in a time of crisis.  Without a larger, regional effort that radically shifts the focus of transportation policy, the summer of hell will turn into a permanent hell.  It doesn't take a genius to fix it, it takes someone with courage.

 

Trump's Budget is Garbage, Especially for NYC

First over the ledge perhaps (OMB)

First over the ledge perhaps (OMB)

As President Trump was busy underwhelming or shoving European leaders this week, his budget was released back in DC in his absence.  Normally it would be shocking that such an important political statement would be delivered without the President on hand, except when you see how his presence has generally been a disaster in other policy discussions. 

A somewhat more cynical take would consider this distance an intentional move given how politically unpopular this budget was bound to be.  However, there is no way distance can hide how much of a betrayal this budget is to the President’s campaign pledges and how terrible a budget it is on its own merits.

There are three big takeaways from the budget process before we get into how bad it would be for NYC. 

First, it would be a huge wealth-transfer and massive realignment of priorities.  The social safety net would be severely reduced (or altogether erased in some cases) while tax cuts would give billions back to the wealthiest Americans.  Funding for research into things like cancer and climate change, programs for economic development and housing assistance, and aid programs for students and the young poor would all be radically cut, robbing the country of future investment. All in the name of tax cuts for the wealthiest Americans.

Second, it is based on 3% annual growth, which no one thinks is possible (most predict about 1.8%) and seemingly includes a basic math error that double counts a trillion dollars in revenue.  This isn’t even voodoo economics, it’s garbage economics.  Even many Republicans are shocked by the brazen dishonesty of this budget and its defense by members of the administration.  It can’t be stressed enough that this budget does not make any sense on its merits. That is unacceptably irresponsible.

Finally, partly because of the first two reasons, this budget will never get passed.  That's true of most President's budgets anyway, but this one is wildly unpopular even with many Republicans.  That’s not to say many conservative Republicans oppose these types of cuts – they do support them.  This budget is the logical outcome of much of the Republican rhetoric of the last 15 years.  It’s just wildly unpopular with most Americans, so Republicans don’t want to be that obvious about it. And, as many Republicans have already found out with the ACHA vote, they don’t want to go back to their districts to face the ire of constituents over dramatic cuts to popular programs.

Just because this budget won’t pass doesn’t mean it isn’t incredibly dangerous.  It sets the political debate and will make incredibly bad final decisions look better in comparison.  The danger is the basic logic of this budget, and of the general approach Republicans have taken, which is to get the federal government out of the way as much as possible.  The defense of this argument lies with putting responsibility back with the states. 

This would be a valid argument if there were any indication that states could make up the differences in funding.  They can’t.  There is simply no way for even the wealthiest states to provide the types of services that people need in our modern economy.  Whether Republicans genuinely believe that states can do this or disingenuously know that they can’t is up for debate. 

In any case, passing the buck to states won’t solve the problems facing Americans. There is still systemic economic insecurity for a vast number of Americans, which isn’t go away no matter who has the buck.  This budget will only make that insecurity worse.

We can look at NYC as a good example.  Under the Trump Budget, the city would see over $850 million in cuts:

  • $200m from the public housing capital fund that supports NYCHA
  • $165m of direct funding to NYCHA
  • $68m for senior centers, domestic violence services
  • $48m for rental assistance
  • $23m for home heating assistance
  • $12m for affordable housing for low-income families

Though the State of New York doesn’t rely on the federal government that much for funding, NYC does, especially around housing assistance.  If these cuts passed, how much could we expect the state to cover the difference to keep these services running? Setting aside the political beef between Governor Cuomo and Mayor de Blasio, there just isn’t that kind of money laying around in Albany.

This would mean the poor in NYC would suffer - the old, the young, the sick, the disabled, and the abused.  They would take the brunt of these budget cuts and there’s no clear alternative help on the horizon for them. 

Sadly, we would expect a Republican-driven budget to be harsh on the urban poor. They aren’t in a position to punish Republican leaders.  But what is truly shocking about this budget is how much it also punishes the rural poor, many of which backed President Trump and other Republican candidates. 

Republicans have won over rural white voters without offering them any real solutions to their economic problems.  President Trump offered a more populist (and racially tinged) message promising to do so during his campaign, but has largely abandoned that rhetoric for more traditional Republican policies that favor the wealthy. 

That’s not to say Democrats have presented any real solutions for the urban or rural poor, either.  As some of the recent Congressional special elections have shown, the Republican message might be unpopular (with or without the President’s unpopularity weighing in) but Democrats haven’t won anything.  It’s not clear what the Democrats are offering as a real solution to President Trump or the Republican agenda, as unpopular as they are.

Both parties have failed to offer real solutions to the underlying economic struggles most Americans are experiencing.  The Trump Budget is a monstrous document based on brazen cruelty and breathtaking shortsightedness.  But it’s not clear that a Clinton Budget would have offered bold solutions to our problems. 

That’s because the basic logic pushed by Republicans for the last 30 years – deregulation, tax cuts, and global trade - has so thoroughly penetrated our politics that Democrats have never articulated a real alternative. 

That alternative is obvious – we need more federal intervention in domestic policy.  30 years of neoliberal economic policy has hallowed out the middle-class, empowered stateless corporations and individuals, and undermined the civic health of our society.  One outcrop of this is the affordable housing crisis, which I have covered extensively in this blog.  States can’t solve the housing crisis, or any of these problems.  Cities, even ones as big and prosperous as New York City, can't solve these problems.  Tax cuts at the federal level certainly can’t solve these problems.  An activist federal government can and must.

For now, we’re left to continue to fight losing battles over budgets like President Trump’s.  We’ll keep under-investing in housing, infrastructure, and our people.  We’ll keep eroding our civil society and our future prospects.  Until this fever breaks, or until Democrats or someone else articulates a bold alternative, the premise of this debate will guarantee a continuation of garbage economics, garbage politics, and garbage leadership.

Unoccupy Occupancy Laws

The future returns (pinterest)

The future returns (pinterest)

NYC Housing Policy Tools Series

Over the next few weeks, as we prepare for the Trump Era, I will spend time on various housing policies in NYC in order to help frame the the affordable housing crisis.  I have picked four topics related to NYC housing laws: rent regulation, zoning, occupancy, and property taxes.  I concede that there are other policy tools that could be included (particularly around financing) but these four tend to have an immediate impact on the most people.  The hope for this blog series is to explain the current policy tool kit in New York, but also to show why questioning the underlying assumptions about housing policy might be able to expand it. 

Part 3 of 4: Unoccupy Occupancy Laws

No good deed goes unpunished and I submit NYC’s occupancy laws as a good example.  Before we get to that, it’s important to know how miserable live in New York actually was less than 100 years ago – loud, dirty elevated trains; waste-ravaged streets; overcrowded, dank tenements.  Urban life for most people would look positively barbaric to New Yorkers today.  Improved technology, greater public health awareness, and socio-economic shifts radically changed the built environment of NYC, but that all happened because of active governance.

Occupancy laws - a blanket statement for multiple-dwelling law and housing maintenance law - from the first several decades of the 20th century reshaped how New Yorkers lived for the better.  The famous tenements of the Lower East Side made it one of the densest habitats on the earth, ripe with disease, malnutrition, and other physical dangers.  The city simply couldn’t sustain such a careless and inhumane growth trajectory.  

Progressives of the time created our modern occupancy laws to protect individuals and families from economic and environmental exploitation while protecting the broader public body from gross health and safety risks.  They did this by passing laws requiring basic amenities like natural light and windows, guaranteed heat and water, sanitary bathrooms, fire escapes, and other things we take for granted today.

Modern urban life would be intolerable, even impossible, without these types of far-reaching policies.  We are so accustomed to certain benefits of government intervention like this that we forget how necessary it was – and is.  Our private lives are vastly improved by sound public policy.

However, a byproduct of that amnesia is the slow, deliberate shift in our public policy from inclusive public good to exclusive private gain.  Here’s where the good deed of occupancy laws gets punished.  

NYC used to have a staggering variety of housing options.  Single residency occupants (SROs), boarding houses, and long-term hotels, private room rentals – all allowed residents across any income spectrum options to live affordably, if not luxuriously. These types of housing also fostered a deep, shared connection and sense of community, particularly among immigrant populations and transient workers.  This type of social capital was the bedrock of American society and kindled its economic progress.

Starting in the late 1950s, and especially in the 1960s and 1970s - when the city faced the crippling social and economic effects of deindustrialization – incumbent residents organized against these types of housing.  Some of this trend is an understandable, if ultimately uncompassionate, response to increased drug and criminal activity.  Neighborhoods didn’t like having SROs and boarding houses around because they were housing-as-last-resort for many disabled or addicted New Yorkers.  The corresponding social problems could have an economic cost to property values (though there isn’t much evidence of this.)

These residents responded by advocating for and succeeding in changing occupancy laws.  Most SROs and boarding houses were officially outlawed and have utterly disappeared over the following decades.  Renting out private dwellings – like basements and attics - was radically cracked down on.  Minimum room sizes and unit sizes were enacted. And finally, in 1987, apartments were no longer allowed to be constructed without full kitchens, bathrooms, and at least 400 sq. feet of space.

I’ve already discussed how rent laws and zoning laws have empowered the housing crisis, but occupancy laws are just as important.  When the city began its steady rebound by the 1990s, it didn’t have the housing flexibility it used to have during previous boom periods and we have all suffered as a result.  I believe the current and future demographics of NYC strongly indicate that an economic incentive does exist for amending our occupancy laws.  There are two broad trends that support this. 

First, a lot of New Yorkers live alone.  In 1960, 185,000 New Yorkers lived alone - today it is 1.8 million.  The housing stock is simply not designed for that type of isolated living.  We often lament the fact that too many commuters drive alone to and from work, clogging the roads and polluting our environment. I would argue that one person taking up so much space and resources is a similar economic and environmental ill (not to mention the impact of social isolation and loss of social capital).

Second, New Yorkers (like the rest of America) are aging.  1 in 5 Americans will be 65+ in twenty years and already 20% of New Yorkers are - up from 12% in 2000.  The cost of supporting an older population in isolated, dispensed homes is already causing panic in many health policy circles.  NYC is not prepared for this at all.

I should speak for a second on two related trends – Airbnb and shared housing.  Airbnb has gotten into trouble for violating many occupancy laws, but the primary one is having a non-resident live for less than 30 days in an apartment. They grossly overplayed their hand and have eaten crow in NYC (and other cities) but the basic problem for them is that their model turns a residency into a hotel. I don’t think amending occupancy laws should support this model at all.

Shared housing is sort of a niche millennial market at the moment with some notable big players toying with it.  It’s a sound concept and one in sync with many of the principles we share at homeBody.  The problem with shared housing in its current iteration is its limited reach and appeal.  It is prohibitively expensive to join one of these living arrangements.  Part of that is simple economics - marketing to a well-identified audience - younger, wealthier tech savvy workers who are more open to shared living experiences. But part of it is also practical reality – they have to work within a narrow lane of occupancy laws. 

This is also true of micro-apartments, an en vogue idea that has some sound concepts but relies, fatally in my opinion, on the status quo of occupancy laws.  To date, I don’t know of any efforts of these organizations to lobby for changing occupancy laws, but they would be strong partners to help.

I believe we should amend occupancy laws to encourage a return to more flexibility in the housing market.  Shared housing, micro-apartments, SROs, senior housing, combined-housing (different non-related demographics sharing) are all ideas that have succeeded in the past and are currently succeeding in small amounts in NYC and elsewhere. 

If someone new to the city/country wants to live closer to a job downtown cheaply and doesn’t mind sharing a bathroom and kitchen, why not? If a student wants a cheap (or even free) place near school that includes living with senior citizens, why not? If several families want to pool resources and share space, why not?

Experimenting with occupancy seems to me like a cheaper public policy tool than tax incentives (which we’ll cover next week) and a more equitable policy tool than current rent laws. This is not to say the basic public good initially ensured through occupancy laws should be relaxed – healthy and safety standards can be protected while still introducing more innovation.  This is a vastly under-explored topic that should get a fair shake in public policy discussions. Remembering why these types of laws were passed originally is a good start.

Cities Forcing Airbnb to Shift Strategy

Floods of the frat variety (nytimes/williamwidmer)

Floods of the frat variety (nytimes/williamwidmer)

Stepping away from the Carson-at-HUD controversy for a moment, Airbnb has quietly signaled a significant tactical change in its approach to working with city governments. The Silicon Valley company, which currently has an estimated $30 billion value, has gained a reputation for stonewalling local governments as it expands across the globe.  This has included actively flouting local laws, refusing to share data (or sharing cherry-picked data) and ignoring local housing advocates and neighborhood groups. As a result of this behavior, the company is experiencing a severe backlash - whether it’s losing lawsuits or being completely banned.  It appears they are finally abandoning their ‘shoot first’ growth strategy.

The biggest recent news concerning the company came from right here in NYC.  The state passed a potentially crippling law making it illegal to advertise short-term renting in the state, which could jeopardize Airbnb’s biggest single domestic market.  The law stems from several years of the state unsuccessfully attempting to work with Airbnb to come to terms with existing occupancy laws. The company adopted a hard-nosed strategy (similar to Uber’s strategy against the TLC, which it ultimately abandoned as well) that made a lot of enemies in NYC and Albany (Governor Cuomo signed the law in October). 

Whereas many New Yorkers agreed with Uber about how awful the TLC was and welcomed the catch-me-if-you-can strategy, Airbnb was mistaken to assume that New Yorkers felt the same way about the hotel lobby.  New Yorkers simply don’t feel the pain of an expensive hotel room as much as they feel the pain for not getting a cab when they need it.  They do feel the pain when tourists overrun their building or neighborhood.  Misunderstanding that nuance proved costly.

As Airbnb has done in the past (including in its home city of San Francisco) it decided to sue.  The legal argument is somewhat convoluted, but the basic hope of the company was to clarify its liability with the new law (they wanted to make sure only a host could be found guilty and not the company.) The strategy also clearly was to put popular pressure on the city and state and to use its deep war chest to force both to make a better deal with the company.

Once it became clear that the company would not be found liable under the new law (and that there was no political pressure to cave to the company,) Airbnb quickly settled (separately with the city and state) and has accepted the ruling that will come into effect next year.  This was a big win for opponents of Airbnb (and a big loss for potential hosts) but the move was likely a tactical retreat for the company rather than a total surrender. How the new law will impact Airbnb’s revenue will be clear relatively quickly and will likely dictate the scope of a future legal counter-strike.

Having apparently learned its lesson over the last few years in NYC, this week the company demonstrated a radically different approach with New Orleans – it struck a deal with the city government and local groups before a prolonged legal fight.

The deal outlines an agreement between the company and the city to share its list of registered hosts, to ban any hosts in the French Quarter, and to crack down on ‘party houses’ that have negatively impacted local neighborhoods.  This was seen as a major concession to the city, the hotel lobby, and local residents – three groups the company has all but ignored or dismissed previously whether in New Orleans or other cities.

Though New Orleans is a dramatically smaller market than New York, the company has clearly signaled that it no longer sees fighting these groups as the fastest growth strategy. Though it remains to be seen if this will be the new model for the company in other cities, the backlash has clearly spooked the company’s investors enough to shift gears. 

To be clear, growth is still the driving force of Airbnb (just as it is with any company) and there doesn’t appear to be any cultural shift within the company.  Any company that takes that type of capital and hits that type of valuation is under tremendous pressure to increase growth to justify such lofty expectations.  But as cities and residents become more aware of the pros and cons of the company, they are starting to organize in a way that threatens the established pace of growth.  The company has exhausted its “shoot first” growth strategy and has to recalibrate in a more informed marketplace. It took too long for them to recognize this, but perhaps they have now.

Understanding this makes anticipating what happens next in NYC and New Orleans relatively easy. Airbnb has made concessions that will no doubt harm short-term revenues in these markets, but it has bought valuable time to let the political heat subside (while continuing to expand to other friendlier markets.)  During this period they can evaluate how vigilant these cities are on enforcing the new agreements and how much of a price (literally or figuratively) the company would pay for dragging its feet. They have already been accused of this in several international markets.

If either city’s policies appear to be manageable, they will have helpful case studies for other eventual conflicts and move on.  However, if NYC or New Orleans significantly damage the company’s revenue, Airbnb will most certainly sue in federal court.  The company’s investors will leave them no choice.  How those scenarios form and play out is just speculation at this point, but you can bet their legal team is preparing for all of them.

Airbnb likely expected some of this backlash and hoped for a delaying-action as it continued to expand.  Now it must recognize that in more mature markets, it must make concessions to local interests.  This may or may not harm growth in these markets or new markets, but a new strategy is inevitable now.  The pressure to continue to grow – and to justify its evaluation – will not subside, however.  Playing nice with cities is one way to keep growth going. Another is to create new streams of revenue, which it has already begun to do.  But if these efforts don’t meet investors’ expectations, Airbnb could very easily come back with its guns blazing. 

How the Panama Papers Could Impact NYC Housing

Billionarie Row in Manhattan (inman)

Billionarie Row in Manhattan (inman)

This week has seen the first published articles about one of the largest document leaks in history, all coming from the Panamanian law firm Mossack Fonseca. The firm has risen to international prominence by funneling the personal wealth of hundreds of politicians, foreign leaders, business owners, and celebrities into off-shore accounts. The process of off-shoring personal wealth has been a long-accepted though discreet practice for high-worth individuals to skirt local tax obligations, but has come under increased international scrutiny in the age of wikileaks, Snowden, and focus on income inequality.

What is so stunning about the Panama Papers, aside from the sheer amount of documents exposed, is the specter of corruption and illegality of the firm's clients that could have a significant and long lasting impact on the political and financial makeup of many countries.   

Though the firm has defended its practices, the blowback from the leaks has already claimed its first victim in Iceland and appears to be starting or accelerating investigations in countries all over the world. It has certainly caused deep embarrassment for many world leaders.  The true fallout remains to be seen and could take years to fully unravel.

However, the sad truth for casual observers hoping for some schadenfreude against the super-not-cool wealthy is that the firm (most likely) has not committed any crimes and having off-shore accounts or shell corporations are not illegal in most countries.  It doesn't mean that people didn't break the law in obtaining their wealth or in not disclosing it properly, but the leaks don't provide a rack of smoking-guns by themselves.

The leaders of financial secrecy (financial secrecy index)

The leaders of financial secrecy (financial secrecy index)

Tax havens aren't just confined to international territories either, so despite the prominence of Mossack Fonesca internationally, we probably haven't come close to understanding the extent of the practice globally through their leak alone.  That is certainly the case even here at home.  The US has become a magnet for shadow wealth itself through several states that have lax disclosure and tax laws.  

Delaware (and Nevada in the West) has long been known as a business-friendly state due to their fast and low cost incorporation processes as well as looser disclosure and tax laws.  There are in fact more corporations (over a million) in Delaware than residents (under 950,000). There are perfectly legal and valid reasons to incorporate in Delaware and over 60% of Fortune 500 companies have done so (coughs, full disclosure: homeBody is a Delaware Public Benefit Corporation.) 

However, many of these laws also create loopholes that are easy for more nefarious people to exploit and no one can do much about it if they do. One of the most prominent ways to exploit these laws in the US is to form an LLC (limited liability company) whether in Delaware or Nevada (or a few other states as well).  LLCs in those states don't have the same reporting and disclosure requirements that corporations have and don't require the actual owner's name, assets, or business interests. This practice, legally called beneficial ownership, makes them especially attractive to international (and possibly criminal) interests that want to discreetly park some of their wealth in the US. 

1209 Orange Street in Wilmington, DE - The home of nearly 300,000 companies (nyt)

1209 Orange Street in Wilmington, DE - The home of nearly 300,000 companies (nyt)

For many of the super-not-cool wealthy, the best way to hide their money is to form an LLC and use it to buy NYC real estate.  NYC is one of the most popular destinations for international wealth because, in addition to its obvious cache and amenities, it is seen as more stable than markets like Dubai and even Miami, while (somehow) being cheaper than London or Hong Kong.   

Much of the crazy boom in luxury building in NYC over the last 10 years is a direct result of the crazy boom in international wealth looking for safe harbors.  The New York Times did a widely covered series on this game last year and reported that about $8 billion is spent on real estate over $5 million a year in the city and that over 50% of that is to shell LLCs.

You can read many articles like this one complaining about how most of these apartments sit empty for 10 months out of the year as a result of this trend.  Even many property managers that we speak to are frustrated with the practical and communal challenges that it creates.  And despite Mayor Bloomberg's infamous claim that having all billionaires move to NYC "would be a Godsend" the reality is that these folks don't spend a lot of time (or a lot of money - taxes or otherwise) in the city.  Much like art being stored in freeports, NYC is just a sexy insurance policy for many of the super-not-cool wealthy.  

It's hardly a rhetorical question to ask does one billionaire spending less than two months in the city (and paying very little property tax relative to their property's worth) contribute more to the city's economic, cultural, and civic life than an equivalent 11,000 individuals making $90,000 (the region's estimated 2016 AMI) who live and work in the city every day? 

It's also hard to argue that the rise of extreme shadow wealth, the proliferation of ways to hide and transfer it, and the disruption on the local housing market that those two forces have created are benefiting New York City in the short-term - let alone if we consider the long-term implications. Having a powerful, hidden, and largely rootless class of individuals (that even when they are in the city, don't take the bus or subway, don't send their kids to the schools, and don't much care about police and fire pensions) directly or indirectly steering policy priorities doesn't bode well for the long-term needs that the city must address.

This is why the fallout from the Panama Papers will be so fascinating to watch. Will it actually affect the NYC housing market? My view is that it will potentially damage the "asset market"  near the top end, but have little impact for the rest of the market. That doesn't mean that there couldn't be long-term benefits from this leak, though.

At the local level, there have already been moves for greater disclosure in NYC real estate by the de Blasio administration, but so far these have been limited in scope. There isn't much support from the industry since the market remains white-hot for luxury real estate, so securing more reform would be a political battle the Mayor might not be willing to fight at the moment.

There hasn't been much action at the state level either, where Governor Cuomo is facing pressure to close the LLC-loophole in relation to campaign contributions. Despite this pressure, his new budget has not included any mention of that issue, so there doesn't seem to be any chance that any LLC-related reform will take place, whether in real estate or campaign finance.  

At the national level, it has not gone unnoticed that the US government (including President Obama and then-Secretary of State Clinton) pushed for the free trade deal with Panama in 2011 despite warnings that it would encourage tax evasion and money laundering. It is unlikely that anything will change at that level nor is it likely that any prominent US firms or individuals will be outed by the Panama Papers anyway, since it is easy enough for them to hide money state-side. However, there could be more pressure on Congress to address how LLCs help beneficial owners avoid US tax laws. There would also be a lot of vested interested opposing any changes.

A lot of lights off up there (wikipedia)

A lot of lights off up there (wikipedia)

The real impact on the NYC housing market, at least in the immediate future, will likely come from international developments.  We could potentially see a spike in real estate transactions as individuals under investigation or political pressure in RussiaChina, and elsewhere try to move funds before the hammer comes down. If more and more countries launch investigations into the leaks, a lot of them will come through NYC, which could mean sellers will flood the market to cash out beforehand or that units could even be seized.  Those outcomes are purely speculation at this stage, but you can see how little they would affect the "shelter market" that the rest of us are in.

A potential positive outcome on the housing market could be a broader reassessment of the policy priorities that have dominated the city over the last decade.  The amount of capital that has flooded the asset market because of the influx of shadow wealth could be steered to the larger shelter market through better tax policies (421a is still off the books anyway) and better land-use and density polices.  Rather than bending the market to chase those super-not-cool wealthy buyers, we can bend the market back to the people who live and work in the city. My guess is that it could be just as booming a market.

Most real estate observers have said the industry put on blinders during this period and didn't ask questions.  It wasn't there job to, but maybe it could be.  Now that many governments and policy leaders will be asking questions, the industry could stand to reassess itself and determine that transparency and accountability will only benefit its long-term prospects.  If the blowback from the Panama Papers gets bigger and louder, the city might just stand to benefit from it as well.

How to (Rebuild) Affordable Housing in NYC

Michael Kimmelman, the noted architecture critic (and accomplished pianist, apparently) had a piece in the New York Times today titled "How to Build More Affordable Housing in New York City" and in it he explored the post-Sandy recovery of Ocean Village (rebranded as Arverne View) in the Rockaways, Queens.  

Opened in 1972, during the final, sweeping retreat of federal funding for subsidized public housing, the roughly 1100 units were designed in the brutalism chic of the times (which, perhaps surprisingly, still has fans) and began to fall into decline almost instantly.  Ocean Village (a Mitchell Lama development) followed a similar story to many housing complexes of this era - mismanagement, neglect, and resident-flight (for those who could afford to) right up until it was devastated by Superstorm Sandy in 2012.  At the time there were over 300 vacant apartments and many residents were without basic services even before the storm hit the city.

Kimmelman for the most part maintains his architectural-gaze when discussing the property itself (by all accounts Averne View is a signature achievement for defensible-space practices for encouraging community engagement and efficiency-improving amenities) which is a shame because we don’t get to hear from the residents who endured both Sandy and the ‘silent hurricane’ of the previous decades (though this article does).

Despite this oversight, he does discuss two things that warrant further mention.  The first gets to the core of the article’s title, which is slightly misleading – how this model can ‘build’ more affordable housing in NYC.  The model in discussion is a relatively new one in that it encourages private developers to refurbish properties and capture the energy and cost savings therein rather than the more common model of inclusionary housing (which gives tax breaks to developers for setting aside a portion of newly built units in a development for ‘affordable housing’) promoted by the Bloomberg and De Blasio administrations and elsewhere. 

I will spend more time in future posts about both of these models and others but I will say that refurbishment has a compelling upside for improving the deplorable state of public housing in NYC which is perhaps more important than focusing on new development. Rebuilding these units while keeping existing tenants in them is the worthiest of housing policy goals. This model seems well suited to achieve that.

The second thing to further mention is the firm behind Arverne View – L&M Development. These guys are rock stars – for their innovative design, innovative economic models and partnerships, and innovative core principles. Though they don’t appear to be a B Corp, they are committed to ‘the double bottom-line’ as CEO Ron Moelis describes (in this Crain's article which calls them “odd”!) as doing good for the community, which is good for their business model.

It seems to be working since they have over 10,000 units and $600m under management according to the same article from 2013 (I was not able to verify more recent numbers).  L&M proves what many in the affordable housing community believe – that smart policies, strong partnerships, and good design can be good for communities as well as private developers.