In Defence Of The 'Poor Door': Why It's Fine For A Luxury Condo Developer To Keep Its Low-Income Units Separate

Imagine if the federal government abolished food stamps and replaced them with need-based price mandates on supermarkets.

That is, supermarkets would be required to make a percentage of their sales at regulated “affordable” prices to needy families. The regulated prices would often be below cost, so supermarkets would raise prices on everybody else to make up for the loss.

Since we don’t want any “classist” dietary divisions, the regulated products would span the range of tastes and prices: if rich people are buying lobster, so must poor people, even if that means the program can feed fewer people overall.

Supermarkets would probably complain about the cost of all this, so the federal government would give them compensating tax breaks.

It would also contain their losses by capping participation in the “affordable food program” and creating a waiting list. Once you got in, you could buy cheap food as long as you want it, but until then you’d be stuck waiting and hungry.

Why make this change? Well, food stamps cost money, but this program would have no direct cost to taxpayers. And while food stamps often lead to poor people buying food from cheap supermarkets in poor neighborhoods, this program would end food segregation, ensuring that people of all economic classes eat similar foods from similar sources.

This idea probably sounds insane to you, because it is. But it’s roughly the same as New York City’s “inclusionary zoning” strategy for providing affordable housing.

We require and incent developers who build market-rate housing to also sell or rent some units in the same developments at cut-rate prices. The idea is that affordable housing shouldn’t just be affordable and livable; it should be substantially similar in location and character to new luxury housing. If rich people are getting brand new apartments overlooking the Hudson River, so should some lucky winners of affordable housing lotteries.

Hence the outrage over the “poor door” at a planned luxury condo project that Extell will build on Manhattan’s Upper West Side: market-rate buyers will use one entrance, while tenants in the project’s affordable housing component will use another. Affordable apartments will also be on low floors and, unlike many of the market-rate units, they won’t face the Hudson River.

Getting mad about the “poor door” is absurd. The only real outrage is that Extell had to build affordable units at all.

New York’s housing advocates are right about one very important thing: upzonings are a windfall for landowners and the city should be asking for something in exchange for allowing more development. But what it should be asking for isn’t luxury apartments with river views to give out by lottery. It should be asking for cash.

That is: Upzone land so more housing units can be built to meet supply. Let developers decide what to build and what to charge for it based on market forces. Charge developers substantial fees to access those newly-created development rights. Collect full-freight property taxes on new property that gets built. Use tax and fee proceeds to pay for projects of broad use to New Yorkers, including housing subsidies.

Even though they are an artifical creation, it is probably best to think about development rights in New York City as a natural resource. If there’s oil under your land, the value of the land is the value of the oil less the cost of extracting it. If you have buildable land, its value is what you can sell a developed property for less the cost of construction. When the city upzones land, it creates value out of thin air; the instinct to demand something from landowners in exchange for this creation is perfectly reasonable.

But windfalls from upzoning are a limited resource: You can charge the developer the value of the windfall, but if you charge more he won’t bother to build. And the more you charge in the form of a mandate (such as an affordability mandate that reduces rents generated by a development) the less you can charge in tax.

Let’s imagine that the city forces Extell to get rid of the “poor door” and spread the affordable units throughout its new project. Since the affordable units will therefore be on higher floors with better views, Extell will earn a smaller profit. Now, the deal economics are probably so compelling that Extell would build anyway. But all that indicates is that the city could also let Extell proceed with the “poor door” plan and charge them an additional fee, revenues from which could have been used to create more affordable housing elsewhere in the city.

Or, it could simply let Extell build whatever it wants and charge an even larger fee and even more in tax.

The city’s choice to impose so many mandates is undermining its tax base. Often, the city awards tax abatements to developers in exchange for building affordable housing. As of 2012, property tax abatements in New York City lead to $US2.9 billion in annual lost revenue, about 20% of actual property tax collections in the city. About half of those abatements relate to programs that promote new construction of affordable housing.

That is, even though they are off-budget, New York’s inclusionary zoning programs have a very large fiscal cost.

Inclusionary zoning looks like a much worse deal when you realise it’s not free. If the city received an extra $US10 million to spend on affordable housing, it would be crazy to spend that upgrading the views of existing subsidized tenants rather than helping more people afford more apartments. But that’s effectively the choice the city makes by pursuing inclusionary zoning instead of just permitting and taxing market-rate development.

Our country’s nutritional support programs recognise that food is a market good and the way you make it affordable is by helping people buy it on the open market even if they have few financial resources. New York would do well to realise that applies to housing, too — and to stop freaking out about the poor door.

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