New York City’s affordable housing crisis frequently feels intractable. A complex web of sky-high land and construction costs, a complex regulatory scheme and a massive imbalance between supply and demand makes housing New York’s workforce and working classes extraordinarily difficult.
While many of the policies advanced over the past five years were created to “help” tenants they have been counterproductive. Growth of income, in the form of rent, is regulated and limited; growth in expenses however, both in pricing and scope, are unregulated and have increased at much faster rate than income.
Affordable housing is designed to provide the operators with a modest return, never greater than 8%, (which almost never happens). By design, projects operate with extremely thin margins. When revenue fails to keep pace with expenses, affordable housing goes insolvent. It is math, not politics.
The next landmine for affordable housing is insurance premiums. Average annual increases exceed 20% each year with no end in sight. These increases were not anticipated when most affordable housing projects were underwritten, and the projects cannot sustain these increases in operating costs.
Insurance is an opaque business. We are required by law to have it for our cars, mandated by our mortgage holders to have it for our homes and, for affordable housing operators and developers, required by our regulatory agreements to maintain prescribed levels of coverage. However, most consumers and businesses have limited understanding of how the business works. We purchase insurance when we buy a home, cover the increases in premiums that occur each year without explanation and hope we never have to file a claim.
What our insurance companies do with our premiums is mysterious. But the immense returns of Warren Buffett’s Berkshire Hathaway provide some insight into their profitability. However, this model has been disrupted by natural events (e.g. floods, storms and tornadoes) and private equity unregulated and seemingly limitless funding of liability lawsuits. These losses must be made up by someone somewhere and that someone is us and that somewhere is New York City.
Faced with a death spiral and little recourse or leverage to reduce premiums, our industry did something seemingly simple, but unique. We took matters into our own hands and started our own collective insurance company.
We started the process by asking Dick Ravitch for help. Dick had amassed a more than half century record of innovative thinking on complex urban problems as well as possessing a relentless commitment to public service. While it was obvious to the industry that insurance premiums were skyrocketing, Dick insisted that we assiduously document the rise.
Nearly 20 managers, owners and operators embarked on a deep dive into our liability and property insurance. What we found was premiums had risen without a consequent growth in claims. Insurance prices were rising not because costs were going up, but because insurance companies needed to squeeze more profits out of the affordable housing sector to cover losses in other jurisdictions.
Our insurance premiums were choking off the funds necessary to keep our buildings safe and, paradoxically, increasing the likelihood of filings claims. All the while, our tenants face the consequences of reduced capital investment, less money for day-to-day maintenance, and, because insurance costs are part of the Rent Guidelines Board formula for calculating housing expenses, rent increases.
For the last two plus years a small group of affordable housing operators and owners have worked tirelessly to build a collective insurance company called Milford Street from the ground up. We learned the business, raised the money, went through the onerous and arduous process of getting licensed and have begun writing policies at a significant discount.
We could have passively stood by while our properties went bankrupt and then asked for a massive government bailout, but instead we harnessed our collective economic and intellectual prowess to solve what mainly perceive as an unsolvable problem. Just a few weeks ago, Gov. Hochul and the Empire State Development loaned us $2 million to help lower initial capital requirements, reduce premiums and make the captive more competitive. This relatively small loan will allow us to compete against private insurers who have lowered their rates in hopes of driving us out of business.
The insurance crisis for multi-family housing both affordable and market rate is a national problem, but here in New York we have crafted an innovative solution. With collective action, creative thinking, hard work and modest help from government we can forge solutions to even the most challenging problems.
Crotty is a principal of Workforce Housing Group and a founder of Milford Street.