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The nature, validity and viability of subsidized real estate finance might best be explained through its storied history. The brief chronicle below attempts to capture the major trends and other influences that have shaped our industry.

History of Subsidized Real Estate Finance

19th Century Slums
In the second half of the 19th century, waves of Italians, Eastern Europeans and southerners migrated to major US urban areas. Surging housing demand and a lack of regulation incentivized private investors to create hazardous multifamily dwellings into which the new immigrants flocked. Diseases such as tuberculosis spread ferociously leading to heated political debate on issues ranging from overcrowding to pollution to public health and safety to the need for light, air, and adequate recreation. In response, the federal government issued a wave of legislation in the form of the Tenement acts of 1867, 1879 and 1901. The result was a new form of public intervention in private real estate markets.

20th Century and Public-Private Partnerships
Early subsidized real estate finance saw the birth of a structure that exists today: public-private partnership. A notable example is the successful 1922 Metropolitan Life Insurance Company development of the Sunnyside, a 2,122-unit moderate-income apartment complex subsidized through ten-year property tax abatement. In this project, public tax funds were leveraged with private investment to produce subsidized housing. A later example is the 1934 Bronx Hillside Homes project, a 26-acre, 1,400-family limited dividend housing development financed by a federal loan.

Great Depression and the New Deal
A 1926 real estate market downturn followed by the 1928 Great Depression led to sweeping reforms intended to alleviate a US housing crisis. Under President Roosevelt’s New Deal, the U.S. Housing Authority was created in 1937 to replace privately-owned slums with wholly-owned publicly rental housing, financed by 40-year tax-exempt bonds. Local housing authorities paid operating expenses through building rental revenue. The first public housing project was the New York City Housing Authority’s development of First Houses in New York City’s Lower East Side in 1935. Though the condition of slums has improved over time, rental income alone proved inadequate to support maintenance costs in many public housing projects, resulting in distressed building conditions. Public housing remains a major provider of affordable housing services. In New York City, approximately 40% of affordable housing stock is public housing.

Post-War and Urban Renewal
Due to post-war suburban sprawl, inner-city neighborhoods experienced deterioration. In search of work, three million African Americans migrated from the South in the 1940s and 1950s and through racial restrictions were forced to inhabit the dilapidated buildings. In response to urban decay, governments issued tax abatements to incentivize large private developers to redevelop these neighborhoods in a process called urban renewal. Two prominent examples are the Metropolitan Life Insurance Company’s 51-building Parkchester in 1942 and their 56-building Peter Cooper Village-Stuyvesant Town in 1947. Next, the Housing Acts of 1949 and 1954 subsidized written-down building values for redevelopment. However, only 2.5% of the demolished buildings were set aside for public housing and many low-income families, most of which were African American were effectively displaced. Urban renewal, thus, came to be known as “Negro removal.”

1960s and the Urban Racial Crisis
In addition to urban displacement, African Americans faced unfavorable housing laws and physical violence. Racially-restrictive covenants prevented African Americans from inhabiting many neighborhoods. Even federal housing programs honored racially-restrictive covenants. Finally, local police, white workers, and white residents directed physical violence against African Americans. President John F. Kennedy’s 1962 ban on racism in federal housing programs seemed to only fuel racial tension. In response, African Americans battled fought back violently. The Harlem riots of 1962, the Watts riots of 1965 and the Newark riots of 1967 were iconic of similar conditions in major cities all over the country.

Private Sector Solutions
In response to the urban crisis, private corporations led the way in creating programs designed to aid disadvantaged low-income and minority communities. In 1960, the Ford foundation’s Gray Areas program targeted minority communities for the creation of housing, job opportunities and public education. The Ford Foundation also led the way for the proliferation of community development corporations (CDCs) which combined federal, nonprofit and private resources to promote economic development in disadvantaged communities. Today, thousands of CDCs and other types of neighborhood development organizations exist in U.S. cities and rural areas, building and managing affordable housing, health clinics, office and industrial parks, and shopping centers; and providing preschool education, child care, job training and placement, and a host of other family and community services.

1970s to Present Day: A Proactive Subsidized Real Estate Framework
After the 1940s, support for public housing dwindled and development stalled. Fueled by support from its membership, the National Association of Home Builders (NAHB) incentivized the federal government to create new suite of affordable housing subsidies throughout the 1960s, many of which exist today. These included below-market mortgages and rent subsidies for special-needs housing and tax abatement programs. During the 1970s, policy shifted away from new construction towards neighborhood stabilization and rehabilitation through the creation of such programs as the Community Development Block Grant (CDBG). Banks were also compelled to contribute to community revitalization. Through the efforts of notable activist Gale Cincotta, the Federal Government created the Community Reinvestment Act (CRA) in 1977, obligating banks to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Finally, in 1986, Congressman Charles Rangel spearheaded the creation of low-income housing tax credits (LIHTC), which is responsible for approximately 40% of all new multifamily construction today.