Box 22, Folder 19, Document 8

http://allenarchive.iac.gatech.edu/originals/ahc_CAR_015_022_019_008.pdf

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Box 22, Folder 19, Document 8

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I
If
WORKING PAPER
I.
COMMENTS ON ·THE
PROPOSED URBAN DEVELOPMENT CORPORATION
, 1.
Concept
In its proposal for the establishment of an Urban Development Corpor-
ation* HUD asserts, "The greatest domestic challenge that faces America
today is the need to rehabilitate and rebuild the nation's slum neighborhoods and the 5,000,000 substandard and deteriorating dwellings· in
which 20 million Americans live.
The problem exists in large and small
cities throughout the entire country. u,
The Proposal points out that .
neither government nor industry can do this alone, and proposes a
nationally based, private, non-profit institution--UDC--which has access
to substantial amounts of FHA insured mortgage credit, and the ability
to offer major inducements to cities, industry, labor, and residents of
slums.
It proposes that UDC be directed
at rehabilitation,
i"i ··
with the objective of rehabilitating 500,000 -slum dwellin.g units withi n "the
next decade.
dwelling units
ation.
The propos~d short term goal i s rehabilitating 30,000
during
. i
a •
, t he first two years of it s a per-
For these f irst two years it is as~erted the UDC will r equire a
reservation o f $200 million in 221 (d) (3) be l ow market interes t rate (BMIR)
mortgage credit funds, $200 mil lion in FNMA spec i a l ass i stance funds f or
r ent supplement dwellings, and $9 million in r ent supp lement funds.
In
addition, $12 million in working capital will be requir.e d for the first
two years of operat i on which i s to be suppl i ed by foundation
l

and corporate grants and l oans, and HUD demonstration funds.


"·A Proposal for a Nationally Based Private Non-Profit Urban Development


Corporation to ,Rehabilitate and Replace Substandard Urban Slum Dwellings,"
HUD, Nov. 1966
�,,
. 2.
The kernel of the UDC concept is that _the large and orderly market
it provides will produce an efficient,aggressive and technologically
advanced rehabilitation industry.
This new industry will serve the
total rehabilitation market, private as .well as public.
2.
Feasibility
There appear to be :fbur key questions concerning feasibility of this
proposal:
Technological
Social
Scale of operations required
Acceptability
The technological feasibility of massive rehabilitation of many types
of slum dwellings has been demonstrated.
the 114th Street program in Harlem.
The most striking example is
There the buildings were largely
-~
gutted, and attractive, healthy, modern apartments · created, one f or each
of the far below ~standard units that were scrapped .
HUD estimates that
the re are more than 5 million units in the nation's s l ums that are
structurally s ound and susceptible to such rehabilitat i on.
That many slum neighborhoods have potential to r espond to the impact
of rehab ilitation i s a lso strikingly demonstrated by the 114th Street
experiment.
The pride shown by the residents of the r ehabilitated units,
the low l eve l of vandalism during construction, and the enthus iasm of the
ne i ghborhood for the project illus trate this.
HUD estimates that
5 million units suitable f or rehabilitation are located in slum neigh~
borhoods with the potential to respond to the improvements offered.
�,
3.
The minimum effective scale is largely a matter of judgement.
Experts consulted seem to agree that the scale proposed (30,000 units
annually
in the first two years, 50,000 units/thereafter) is sufficient to
provide the leverage needed with labor, contractors, the materials
industry, and city administrations to achieve the innovations desired
and to visibly affect the quality of life in the nation's slums.
A
commitment to only the first 30,000 units may be sufficient but on this
opinions differ .
HUD has been in contact with industry, labor and city representatives and reports that in every case those interviewed were persuaded
of the merits of the UDC idea.
Organized labor's reaction was favorable
to the suggestion of a national contract with UDC containing work rules
providing for .
appropriate to eff icient rehabilitation and/crews which i nclude labor
from the slum neighborhoods .
Builders and developers were pleased with
the signif icant r ole the private. sector could play.
Manufacturer s
expressed i nterest in undertaking research and development of products
f or a new r ehabilitation market.
3-.
Co s t s
In t he UDC p r oposal the average tota l ·cost pe r dwel ling units is
estimated t o be $13, 000 .
Th i s is a conserva t i ve estimate bas ed on the
very limited experience to date.
There is reason t o ·b elieve that UDC
activity will bring the unit cos t s down due to economies of scale ,
(
�4.
improved contractor management) increased labor productivity) and to
technological innovations induced by the new rehabilitation industry.
That there will be cost reduction is highly likelyJ and that this reduction will spur private rehabilitation seems probable) but there is no
basis for quantitatively estimating the degree of reduction possible
and, in all likelihood) will not be until after a -few years of UDC
operation.
It is possible that costs could go as low as $9J000 per unit.
The UDC proposal suggests that the initial 30J000 units be financed
half with BMIR (Below Market Interest Rate) mortgage credit and half with
FNMA special assistance funds for rent supplement dwellings.
The annual
rent supplement funds that would be required depends ) of course J on the
average ability to pay.
If the BMIR funded 15)000 units were all rented
to families with annual incomes over $4J000J the annual rent supplement
required for the remaining lSJ000 units would be between $12.2 million
and $19.6 million) depending upon the t enants' incomes.
The mortgage credit and rent supplement funds required for the first
five year s of ope r ation are shown in Table l J based on the estimat ed cos t
of $13 J 000/uni t.
The ave r age annual te nant income can be expected t o be
be tween $2, 000 (whi ch was the 1965 nat iona l average income o f t he 2. 5 million s lum fami l ies with i ncomes be l ow $4, 000/year) and $4 , 000 whic h i s typic al
of income s in Harl em.
The commitment to future r e nt suppl ement payme nts depend s , of course,
on the degree to which c os t s a re re duced by the new r e hab ilitation
indus try and upon the change s in family income.
this.
Tabl e 2 illustrates
It can be seen that unless costs are reduced to below $9,000/unit
�;I
...
5.
TABLE
i
Funding Requirements
(For Unit Cost= $13,000)
y E AR
1967
1968
1969
1970
1971
Units Constructed
During Year
5,000
25,000
50,000
50,000
50,000
Units Completed
5,000
30,000
80,000
130,000
180,000
Average Units Cornpleted During Year
2,500
17,500
55,000
105,000
165,000
..
Annual BMIR Mortgage
Credit ($, millions )1(
33
167
325
325
325
Annual FNMA Mortgage
Credit*
33
- 167
325
325
325
Annual Rent Supplement Funds($,rnillions)**
(Tenant Income=
$4,000)
1.0
7.1
22
43
63
Annual Rent Supplernent Funds($,millions)**
(Tenant Income=
· $2,000)
1. 6
11. 5
36
69
108


Based on half the units being financed with BMIR 3%-40 year


- mortgages, the other half with 6%-40 year mortgages .



Based on rent supplements applicable to the one-half qf




the units that are financed at 6%-40 years.
�II
6.
TABLE . 2
Annual Rent Supplement in$ Millions,
After Five Years
(90,000 Units, 6% 40 Year Mortgages)
Average Unit Cost
Average Tenant
Annual Income
$9,000
$11,000
$13,000
$4, 000
23
48
73
$3,000
45
70
95
$2,000
68
93
118
··-~~-
�r
7~
or average incomes rise to over $4,000/yea; rent supplements will be
required indefinitely.
4.
Additional Benefits
a.
Cost Reduction for Private Rehabilitation
The total market for rehabilitation is far greater than the
500,000 units proposed for UDC action during the next decade.
Even if
half of the 5 million units presently suitable for rehabilitation are
torn down, the private sector market for rehabilitation is 4 times
larger than that proposed for UDC over the next decade.
Cost reductions
stimulated by UDC will therefore pay a large dividend in terms of reduced
economic rent for slum families .
This ' tan be considered - to· mu1tiply tp :
by 5 the savings which are reflected in the rehabilitation directly
sponsored by UDC .
b.
Slum Employment
Rehabilitation is, and probably will remain, a labor-intensive
industry.
Approximately one-half man year of on-site labor is required
per rehabilitated unit .
If half of this were to be provided by local
labor, r ehabi l itation at t he ~ate of 50, 000 units per y ear will directly
employ some 12, 000 slum dwelle r s .
Since , presumably, the same people
wou ld partic.ipate in t he private rehabilitation market , t he number of
slum dwellers employed in the new r ehab i litation indus try might be
so,ooo.
c.
Application of New Tec hnology to New Const r uct i on
The degree t o which technological innovation stimulated by
rehabilitation will be effect ive in r educing the cost of new const ruction
is uncertain.
What is clear is that new products will be used when they
�If
·a.
become available market items, t):J.ereby. improving the quality if not the
cost of new construction.
d.
Interaction With Other Programs
UDC-sponsored rehabilitation activities can strongly reenforce
other programs.
Among these are the Demonstration Cities, home ownership
for slum dwellers, and neighborhood Service Centers.
5.
Additional Problems
a.
Mortgage Terms and Economic Life
~he use of 40 year mortgages (and consequently an implied remaining
economic life of 55 years) has been assumed by HUD.
However, it is by no
means clear that rehabilitation can provide either physical or economic
lifetimes approaching this in a substantial fraction (perhaps most) of the
neighborhoods under consideration.
Reduction of the mortgage terms to
20 years would require an increased annual rent supplement of $330/unit.
b.
Property Acquisition
Limited experience suggests that it is possible to assemble
properties for rehabilitation, u&ing only the threat of rigid code enforcement to keep prices from rising.
Alternately, or in conjunction,
condemnation proceedings can be used in Urb~n Renewal Areas.
c.
Rehabilitation vs. New Housing
While rehabilitation has well known social advantages over slum
clearances f ollowed by new construction, it offers far less opportunity
for cost reduction through technological innovations and raises the
thorny problem of the wisdom of investing heavily in obsolescent
'--",
properties.
An intriguing proposal for neighborhood redevelopment using
�n
9.
a mix of rehabilitation and new housing was developed in a working
session on UDC*.
UDC's concern with rehabilitation to the exclusion~£
new housing could become a block to the kind of federal effort needed
to obtain cost reduction through major innbvation<>in construction,
technology and project management.
It has been suggested that the reason the Proposal selected rehabilitation rather than a mixed rehabilitation/new housing objective for
the UDC was the concern that labor in particular (and perhaps the
construction and materials industries as well) would strongly oppose the
UDC unless it clearly restricted its activities to rehabilitation.
is a matter of judgment and could very well be correct.
This
It must be
noted , howev er, that acceptance of UDC might be forthcoming if these
groups realize that new construction based on improved and economizing
technology is inevitable and UDC can provide a sympathetic client with
which they could cooperate to gradually modernize traditional practices.
This is a subject that future staff work might illumine.
d.
Effect on Equity Holders
If the costs of rehabilitation remain high , the federal govern-
ment , UDC and the cities involved will be p~edisposed to use all means
a t t hei r dis posa l to dr i v e down t he costs fo r acquir i ng t he propertie s
f o r rehabi lit at i on.
majo r to o l f o r th is .
Ri gid c ode enfo r cement has been suggested as t he
I t i s no t clear that a self - avowed polic y of
l i qui dating the equity ho lde r s by code e nfo r cement won't deve l op a fa tal
backla s h .


Int e rim Report :


Study of the Fea s ibility of an Ur ban Development
Corporation
�11
10.
e.
Relationships
The proposed relationships of UDC with the local government,
various national groups, and the neighborhood (including the question of
continuing responsibility for maintenance and upkeep of the rehabilitated
buildings) are largely undefined.
6.
Conclusions
a.
While very many details of UDC remain to be worked out, it appears
highly likely that the major objectives will be met if a strong Presidential
commitment is given.
b.
This is the only practical mechanism that has been found for
visibly improving the quality of slum housing within the next few years.
c.
The minimum effective scale of the UDC is one which can stimulate
a new industry in the U.S.--the rehabilitation industry .
this industry will probably not develop.
Without the UDC
The proposed level of UDC effort
appears to be the minimum needed if it is t o b e successful.
d.
The costs--in terms of below market interest rate mortgage credit
and rent supplements amount to a subsidy of a substantial fraction of
the total rent.
The rent supplements involve a firm long term commitment,
which is uncertain.

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