Box 22, Folder 19, Document 8

Box 22, Folder 19, Document 8

WORKING PAPER





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 neigh-
borhoods 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.” 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, bi
with the objective of rehabilitating 500,000 -s1um dwelling units within ‘the
next decade. The proposed short term goal is rehabilitating 30,000
dwelling units during PRA the first two years of its oper-
ation. For these first two years it is asserted the UDC will require a

reservation of $200 million in 221(d)(3) below market interest rate (BMIR)

mortgage credit funds, $200 million in FNMA special assistance funds for

_ rent supplement dwellings, and $9 million in rent supplement funds. In

addition, $12 million in working capital will be required for the first

two years of operation which is to be supplied by foundation

and corporate grants and loans, 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
9,

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 four 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 most striking example is
the 114th Street program in Harlem. There the batldinge-wexe largely
gutted, and attractive, healthy, modern apartments’ created, one for each
of the far below-~standard units that were scrapped. HUD estimates that
there are more than 5 million units in the nation's slums that are
structurally sound and susceptible to such rehabilitation.

That many slum neighborhoods have potential to respond to the impact
of rehabilitation is also strikingly demonstrated by the 114th Street
experiment. The pride shown by the residents of the rehabilitated units,
the low level of vandalism during construction, and the enthusiasm of the
neighborhood for the project illustrate this. HUD estimates that
5 million units suitable for rehabilitation are located in slum neigh-

borhoods with the potential to respond to the improvements offered.
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 representa-
tives 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 efficient rehabilitation and/crews which include labor
from the slum neighborhoods. Builders and developers were pleased with
the significant role the private. sector could play. Manufacturers

expressed interest in undertaking research and development of products”

for a new rehabilitation market.

3. Costs

In the UDC proposal the average total cost per dwelling units is
estimated to be $13,000. This is a conservative estimate based on the
very limited experience to date. There is reason to believe that UDC

activity will bring the unit costs down due to economies of scale,
improved contractor management, increased labor productivity, and to
technological innovations induced by the new rehabilitation industry.
That there will be cost reduction is highly likely, and that this reduc-
tion 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 $9,000 per unit.
The UDC proposal suggests that the initial 30,000 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, on the
average ability to pay. If the BMIR funded 15,000 units were all rented
to families with annual incomes over $4,000, the annual rent Sip lemeits
required for the remaining 15,000 units would be between $12.2 million
and $19.6 it ten, depending upon the tenants' incomes.

The mortgage credit and rent supplement funds required for the first
five years of operation are shown in Table 1, based on the estimated cost
of $13,000/unit. The average annual tenant income can be expected to be
between $2,000 (which was the 1965 national average income of the 2.5 million
slum families with incomes below $4,000/year) and $4,000 which is typical
of incomes in Harlem.

The commitment to future rent supplement payments depends, of course,
on the degree to which costs are reduced by the new rehabilitation
industry and upon the changes in family income. Table 2 illustrates

this. It can be seen that unless costs are reduced to below $9,000/unit
TABLE 1

Funding Requirements

(For Unit Cost = $13,000)











YEAR

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 Com-
pleted During Year 2,500 17,500 | 55,000 | 105,000} 165,000
Annual BMIR Mortgage
Credit ($,millions)* 33 167 325 325 325
Annual FNMA Mortgage
Credit* 33 167 325 325 325
Annual Rent Supple-
ment Funds($,mil-
lions) **
(Tenant Income =
$4,000) 1.0 ek 22 43 63
Annual Rent Supple-
ment Funds($,mil-
lions )**
(Tenant Income =
$2,000) 1.6 bL.3 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 of

the units that are financed at 6%-40 years.


TABLE . 2

_ Annual Rent Supplement in $ Millions,
After Five Years
(90,000 Units, 6% 40 Year Mortgages)













Average Tenant Average Unit Cost

Annual Income $9,000 $11,000 $13,000
$4,000 23 48 73
$3,000 45 70 95 -
$2,000 68 93 118










or average incomes rise to over $4,000/yeay 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 multiply‘?
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, rehabilitation at the rate of 50,000 units per year will directly
employ some 12,000 slum dwellers. Since, presumably, the same people
would participate in the private rehabilitation market, the number of
slum dwellers employed in the new rehabilitation industry might be
50,000.
c. Application of New Technology to New Construction
The degree to which technological innovation stimulated by
rehabilitation will be effective in reducing the cost of new construction

is uncertain. What is clear is that new products will be used when they
become available market items, thereby 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
The 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, using only the threat of rigid code en-
forcement to keep prices from rising. Alternately, or in conjunction,
condemnation proceedings can be used in Urban Renewal Areas.
c. Rehabilitation vs. New Housing
While rehabilitation has well known social advantages over slum
clearances followed 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
a mix of rehabilitation and new housing was developed in a working
session on UDG*. UDC's concern with rehabilitation to the exclusion of
new housing could become a block to the kind of federal effort needed
to obtain cost reduction through major innovations in construction.

technology and project management.

It has been suggested that the reason the Proposal selected rehabi-
litation 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. This
is a matter of judgment and could very well be correct. It must be

noted, however, 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 predisposed to use all means
at their disposal to drive down the costs for acquiring the properties
for rehabilitation. Rigid code enforcement has been suggested as the
major tool for this. It is not clear that a self-avowed policy of
liquidating the equity holders by code enforcement won't develop 2 fatal

backlash.



*Interim Report; Study of the Feasibility of an Urban Development
Corporation
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. Without the UDC
this industry will probably not develop. The proposed level of UDC effort
appears to be the minimum needed if it is to be 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.