The principals of Nassau Capital Advisors, LLC have developed a growing advisory practice assisting municipalities in New Jersey address the challenges associated with the Mt. Laurel affordable housing mandate of the New Jersey Supreme Court.
In 2013, the Supreme Court invalidated the Round 3 regulations of the Council on Affordable Housing (COAH). In 2014, COAH failed to adopt new regulations in accordance with the Court’s mandate. In March, 2015, the Supreme Court eliminated COAH’s jurisdiction in the matter, and returned to the judicial branch of state government full oversight over affordable housing policy. The Supreme Court has now designated trial courts throughout the state to begin adjudicating issues in their respective jurisdictions involving municipal prospective need, petitions seeking immunity from builder remedy actions, and a host of related matters. These proceedings will continue through 2016.
The principals of Nassau Capital Advisors, LLC have considerable experience as financial advisors to governmental agencies, providing assistance and guidance in the development and financing of affordable housing. We also assist municipalities and their affordable housing legal and planning teams in navigating the current judicial process of establishing “fair share” allocations and developing credible plans for inclusionary zoning.
Our principals, Dr. Robert S. Powell, Jr. and Gerry Doherty, recently authored a report published in September, 2015 by the New Jersey State League of Municipalities, entitled Demographic and Economic Constraints on the Inclusionary Zoning Strategy Utilized for the Production of Low and Moderate Income Housing in New Jersey. View the report.
At the request of the State League of Municipalities, we participated in a judicial mediation session in October, 2015, with planners and other consultants in the court of the Hon. Mark A. Trancone, J.S.C., Ocean County. Judge Trancone is presiding over Mt. Laurel Declaratory Judgment actions filed by Ocean County municipalities.
Litigation Support and Financial Advisory Services
To best understand the ways our team might assist a municipality in addressing these affordable housing challenges, a brief background review of inclusionary zoning may be useful.
The New Jersey Supreme Court’s 1983 Mt. Laurel decision established a constitutional obligation that municipalities, in the exercise of their delegated power to zone, “afford [ ] a realistic opportunity for the construction of [their] fair share of the present and prospective regional need for low and moderate income housing.” In 1985, the Legislature enacted the Fair Housing Act (FHA), creating the Council on Affordable Housing (COAH), and directed that agency to develop rules for the implementation of the Court’s policy. The tool the Court and Legislature both envision that municipalities will utilize to establish “a realistic opportunity” for the creation of affordable housing is inclusionary zoning. The tool relies on private capital for the subsidy of affordable housing. The strategy is to provide financial incentives to private developers, in the form of density zoning bonuses for development in certain areas of a community. In return, developers agree to subsidize a certain number of low and moderate income housing units.
The reliance on private capital, as opposed to public subsidies, is a fundamental element of New Jersey’s affordable housing strategy. The Fair Housing Act specifically notes that nothing in that statute “shall require a municipality to raise or expend municipal revenues in order to provide low and moderate income housing.”
Thus, the development of a realistic, economically-feasible inclusionary zoning strategy requires the courts and municipalities to address a number of financial and economic issues. Nassau Capital Advisors can assist the parties in understanding and addressing these issues, so that the outcome of the current judicial proceedings will produce affordable housing plans that are realistic and credible.
The Immediate Challenge: What is a realistic “fair share” mandate for the courts to establish for 2015 – 2025?
Historically, the courts and COAH assigned affordable housing mandates to municipalities by focusing almost exclusively on the prospective need for such housing. Such need is determined by demographic and household income studies of the New Jersey population.
What has been overlooked historically is an understanding of the economic and financial limitations of inclusionary zoning as a tool which must attract sufficient private capital to create the affordable units needed to meet prospective needs.
The inclusionary zoning strategy is a regulatory tool with enormous constraints. The empirical evidence supporting this conclusion is compelling. With the passage of the Fair Housing Act and the establishment of COAH, zoning plans for inclusionary developments were initiated by municipalities throughout the state pursuant to the First Round Certifications in 1988. Thereafter, COAH required municipalities to file annual performance reports on such plans. COAH provides a summary of such reports on its website, for the period 1990 – 2010.
A detailed review of these reports by Nassau Capital Advisors, LLC found that for the 20-year period 1990 – 2010, municipalities adopted inclusionary zoning plans authorizing a total of 35,910 units of low and moderate income housing units to be built.
Of this number, 16,870 affordable units (approximately 47% of the total authorized by zoning) were actually constructed statewide over this 20-year period. That represents an average of 844 affordable units per year actually built statewide, over the 20-year period.
Looking forward, inclusionary zoning continues to have very limited potential for creating a meaningful supply of affordable housing in New Jersey. This negative outlook is due (among a number of reasons) to New Jersey’s lagging economy, stagnant growth in population and employment, and a very weak outlook for new housing construction.
Our September, 2015 report for the N.J. State League of Municipalities concluded that New Jersey is likely to produce between 17,000 – 24,000 new units of affordable housing in total for the next decade (through 2025). The projection assumes an unprecedented, robust level of compliance and participation in the inclusionary zoning process at the local level.
That affordable housing projection represents a small fraction of the prospective need recently given to the courts in several expert reports. Yet, these prospective need studies (and not a recognition of the severe economic limitations of the inclusionary zoning strategy) may form the basis for judicial mandates to the state’s municipalities. Municipalities may wish to bring to the attention of the courts the severe constraints of the inclusionary zoning tool, as the courts develop their mandates town by town, to obtain more realistic mandates for the coming decade.
There is a second structural limitation to the inclusionary zoning tool which the courts have historically been unwilling to recognize in crafting these mandates. A significant percentage of the prospective need for affordable housing historically allocated to towns is statistically impossible to satisfy through the inclusionary zoning strategy, because the prospective need numbers include households too poor to afford even the least expensive units developed by an inclusionary zoning plan.
The 2015 study cited above by Nassau Capital Advisors, LLC estimated that approximately 27% of households statewide are too poor to afford even “very low income” affordable housing. (This group of households has incomes between 0% – 20% of median income.) A similar finding was reported in a 2015 report by Econsult Solutions, Inc.
Thus, municipalities should request that their prospective need numbers through 2025 be adjusted down to reflect the number of extremely poor households included in the total.
Looking Beyond 2016: Assistance in Developing Workable, Smart Plans
Once the courts establish affordable housing goals, a municipality should understand the financial and economic basis for inclusionary zoning projects in order to craft the smartest plans. Nassau Capital Advisors, LLC can assist municipalities with this work. The financial issues that arise at this stage of the process include the following:
- How much private subsidy will be needed to produce the desired number of affordable units in a particular municipality?
- Understanding that this subsidy will need to come primarily from private developers, what are the financial and economic calculations developers utilize in order to decide whether to invest in an inclusionary development project? (The more a municipality knows about the potential profitability of a project, the better equipped it will be to negotiate set-asides.) Nassau Capital Advisors creates detailed financial models for inclusionary projects, using the same financial standards and formulas employed by developers. Once models are prepared, the details and soundness of a plan can be analyzed and negotiated with more certainty and transparency.
- Are the density bonuses provided to a developer in a draft inclusionary zoning plan sufficient to generate the needed subsidy? If not, the plan likely won’t be built, or can be successfully challenged by a developer. If the incentives are too generous, the town may miss the opportunity to get more affordable units for the same density.
- Private capital is the principal form of subsidy, but there are other sources of funds, and Nassau Capital Advisors can assist in identifying them. A town might consider supplementing a mixed-income inclusionary zoning plan with financing strategies to create projects which are 100% affordable. This approach can reduce the excess density requirements of inclusionary zoning projects. Affordable housing trust funds, collected over the past several years by municipalities, can serve as matching capital, combined with low-income housing tax credits and low-interest, long term HUD financing, to acquire and rehabilitate existing properties as 100% affordable units. It’s being done now in many communities. Nassau Capital Advisors creates funding strategies to illustrate how this works, and assists in structuring the transactions.
- Finally, a municipality might consider partnerships with affordable housing developers (both non-profit and for-profit) and a town’s public housing authority. Such partnerships can produce new capital for affordable housing through use of low income housing tax credits, low-interest HUD loans which generate excess proceeds, and other governmental programs. We have experience working with municipalities and their public housing authorities on collaborative financing strategies. Our firm also serves as financial advisor to a number of public housing authorities.
Credentials and Experience
Dr. Robert Powell, Managing Director, has been qualified as an expert witness on matters of real estate financial feasibility by state and federal courts throughout New Jersey in numerous litigation and arbitration matters over the past 15 years.
Dr. Powell’s credentials include a successful career in the development and financing of millions of square feet of commercial and residential real estate. For 10 years he served in senior executive positions, including President and CEO, of DKM Properties Corp, Lawrenceville, NJ. The firm developed and managed more than six million square feet of commercial and residential real estate during his tenure. His experience includes the structuring complex financial packages for real estate development projects.
Dr. Powell’s work with real estate development and finance began during his tenure as the first Executive Director of the NJ Economic Development Authority in Trenton, NJ, and has continued for more than 30 years, during which time he has negotiated hundreds of millions of dollars in incentives for his own development projects as well as for scores of public and private clients.
Dr. Powell has a Master’s Degree and Ph.D. Degree from the Woodrow Wilson School of Public and International Affairs at Princeton University, with a special focus on economics and public policy analysis. Dr. Powell is a licensed real estate broker in the State of New Jersey.
Gerry Doherty, Principal and Senior Associate, has 30 years of experience in evaluating the financial feasibility of real estate transactions. Mr. Doherty specializes in developing complex, customized financial models used to evaluate proposed or existing real estate development projects.
Mr. Doherty has a Master’s Degree in Economics from the University of Connecticut and a Bachelor’s Degree in Economics from the University of Delaware. Mr. Doherty’s litigation and expert witness experience includes substantial assignments on behalf of The Port Authority of New York and New Jersey and New Jersey Transit Corp.
Our Clients (Partial List)
Municipalities and Other Government Agencies – Affordable Housing Litigation Support:
- NJ State League of Municipalities – Report on Inclusionary Zoning and Mt. Laurel litigation support
- South Brunswick Township (Middlesex County) – affordable housing strategy and litigation support
- Borough of Ho-Ho-Kus (Bergen County) – affordable housing litigation support
- Consortium of multiple municipalities in Monmouth, Ocean and Mercer Counties in connection with Mt. Laurel litigation proceedings and Economic Report on Affordable Housing Feasibility Analysis
- Borough of Madison, NJ (affordable housing collaboration with Madison Housing Authority)
- Rockaway Township (Morris County) – affordable housing litigation support
- Borough of Absecon, NJ (Affordable housing litigation support)
- N.J. Department of Community Affairs – Financial advisory services on economic feasibility evaluations of local affordable housing plans
Mt. Laurel Litigation Support Services – Law Firms:
- Jeffrey Surenian & Associates, Brielle, NJ
- Edward Buzak, Esq., Buzak Law Group, Montville, NJ
- Gerald Muller, Esq., Miller, Porter, Muller, Princeton, NJ