How Do Funding and Review Processes Shape the Design of Affordable Housing?

by David Luberoff
Deputy Director

How do the notoriously complicated funding and approval processes for affordable housing shape the design of those projects? In particular, are these elements so complex that they make it difficult, if not impossible, to incorporate high-quality design into the planning and execution of affordable housing?

In a new paper, jointly published by the Joint Center and Enterprise Community Partners, Inc., and being presented at a Research Seminar tomorrow (Friday, March 23), Donald Taylor-Patterson, a second year Master of Urban Planning student at the Harvard Graduate School of Design and former Joint Center student research assistant, and I examine these questions as they pertain to Massachusetts in general, and to greater Boston in particular.

One Beach apartments, Revere, MA. Photo by Flagship Photos.

To do so, we drew on three sources of information. First, we carefully reviewed the state's Qualified Allocation Plan, which are the guidelines the state uses to allocate its annual allotment of federal Low-Income Housing Tax Credits (LIHTC), a key funding source for affordable housing. Second, Taylor-Patterson interviewed 18 leading experts in the field and we reviewed the insights that came from those discussions. Finally, Taylor-Patterson spoke with participants at Enterprise's 2017 Affordable Housing Design Leadership Institute (AHDLI), an annual event that brings together non-profit developers and design professionals to discuss how to improve the design of proposed affordable housing projects. (The research, it bears mention, did not attempt to define "design excellence," which can be subjective. Instead, the research focused on whether and how key actors and processes assessed the design quality of affordable housing developments.)

Four key findings emerged from this research. First, the LIHTC process in Massachusetts generally encourages design excellence for "invisible" project elements, particularly those that can be measured such as energy efficiency or accessibility. Second, the harder-to-measure "visible" or "aesthetic" design elements are often the product of the informal and formal ways that community groups and local governments review proposed affordable housing developments.

Third, while funding and approval processes sometimes crowd out efforts to improve design, key actors can bring design back into the picture, particularly if they can create (or take advantage of) well-timed processes that bring together developers, designers, and others for design-focused discussions that take funding and other constraints into account. Finally, although there is widespread agreement on some aspect of design excellence, the fact that each project's physical, political, and financial context is unique makes it almost impossible to use as regulatory process to specify what design excellence entails.

Taken together, these findings underscore how the complex interplay of funding, design, regulatory processes, and local politics creates both challenges and opportunities to ensure that affordable housing projects are designed and built in ways most likely to benefit both residents and neighborhoods. They also suggest that realizing design excellence for affordable housing projects is difficult but achievable. This is particularly true if the work plan for project development encourages and incentivizes processes that allow project designs to be challenged and pushed to a higher standard.

Fifty Years After the Fair Housing Act was Passed to Combat Segregation, We are Still Struggling to Find the Will to Implement It

by Moses Gates
 Regional Plan Association

In the third set of papers from the Joint Center’s A Shared Future symposium, published last week, researchers familiar with three cities were asked the question, “What would it take to make new and remake old neighborhoods so that regions move decisively toward integration?” Ultimately, the underlying answers—reducing income inequality, combating both institutional and individual racism—are social. But as land-use planning has been used as a main tool for both creating and maintaining segregation and housing discrimination, it seems evident that the implementation of solutions could go through this same route.

From this perspective, all respondents identified a similar problem that keeps their regions segregated: too much control of land-use on a local level and not enough on a regional or state level. Marisa Novara and Amy Khare, when talking about Chicago, write that, “If the goal is more integrated communities… land use decisions cannot be concentrated solely in the hands of local actors.” Willow Lung-Amam notes that the policies which directly encourage integration—such as fair share policies around subsidized housing—are “likely to face fierce opposition” on the local level. And William Fulton observes that while Houston is a bit different, with its lack of zoning, this does not necessarily shift the land-use control balance. Indeed, instead of zoning restrictions, local communities simply switch to restrictive deed covenants, historic district designations, and minimum lot coverages to limit development, while the lack of zoning means that Houston and surrounding jurisdictions cannot leverage the power of zoning via policies such as inclusionary housing requirements.

Apartments in Houston, Texas (Pixabay)

With the problem identified, it would seem that solutions proposed would seek to challenge it. But this is where the authors take a small fork in the road. Instead of answering the “

what would it take?”question, they all answer “what can we do?” After acknowledging the political infeasibility of anything that would seriously challenge the institution of local land-use controls, they all present a series of various granular technical fixes, such as adjustments to determining awards of Low-Income Housing Tax Credits, easier permitting for accessory dwelling units, enforcements of fair share allocations financing for vacant home rehabilitation, housing voucher portability, funding for anti-displacement programs, and using the various governmental points of leverage to require more affordable housing. Rolf Pendall, in his summary, notes that the targeting of these solutions reflects the political fragmentation of a particular region, with most emphasis on the places where these incremental changes would impact the largest number of people. He describes this underlying principle as a decision to “focus energy for political change where the payoff is greatest.”

But are we focusing our energy this way when we write off serious change at the metropolitan, state, or even federal level? All of the solutions proposed are essentially extensions of policies that exist, to one degree or another, in other places in the United States. Yet none—either in combination or individually—have been shown to move a region “decisively toward integration.” As Douglas S. Massey and his colleagues have documented, virtually every major metropolitan region in the country still suffers from unacceptably high levels of residential segregation, in most cases only seeing modest improvements since the passage of the Fair Housing Act. Neighborhoods—whether in places with or without these policies—stay segregated, and when they are integrated it’s generally just a waystation on the road from one type of segregated neighborhood to another. It’s clear that the way forward is something new and large (and likely disruptive and politically contentious) that would weaken local land-use control and enable larger entities like state governments or regional planning bodies to provide real housing choices and combat segregation.

Implicit in this is the idea that the interest in maintaining segregation lies with individual localities, but that the sum of the localities (in the form of metropolitan regions or states) are invested in combating it. While not discounting the fact that many people say they desire integrated neighborhoods in the abstract while opposing them in their own community (something anyone who has ever attended a local zoning meeting in an exclusionary area can attest to) the math is obvious. Opposition is concentrated in localities with a minority of the population, and this opposition is the roadblock to creating truly integrated regions.

This is a something that can be overcome. Surrendering to a powerful and vocal minority is the action of a weak and disinterested majority. And despite the benefits of neighborhood integration—such as better educational outcomes for all students—this unwillingness to seriously challenge residential segregation has persisted, especially among the white majority that has not borne the brunt of its negative effects.

But this may be starting to change. The idea that local land-use control is sacrosanct is coming under question. For instance, a serious challenge came earlier this year when California State Senator Scott Wiener, a San Francisco Democrat, introduced California Senate Bill 827, which would essentially override local zoning by requiring municipalities to put a floor on the size of developments permitted near transit. While unlikely to pass in its current form, the bill, which has two cosponsors, is already gathering significant political support around the state and interest across the country. This bill is far from a complete mechanism to combat residential segregation.  It does not directly address racial segregation (and there are even concerns that it will negatively impact historically minority neighborhoods neartransit) and is mainly lauded for its potential impact on housing supply and the environment, not segregation. But it would allow more housing in many exclusionary municipalities with the infrastructure to support it, and it does show the ability to use a tool—direct state overrides of exclusionary zoning practices—that we seem to purposefully leave in the toolshed.

Ultimately, and sadly, we do not yet have any real tool that will move any metropolitan region decisively toward integration—at least not any tool we’re willing to use to its full effect. But hopefully, we are at the place where that may start to change. In many ways, we are at a point similar to the beginnings of the civil rights movement, which succeeded in overcoming the unwillingness of a larger political entity (the federal government) to use its power to override the racist practices of smaller political entities. And recent tentative steps, geared at slightly pushing the envelope of the politically possible—such as the Obama-era HUD’s Affirmatively Furthering Fair Housing (AFFH) rule and the increasing willingness of at least a few states to explore overrides of municipal zoning control—in some ways mirror the early civil rights bills of the 1950s. In moving forward, we should look back on what moved us from these tentative steps in the 1950s toward the broad ones of the 1960s, mainly the organization, enfranchisement, and political power that the civil rights movement produced, and see how we can recreate it for modern times. Without this, “what will it take” and “what can we do” will stay questions with different answers.

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Papers from the A Shared Future symposium are available on the JCHS website. 

Affordable Rental Housing Development in the For-Profit Sector: A Case Study of McCormack Baron Salazar

by Rachel Bratt
Senior Research Fellow

Despite the private for-profit sector’s importance in affordable housing development, there has been relatively little research on the sector. Many researchers working on affordable housing issues have, instead, focused attention on the role of nonprofit organizations and public housing authorities. My new working paper on one of the country’s leading for-profit affordable housing developers, McCormack Baron Salazar (MBS), provides some insights into their successful business model.

In view of the fact that the private for-profit sector is not able to build housing that is affordable to lower income households without public assistance, while still realizing the desired level of profit, the federal government has been providing various incentives to the private sector for more than 50 years. Public incentives, which can be used by both for-profit and nonprofit developers, replaced the prior federal strategy of providing deep subsidies to local housing authorities to produce public housing. Although private for-profit developers have the potential of adding “market discipline” to deals, a key challenge is how to provide sufficient incentives to encourage private sector participation, while also safeguarding the public purposes of housing programs—providing housing over the long-term, at prices that are affordable to lower-income residents who are unable to compete in the private housing market.

The Low Income Housing Tax Credit (LIHTC) program, created in 1986, cemented the role of private developers in affordable housing development and is now the major federal housing subsidy program aimed at assisting lower-income households. According to data compiled by JCHS Research Analyst Irene Lew, for-profit developers have produced about 78 percent of the LIHTC projects placed in service between 1987 and 2013.

A search of the literature* explores the extent to which for-profit developers meet the requirements of the “Quadruple Bottom Line.” This concept suggests that all affordable housing developments should:

• have the financial backing necessary to preserve the development’s long-term affordability;
• address the social and economic needs of the residents;
• contribute positively to the neighborhood; and 
• be environmentally sustainable (Bratt 2008a, p. 358; see also Bratt, 2012). 

The case study of MBS, which focuses on their home-base city of St. Louis, presents information on this company’s approach to meeting these standards. MBS is well aware of these concerns and appears to be incorporating them into their operations.

The roots of MBS go back to 1973, embracing the vision “to rebuild low-income communities by providing quality housing options for all people.” The firm’s first projects involved the development of relatively small-scale mixed-income rental properties on single sites. This model changed over time, with the major focus being the redevelopment of large deteriorated housing developments into new mixed-income communities.

In addition to revitalizing places, the firm has a strong commitment to the residents of the communities they build. With the assistance of Urban Strategies, the separate nonprofit organization they formed, MBS works with local officials to develop high quality new neighborhood schools, collaborates with social services providers, and creates well-designed developments with amenities that support family living. Through all these efforts, MBS strives to promote the economic security of their residents.

Over the years, MBS has identified a group of “essential ingredients” that are needed for it to make a commitment to do a specific project:

First, in understanding their role as outsiders to the community, MBS believes that a strong local partner with a stake in the development is essential. This can be a local government, a philanthropic investor, a large nonprofit institution such as a hospital or university, or a private business that is willing and able to contribute significant financial and in-kind resources to the early phases of the project.

Second, the proposed development must have an attractive location. It must be either downtown or close to an anchor institution in that community. Often, the lead local development partner is, in fact, that anchor institution and therefore has a great deal to gain by upgrading the general area in which it is located.

Third, and consistent with securing an appropriate local partner, MBS works to limit as much as possible their up-front risk in a deal. Thus, MBS expects its local partner(s) to cover most or all of the soft costs involved in getting the development launched, including architectural and engineering studies and acquiring the necessary permits. Once development is underway, MBS becomes fully in charge of the process and is ready to assume the bulk of the risk.

Fourth, in order to make MBS’s large, complex deals work, and to ensure that the housing will be affordable to the intended group of households, additional financial resources are typically required (e.g., from the federal, state or local government, from a private institution, from a philanthropic entity, and/or from a corporate partner). In short, there is usually a great deal of subsidy money involved.

Fifth, development fees must be adequate, and, for the most part, are non-negotiable.

Even a project that incorporates all of MBS’s “essential ingredients” may still face significant challenges, largely due to external constraints and the complexity of developing and managing high quality affordable housing. A problem facing some MBS developments is that insufficient public housing authority reserves have been set aside. This issue is looming in projects owned by the St. Louis Housing Authority, for example, where some stakeholders fear that the high quality of the developments will suffer once reserves are depleted. However, unless Congress drastically cuts public housing operating subsidy funding, MBS principals feel that such depletion is unlikely at least within the next few years.

A second major issue is the lack of a budgeted line-item for resident services. Although MBS has a commitment to providing high quality supports and educational opportunities for its residents through Urban Strategies, its ability to do so depends on funding from outside sources.  Many nonprofit organizations strive to provide resident services through cash flow generated from the operation of their buildings.

MBS’s redeveloped properties are typically only able to offer the new housing to about 20-30 percent of the original residents. Although this is apparently higher than the standard for this type of redevelopment project, the often-heard criticism of HOPE VI projects, that resident selection processes result in “creaming” (admitting only the most stable and reliable tenants to the new developments), also appears to be a factor in MBS properties. The other side of this argument, of course, is that property managers and resident committees are responsible for assuring, as much as possible, that the new tenants are able to pay their rent and that they will not cause any problems for management or for the other residents.

Going forward, it is not clear how easy it will be for any firm, including MBS, to pursue its preferred strategy—large-scale, mixed-income development. A number of circumstances aligned in a positive way and provided fertile ground for MBS’s current business model to emerge and flourish.

The paper concludes with an overview of the components of successful public-private affordable housing programs, regardless of whether the developer is a for-profit or a nonprofit. The paper also suggests that there is a need to better understand the full range of for-profit affordable housing developers, including their overall strengths and weaknesses; clearly, MBS represents only one type of for-profit firm. Certainly, the mission driven aspects of MBS’s business model are not typically a motivating factor for the great majority of private for-profit affordable housing developers. The recommendations also emphasize the importance of a strong and committed federal role in affordable housing development, including the need for deeper housing subsidies, with less reliance on multiple funders for putting together affordable housing development deals. Even a large, well-capitalized firm like MBS cannot develop affordable housing without additional and significant public and private resources, and assembling them can be a difficult and time-consuming process.

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Renaissance Place at Grand, St. Louis, Missouri

• The Arthur Blumeyer public housing development was built in 1968, housing 1,162 family and elderly households.
• HUD awarded the St. Louis Housing Authority a $35 million HOPE VI grant for Blumeyer’s redevelopment in 2001.
• The new community, renamed Renaissance Place by residents, and developed by MBS, contains 512 mixed-income apartments, including 140 which are in universally-designed accessible buildings

Context of the large-scale housing development – a neighborhood within a neighborhood.

Photo by Peter Wilson, courtesy of McCormack Baron Salazar

Photo by Peter Wilson, courtesy of McCormack Baron Salazar

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Note * The  literature review part of the paper was written jointly with Irene Lew, Research Analyst, Joint Center for Housing Studies

References

Bratt, Rachel G. 2008. "Nonprofit and For-profit Developers of Subsidized Rental Housing: Comparative Attributes and Collaborative Opportunities." Housing Policy Debate 19(2):323-365.

___. 2012. "The Quadruple Bottom Line and Nonprofit Housing Organizations in the United States." Housing Studies 27(4): 438-456.

House Appropriations Bill Underfunds Housing Assistance Programs

by Irene Lew
Research Assistant

The FY 2016 appropriations bill covering spending for Transportation, Housing and Urban Development, and Related Agencies (THUD) is headed to the full House for debate this week. Approved on May 13 by the House Appropriations Committee on a party-line vote, the FY 2016 bill provides $42 billion for HUD, which is $1 billion above the FY 2015 enacted level but still $3 billion below the amount requested in the President’s budget. Due to the Congressional Budget Office’s projection of a $1.1 billion decline in revenue from FHA insurance premiums in FY 2016 and a shift to a calendar-year funding cycle for the project-based rental assistance program, HUD had required an increase of about $3 billion in FY 2016 just to maintain rental assistance for the millions of families that currently receive it. However, the bill has approved funding for rental housing assistance programs that are well below levels requested in the President’s budget (Figure 1).

Source: House Appropriations Committee on Transportation and Housing and Urban Development

The proposed funding level for HUD programs in the appropriations bill reflects the continuing impact of spending caps on non-defense discretionary programs that had been established as part of the 2011 Budget Control Act. As OMB Secretary Shaun Donovan points out, real budgeted discretionary spending (referring to programs that are funded on an annual basis and exclude entitlements such as Medicaid and Social Security) now stands at its lowest level in a decade. The THUD bill slashed funding for the public housing capital repairs program by nearly $200 million from the FY 2015 appropriation. Furthermore, despite a 3 percent funding increase over the FY 2015 level for housing choice vouchers, this increase does not restore the 67,000 vouchers lost to sequestration in 2013 and the amount allocated for renewals falls nearly $183 million short of the amount that HUD estimated it would need for renewing assistance for all current voucher holders in FY 2016.

Furthermore, of concern for many affordable housing advocates is the proposed transfer of all the funding set aside for the National Housing Trust Fund (HTF) in FY 2016—an estimated $133 million— to the HOME program in order to account for a 15 percent reduction in the appropriation for HOME. Although the Committee voted to maintain HOME funding at the FY 2015 level of $900 million, 85 percent of this amount ($767 million) will be directly appropriated for the program while the remainder will be transferred from the HTF, which was finally being capitalized after a long delay. This transfer puts the HTF at risk because the bill forbids Congress from putting any other money into the HTF following the transfer.

The capitalization of the Trust Fund would have supported the expansion of rental housing targeted at  households with extremely low incomes (up to 30 percent of Area Median Income), the first new production program aimed at this group since the creation of the Section 8 program in 1974.  Existing affordable housing production programs like HOME and the Low Income Housing Tax Credit (LIHTC) program have higher income-qualifying limits than those established by the HTF, with income eligibility capped at 80 percent of Area Median Income (AMI) for HOME and 60 percent of AMI for the LIHTC program. In order to make tax credit units affordable to extremely low-income tenants, units in these properties often require layering of additional rental subsidies in the form of vouchers or project-based assistance, according to a 2012 report from NYU’s Furman Center. Furthermore, while state housing finance agencies—the entities responsible for allocating housing tax credits—may provide incentives for developers to set aside a certain portion of LIHTC units for extremely low-income households, HOME does not provide any specific set asides for the lowest-income renters.

Unlike HOME and other federal housing assistance programs, the HFT was created with the intention that it would provide a predictable pool of funding not subject to the uncertainty of annual appropriations. The potential elimination of the NHT in the current House appropriations bill comes at a time when the need for housing that the lowest-income renters can afford has never been greater. Rental assistance enables households with the lowest incomes to access safe, decent, and affordable housing by making up the difference between private market rents and what these families can afford to pay. Yet the capacity of federal, state and local governments to provide aid continues to lag behind a growing need. HUD’s latest Worst Case Needs report estimated that while the share of those with assistance has remained essentially unchanged from a decade ago, with a third of eligible households receiving rental assistance in 2013, (Figure 2), overall numbers of extremely low-income renters have increased by 22 percent over the past decade, from 9 million in 2003 to 11 million in 2013.

Note: Extremely low-income refers to households with incomes not exceeding 30 percent of Area Median Income.
Source: HUD, Worst Case Needs Reports to Congress. 

In this tight budgetary climate, the preservation of the existing subsidized stock in the private market, especially those units assisted through the LIHTC program, remains a key part of addressing the housing affordability crisis over the coming decade. Although the LIHTC program has higher income-qualifying limits than public housing or other rental assistance programs, a recent HUD report noted that a sizable share of LIHTC households—46 percent—have extremely low incomes. Tabulations of the most recent data from the National Housing Preservation Database show that over 1.2 million (58 percent) of the nearly 2.2 million total federally assisted units (excluding units subsidized through housing choice vouchers and public housing units without additional project-based rental assistance) with affordability requirements expiring between 2015 and 2025 are subsidized through the LIHTC program (Figure 3). As I pointed out in a previous blog post, units subsidized through the LIHTC program are at lower risk of being removed from the affordable stock and most continue to operate as affordable housing without new subsidies even when tax credit properties reach the end of their affordable-use compliance period. Recent HUD initiatives such as a pilot program to expedite approvals for the purchase or refinance of LIHTC properties through FHA’s Section 223 program will also help preserve the affordability of existing tax credit properties, with estimated lending for FHA-insured LIHTC projects doubling from roughly $900 million to $1.8 billion last year. 

Notes: Other units include those funded by HOME Rental Assistance, FHA insurance, Section 202 Direct Loans, USDA Section 515 Rural Rental Housing Loans. Date of expiration refers to latest date of any subsidy expiring in property. Data includes properties with active subsidies as of February 20, 2015. 

Source: JCHS tabulations of National Housing Preservation Database, Public and Affordable Housing Research Corporation and National Low Income Housing Coalition.

With More than 2 Million Units at Risk, How Can the U.S. Preserve its Affordable Rental Housing Stock?

by Irene Lew
Research Assistant

As our most recent State of the Nation’s Housing report confirms, the renter affordability crisis shows no signs of abating, with more than one in four renters spending over 50 percent of their income on housing in 2012. With the Great Recession pushing up the number of very low-income households that qualified for rental assistance by 3.3 million between 2007 and 2011 (a 21 percent increase), the number of available subsidized rental units has not kept pace—the share of eligible households able to secure aid dropped from 27 percent to 24 percent over this period.

Given the growing demand for subsidized rental housing, preserving the existing stock of affordable housing has become critical. In our report, we analyzed data from the National Housing Preservation Database to determine what types of federally subsidized units with assistance tied to them are particularly vulnerable to loss over the next decade, due to expiring contract or affordable-use restrictions. (The other two primary forms of assisted housing are public housing developments and units rented in the private market using Housing Choice Vouchers.)

Using the database, we determined that contracts or affordable-use restrictions for more than 2 million federally assisted rental units will expire between 2014 and 2024. This amounts to 43 percent of federally subsidized units. Rental units subsidized through two programs—the Low-Income Housing Tax Credit (LIHTC) program and HUD-funded project-based rental assistance—represent 85 percent of housing with expiring contracts or affordability restrictions (see Figure 33). Project-based rental assistance includes Project-based Section 8, as well as Project Rental Assistance Contracts (PRACs) that provide rental assistance to low-income older adults and those with disabilities. 

Over half (57 percent) of the units with expiring restrictions in the coming decade are subsidized through the LIHTC program, while those with project-based rental assistance account for 28 percent. Units in properties supported by HOME funding and those subsidized with USDA Section 515 Rural Rental Housing Loans represent 9 percent, while another four percent are in properties with FHA mortgage insurance, and the remaining 3 percent are subsidized through older HUD programs.

Units in properties subsidized with project-based rental assistance are vulnerable to being removed from the affordable stock because these programs are subject to annual Congressional appropriations, which have continued to decline. The Senate Appropriations Committee’s recent approval of the Fiscal Year 2015 Transportation-HUD Appropriations Bill included a $200 million reduction in project-based rental assistance from the Fiscal Year 2014 enacted level. These budget cutbacks come on the heels of sequestration, which reduced the amount of available funding for project-based rental assistance contracts and forced HUD to short-fund thousands of contracts in 2013 to prevent them from expiring. Short-funding refers to the practice of partially funding renewals in the form of yearly contracts, thereby deferring ongoing costs to future fiscal year budgets in order achieve cost savings today. However, this practice creates uncertainty for owners by adding more complexity to ongoing property financing and operations.

With short-funding becoming so common for the project-based assistance program, over half of the 596,000 units with contracts expiring over the next decade will come up for renewal in 2014 and 2015 alone.  As federal funding becomes more uncertain and HUD struggles to fund existing project-based contracts, fewer owners who are eligible for contract renewals may decide that it is feasible to continue to rent to low-income households, increasing the likelihood that these properties may leave the affordable rental housing stock. And should budget shortfalls continue, HUD may have no choice but to allow some project-based rental assistance contracts to expire even if the owners want to remain in the program.

Meanwhile, units in properties subsidized through the LIHTC program are less vulnerable to removal from the affordable stock, although they represent the lion’s share of units with affordability periods expiring over the next decade. Between 2014 and 2024, approximately 1.2 million LIHTC units will reach the end of their 15- or 30-year mandatory affordability period and are eligible to leave the program. Owners of these properties have three options: apply for another round of tax credits, maintain the property as affordable housing without new subsidies, or convert the property to market-rate housing. For the most part, according to a 2012 HUD report, LIHTC properties that reached the end of their required 15-year affordability period continue to operate as affordable housing without new subsidies. These properties remain affordable without new subsidies for several reasons: they obtain a nonprofit sponsor with a long-term commitment to continuing affordability, they have project-based subsidies such as Section 8 that the owner does not want to give up, and/or the LIHTC rents vary little from market rents. Properties at higher risk for conversion to market-rate housing tend to be owned by for-profit owners in high-cost markets.  While the LIHTC program is not subject to annual appropriations, it could be endangered by comprehensive tax reform that would take a close look at these types of tax expenditures. But given the importance of the LIHTC program in both new production and preservation of affordable rental housing, it does have broad political support.

Given the gap between the demand for rental assistance and the number of assisted units available, there is a clear need for greater efforts to both preserve and expand affordable rental housing developments. Preservation initiatives such as HUD’s Rental Assistance Demonstration (RAD) help ensure that approximately 16,100 rental units in privately-owned properties subsidized through older project-based assistance programs (Rent Supplement and Rental Assistance Payment) remain affordable even after their nonrenewable contracts expire. Yet, RAD only addresses a small part of the growing need for preserving such housing.

Meanwhile, promising large-scale initiatives such as the National Housing Trust Fund have stalled due to lack of funding. Signed into law in 2008 as part of the Housing and Economic Recovery Act, the fund is a permanent program not subject to annual appropriations and has the potential to preserve a substantial share of federally assisted rental housing while also adding new affordable units. The fund was also the first new production program targeted to households with extremely low incomes since the creation of the Section 8 program in 1974. Unfortunately, the program remains unfunded to this day. Initially, it was to be financed with contributions from the GSEs, but these contributions were suspended indefinitely once Fannie Mae and Freddie Mac were taken over by FHFA in 2008. Most proposals for GSE reform, including the Johnson-Crapo bill making its way through the Senate, include some provision to fund affordable housing, but it remains unclear when Congressional action will occur, and what form, if any, the final legislation will provide for affordable rental housing.    

Housing Finance and Tax Reform Can Expand Affordable Rental Options

by Bill Apgar
Senior Scholar

Today, when more than one in three American households live in rental housing, ongoing erosion in renter incomes combined with ever rising rents has pushed the number of renter households paying excessive shares of income for housing to record levels.  Unfortunately, efforts to expand the supply of affordable rental housing remain mired in congressional wrangling over budget deficits and failure to reach consensus over how best to reform the nation’s housing finance sector. Although proposed changes to the single-family mortgage sector have captured most of the headlines, equally important reforms are now being discussed that will fundamentally alter the regulation of multifamily housing finance, including the operations of the Federal Housing Administration (FHA) and the government-sponsored enterprises (GSEs), as well as tax and subsidy mechanisms to expand affordable rental housing options through the Low Income Housing Tax Credit (LIHTC), public housing, and rental assistance programs.

As I discussed in my recent research brief, The Changing Landscape for Multifamily Finance, tax reform can play an important role in balancing the national budget and reducing the national debt. But in seeking to create a path forward, Congress should be careful not to short circuit tax expenditures that reduce the cost of capital for multifamily rental production and that enable developers to offer units at rents affordable to lower-income households. As one of the nation’s largest corporate tax expenditures, however, LIHTC is vulnerable to elimination or substantial cuts to help pay for lower corporate tax rates or any one of several deficit-reduction proposals now under consideration.

Supporters argue that LIHTC is a premier example of a successful public-private partnership. When combined with housing vouchers or other forms of rental assistance, the tax credit plays an important role in providing decent housing that is affordable to the nation’s poor. Opponents, however, counter that LIHTC’s complex rules scare away many financially-motivated private developers.  Moreover, critics contend that all too often LIHTC’s benefits go to moderate-income, as opposed to the nation’s lowest income, renters.

To improve the program’s ability to assist a broader range of renters, it is important to expand the ability of developers to combine LIHTC resources with housing vouchers or other tenant-based subsidies.  Currently, LIHTC requires developers to meet one of two standards: either 20 percent of units must be rent-restricted and occupied by tenants with incomes less than 50 percent of area median income (AMI).  Alternatively, at least 40 percent must be rent-restricted and occupied by tenants with incomes less than 60 percent of AMI. For this purpose, “rent-restricted” means that the tenant pays no more than 30 percent of their monthly income on rent. 

In practice, these criteria have led to multifamily housing developments that serve a very narrow band of tenants with incomes falling between 40 and 60 percent of AMI.  One proposal to extend the reach of the LIHTC program to serve more of the nation’s lowest income renters would require LIHTC developments to serve a larger share of households with incomes less than 40 percent of AMI while limiting the number of residents earning more than of 80 percent of AMI living in LITHC developments.  Another would award additional project-based housing vouchers to developments that have at least 30 percent of units occupied by tenants with incomes of less than 30 percent of AMI.  

Similarly, efforts to reform FHA and the housing GSEs must link access to government guarantees to requirements that a substantial portion (say, 60 percent) of the total rental housing units in developments are affordable to households earning 80 percent or less of AMI.   Such proposals would encourage developers to more aggressively search out available rental assistance options, and in doing so widen the income band of residents able to affordably live in LIHTC and other rental housing developments. Mixed-income buildings that offer rental housing options serving a broad range of incomes are especially important in low income communities that are being revitalized and/or are located in sparsely populated areas. These proposals could be structured to be revenue neutral, but would be enhanced by increasing the funding for housing vouchers and other rental assistance efforts

In another recent effort to harness private capital to expand the supply of affordable housing, HUD’s Rental Assistance Demonstration (RAD) program was designed to stem the loss of public housing and certain other at-risk, federally assisted properties. The program allows owners to pledge a portion of cash flow derived from existing long-term, project-based Section 8 contracts as collateral to support public and private lending to make much-needed improvements. At a time when the backlog of public housing repairs stands at $25.6 billion and other federally assisted properties have yet to recover fully from the Great Recession, RAD helps both public and private owners of multifamily housing address critical rehabilitation needs by borrowing against their future income streams on the private market. 

Market fundamentals suggest that the multifamily finance sector should remain strong in the near term. Coordination of rules governing utilization of existing long-term, project-based Section 8 contracts with ongoing GSE and tax policy reform efforts could unleash private sector expertise to serve broader segments of today’s renters. This would help turn the energy of the multifamily finance sector toward reducing the rental cost burdens that undermine the well-being of millions of US households.