Affordable Housing Finance: Show me the money

In the weeks before the Congress for the New Urbanism conference in Savannah, GA, May 15-19, we’re presenting interviews with experts contributing to a day-long exploration of “Affordability: The Intersection of Everything.” A three-hour morning forum on Thursday, May 17, kicks off the discussion, followed by two break-out sessions that afternoon. Below is an interview with Jeff Staudinger, former Community Development Director for the City of Asheville and currently a consultant in affordable housing finance. He’ll be a panelist in the afternoon session, “New Housing Finance (Mostly) Without the Feds,” at 4 p.m.

Q: Lots of people who will be reading this Q&A are planning and design pros who’ve worked on affordability projects financed with considerable help by federal grants, perhaps passed through state and regional agencies. In the current era, it feels as if the prospects for federal financial support to close affordability gaps are going in the opposite direction of the growing needs. First of all, are we missing something about what’s happening in Washington? And if it’s safe to assume less help than communities need will be coming from Washington, where do you suggest communities begin to explore other options?

Jeff Staudinger.

Jeff Staudinger.

A: The trend away from federal funding for new affordable housing has been going on for some time.

Although the passed and signed 2018 federal budget included an increase in HUD funding, including more money for the Low Income Housing Tax Credit program, it did not undo the erosion of federal funds for housing that has been happening for years.

The federal HOME program has been operating at 50% of its prior funding since 2011. USDA RD direct multi-family loans and guarantees have decreased. An increasing percentage of those funds going to rehab old projects, which the Housing Assistance Council (HAC) found to be woefully under capitalized.

The federal Housing Trust Fund has been used primarily to fund Low Income Housing Tax Credits units for very low income households.

On the public housing side, the Rental Assistance Demonstration program (RAD) in which public housing units are converted to voucher units, has given public housing authorities greater flexibility to use their existing assets, but has provided little new funding.

The name of the game on the national level has been, and continues to be, the Low Income Housing Tax Credit program. Although the federal credit allocation has stayed stable at about $8 billion, fewer units are being awarded annually due to rising costs. Unit production is also affected by the pricing of the credits, which is a function of tax rates. So the recent federal tax legislation, substantially lowering corporate income taxes, is likely to affect LIHTC funding strategies.

Q: How about funding support at state levels?

A: State support has never really been a large factor in affordable housing production, with most states relying on federal funds. Some have provided additional tax credits or set-aside funds to leverage the federal funds.

Q: Which gets us to potential resources at regional and local levels.

A: Right. While the need to leverage federal funding is still a very important use of local funds, direct local support is becoming more and more important in producing affordable housing. More local governments are finding that, by using a combination of direct funding, tax incentives and regulatory relief, they can work with developers to produce affordable housing without the complexity and expense that is associated with the LIHTC program and other federal funding. They can also tailor their agreements to meet other local priorities, such as infill development and mixed-income housing, both of which can be tough to do with some federal programs.

Q: So how might local jurisdictions begin to stitch together these resources?

A: First, advocates, interested developers and local governments should start looking at successful models in other places – and, of course, make sure those strategies can be structured legally in their jurisdictions. I would share, however, that generally it is slow going. The LIHTC program pretty much stands tall as THE WAY to produce affordable housing in the U.S. The demand for local funds to leverage those credits is high. Competition is fierce, so local financial support (or land, or infrastructure) makes one developer’s application, generally, more competitive than another.

They should also start sharing among possible partners their needs, priorities and business models. An affordable housing market analysis, for example, often can provide a solid starting place for public and private sectors to mutually understand the extent of housing need within a market context. This tool can help clarify assumptions about what constitutes “affordability” in a particular community, for example.

A certain amount of mutual transparency is also useful. The public sector is tired of hearing developers say they can’t afford to build affordable housing; and the private sector is equally weary of public sector complaints about unreasonable profits. Barriers can be reduced when the understanding of mutual risks, rewards and opportunities are openly discussed.

I believe the public sector also has some level of responsibility to facilitate and redirect the almost inevitable neighborhood pushback to affordable housing development. This does not de-obligate the development community from proposing and delivering good developments. However, part of the reason housing becomes unaffordable is that NIMBY resistance becomes public policy.

Q: The NIMBY issue rises in just about every affordable community discussion. What does your experience tell you about creating an environment in which all perspectives are represented but no group is rewarded for paralyzing the process?

A: I think this is one of the most vexing questions for both developers and advocates. I remember Kennedy Smith saying “40% are for you, 40% against you, and your job is to get 51% of the remaining 20% on your side.”

That suggests it’s a battle, which it often is. Maybe there is another way. First of all, it is important for the developer to play by the rules and to satisfy all the requirements for clarity about his or her intentions. But the same goes for regulatory bodies. Does the project fit within a jurisdiction’s existing regulatory framework? Is it feasible without rezoning or variances, for instances? If the developer’s plans satisfy the rules to move ahead by right, no should be empowered to change development plans because they happen to live nearby and don’t want change. Elected officials need to get this, and developers need to help them.

Affordable housing advocates need to stand up and ask personal questions of those who are concerned or opposed. Can your children live near you? What happens if your circumstances change?  Would you have to move away?

This can create, at a minimum, some dialogue and maybe illuminate some shared values. The developer also needs to understand that conversation is better than confrontation. Sometimes it works, sometimes it doesn’t. What doesn’t seem to work (or works only after a lot of cost and conflict) is a hard-core inflexible approach. The more developers know about the place where they’re proposing development, the better their chances to plan a project that meets the broad range of community perspectives about what fits. And I think the local government, if affordable housing is a priority, needs to stand up and say so and support solid projects both financially and politically.

Q: What are the options (Community Land Trusts, public-private partnerships, etc.) that seem practical? And what are the advantages/disadvantages of each alone or in combination? Any lessons learned from communities that have tried various approaches?

A: I think the keys to success to any option are partnership and accountability. This is because, frankly, local governments and developers need to work collaboratively to create affordable housing in most markets. Or, in other words, affordable housing will likely not be created unless there is a public/private partnership.

That said, there is a broad array of partnership options. These include:

  • Lender/borrower partnerships;
  • Tax incentive/performance partnerships;
  • Land ownership/lease and other time-defined use of land partnerships;
  • Developer/designer/contractor partnerships;
  • Tenant/ownership subsidy partnerships;
  • Regulatory incentive partnerships.

I am sure there may be others. Much depends on the parties’ perceptions of risk/reward, and the relationship to the larger economic and political context. For example, a local housing trust fund that makes direct loans to affordable housing developments is a widely replicated model program. Typically, the fund will agree to take a subordinated lien position to private funding sources (or bigger government resources), putting it at greater risk of loss if the project fails. Is this risk sufficiently mitigated by the upside housing production? This local fund may wish to try to mitigate its risk by requiring the developer to provide a personal guarantee.

The questions become: Does the upside of potentially low-cost and flexible public financing sufficiently mitigate the risk to the developer? How will the primary finance resource, be it public or private, view the local government’s engagement in the project? Are the terms and conditions sufficiently favorable that the primary financer will consider it is closer to equity than debt, reducing its risk, and perhaps allowing a more highly leveraged deal? And how will their regulators view this?

As you can see, the development of the right tools requires dialogue and, ultimately, flexibility to respond to the vagaries of the local situation.

Q: So the idea is to assure a match between a communities’ capacities and an appropriate range of options, right?

A: The community needs to ask a lot of questions, and be informed by research, such as the housing market analysis mentioned earlier, along with understanding the legality of what they want to explore. From that point, there are other important questions to consider:

  • What are the major affordable housing needs? Are they based in a revitalization, a sprawl, or a gentrification context? All of the above?
  • What is the scale of the affordable housing need?
  • What are the current demographic and economic drivers and the forecast?
  • Where will the community target its efforts?
  • Who will be the primary beneficiaries?
  • What other resources are or will be available?

Q: Do you have an example of a particular community in which this discussion is playing out?

A: Consider Asheville, NC, where I’ve been working as a City staffer and now as a consultant.

Asheville’s major housing needs are based on a growing tourist-based economy in an area with limited geography available for housing development. There is little existing dilapidated housing stock, and what is there is in rapidly gentrifying neighborhoods. The projection in 2015 was that by 2020 over 6,000 new residential units affordable to households making 80% or less of the area median income would be needed just to accommodate growth projections.

The existing housing developers dedicated to affordable housing are creating less than 100 new units annually. However, new construction of market-rate apartments mushroomed post-recession on major corridors south of the downtown. And lots of single-family market housing is being built in relatively nearby county locations.

Asheville has decided to target households at 60%-80% AMI, as well as to work with the local housing authority in diversifying public housing undergoing transition. It has also sought to incentivize developers in the private sector to include affordable units in new market-rate rental complexes. It has also looked to alternatives such as community land trusts to return home-ownership to low-middle income families.

Asheville has therefore put in place policy and funding programs that:

  • Encourage lender/borrower partnerships: Asheville has added $10 million to its housing trust fund (through an affordable housing bond) to significantly increase its ability to leverage new affordable units;
  • Established a tax incentive program (a “synthetic” Tax Increment Financing (TIF) program) for development that is targeted to location-efficient affordable developments;
  • Made city-owned land available for mixed-income development;
  • Conditionally allocated $1 million for Community Land Trust ownership;
  • Is investing in public infrastructure to enable a RAD conversion and expansion to increase a 98 unit public housing development to over 200 units, and helping therefore leverage LIHTC funding;
  • Provides additional incentives to partner developers who actively collaborate with the PHA to use housing choice vouchers.
  • Offers density-bonus incentives to reward infill developments along major urban corridors and in urban neighborhoods.

Notice that it does not provide significant incentives for housing rehab, except to assist special needs households to remain in their homes. It does not provide significant resources for new non-CLT ownership construction or financing. It does not have mandatory inclusionary zoning (NC has not enabled local governments to do so). It does not have rent control (specifically illegal in NC).

Asheville has responded to locally identified need with a number of incentives. It continues to cultivate developers and looks to actively collaborate with developers. One of the ways it will do that is by being one of the sponsors of an upcoming Incremental Development Alliance workshop and work with the National Association of Town Builders’ plan to meet in Asheville this fall.

Q: What needs to be in place (local regs, P3 relationships, etc.) to provide a foundation for new finance options? From your experiences with non-profits and with municipal and regional governments, what should local policymakers and potential partners anticipate (neighborhood concerns, questions from elected officials, etc.)?

A: Here are six suggestions, some of which recap points I made earlier:

  • Look for a shared understanding of what the local market looks like and, in that context, what the affordable housing needs are.
  • Understand local developer capacity within that market. This would include the capacity of both for-profit and non-profit developers.
  • Inventory government resources as those resources relate to the market analysis.
  • Explore the potential for partnerships. What resources are available from others, such as USDA, HUD, State housing finance agency, etc.? Have those resources been used locally? In what way? Lessons learned?
  • Evaluate the public perception of the importance of affordable housing, and work from that perception as a starting place for conversations between elected officials, neighborhoods, advocates, and developers.
  • Local developers should actively seek partnerships with local governments.  My sense is that locally-based developers may have more success in missing middle conversations, because they already understand the local political dynamics, the neighborhood concerns, and the priorities of other key partners like the banks.
  • Consider innovative approaches that show promising results.

Q: On that last point, are there experimental approaches that appeal to you personally?

A: I am particularly interested in how crowd-funding and affordable housing might intersect. I have seen examples of successful crowd-funding for neighborhood-based commercial ventures that seem potentially transferrable to neighborhood-scale affordable housing.

Many developers are clearly seeing that “small is beautiful.” 400-500 square foot apartments, once reserved for the elderly, are now being developed for young, single folks. Just five years ago, no bank in Asheville would touch this.

In the affordable realm, I think the time may be ripe for a new surge in limited equity co-ops as a homeownership alternative. I also think that public housing authorities should be seriously thinking how to integrate limited equity ownership options into their Rural Assistance Demonstration. The time to think that public housing is a short time alternative is long past. Communities wish to stay together. Community Land Trusts and Co-ops may be the way to do this.

The cost to create net-zero energy development is no longer the barrier that it was. I think forward-seeing financers will realize this, and that utilities will start seeing that as well. This goes hand-in hand with development that puts folks in easy reach of jobs, schools, goods and services. Developers and financers need to factor in the cost to live somewhere, not just the cost of rent or a mortgage. But the cost of developing on prime land in successful places is high. So how do we create new, diverse and affordable neighborhoods that are largely self-sufficient? I think this is an emerging priority.

Ben Brown

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