Achieving Deeper CAF Affordability Countywide (Feb 2024)

Achieving Deeper Committed Affordability across Arlington February 13, 2024

Although Arlington has a history of robust community engagement and policy goals around affordable housing, too many residents con�nue to be economically displaced from the County. This is especially true of our lowest income neighbors who live at or below 30% of the Area Median Income (AMI). O�en, affordable housing wins do not go deep enough to allow these neighbors, essen�al for Arlington’s con�nued economic vitality, to stay in our community.

The County Board and housing providers have recently taken steps on a project-by-project basis to create this “deep affordability” – i.e., units affordable to the 30% AMI household. For example, since 2018 the county has added 84 deeply affordable units across several projects. However, Commited Affordable Units (CAFs) with rents affordable to 30% AMI households s�ll represent less than 1% of the County’s CAF stock despite more than 25,000 County residents living below this income level. This piecemeal approach likely means that the County will con�nue to lose ground on deep affordability.

Instead, we call on the County Board to adopt a county-wide policy goal to achieve at least 10% of units affordable at 30% AMI in ALL County-funded CAF projects moving forward.

ACF has studied this issue at length and has previously put forward ac�onable tools for County Board considera�on. While deep affordability may be perceived as cost-prohibi�ve, our analysis demonstrates that it is achievable with a modest level of addi�onal Affordable Housing Investment Fund (AHIF) investment. The County Board’s recently adopted plan requiring a minimum of 10% of CAF units at 30% AMI at Barcro� Apartments provides �mely evidence that it is possible to balance this goal with careful financial stewardship.

A commitment to crea�ng more 30% AMI units is also responsive to the needs of exis�ng and future very low-income households throughout Arlington. Mee�ng this modest goal would provide a substan�al number of units over �me, while not burdening individual projects with any unintended consequences arising from reduced cash flow or a higher level of resident service needs.

Important next steps to ensure this goal is achieved over the next decade lie in the County Board's hands.

Policy Goal: Achieve 10% of Units at 30% AMI Add Policy Goal to Affordable Housing Master Plan (AHMP)

Appropriate Corresponding Increase in AHIF

Align AHIF NOFA

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Support State Policy Changes

Current Affordability Distribution of CAF Portfolio 50% AMI 21%

30% AMI

40% AMI 2% 30% AMI 1% 80% AMI 11%

40% AMI 50% AMI 60% AMI 65%

60% AMI 80% AMI

Source: Annual Affordable Housing Master Plan Indicators for FY 2023, Arlington County (revised in January 2024). Units reported as having HUD Housing Assistance Payment contracts serving residents up to 50% AMI are included in the 50% AMI category.

Background Although there are an es�mated 8,000+ renter households earning 30% AMI or less in Arlington (almost 8% of all Arlington households), the County’s CAF por�olio has only recently begun targe�ng units at this income level. In 2023, the County reported a total of only 89 CAFs at 30% AMI and another 229 at 40% AMI, together represen�ng just under 3% of all CAFs (see chart above). Most of the 30% AMI units were added a�er 2018, and yet they s�ll were only 2.7% of units financed in those years. Furthermore, since 2018, there has been a small decline in the reported 1 number of 40% AMI units, as well as a decrease in the share of units at 50% AMI. As a result, the total share of units over �me that are affordable at 50% AMI and below has shown a steady decline from 31% in 2010 to 24% in 2023 (see chart on next page).

These trends exist despite policies that atempt to achieve the opposite, including Objec�ve 1.1.6 of Arlington’s 2015 Affordable Housing Master Plan (AHMP), which calls on the County to incen�vize affordability below 60% AMI. The updated 2022 AHMP Implementa�on Framework recommends deepening the affordability of affordable housing units using three strategies: 1. Provide incentives for the inclusion of more deeply affordable units in new projects financed through the County’s NOFA process.

2. Adjust affordability covenants for existing projects when they seek refinancing through the County.

3. Work with CAF owners to explore collaborative efforts to increase the share of units dedicated to lower affordability levels.

It is �me for the County Board to move forward on this objec�ve by se�ng a more specific target AND providing the necessary funding to achieve it.

1 This is mainly atributable to a shi� in planned units from 40% AMI to 30% AMI. The County adds units to the CAF inventory at

the �me they are approved. If changes occur between approval and comple�on, the previously published numbers are revised to reflect the change.

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Share of Total CAFs 70% 60% 50%

CAFS <=50% AMI

40% 30%

CAFS 60% AMI

20%

CAFS 80% AMI

10% 2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

0%

Source: Annual Affordable Housing Master Plan Indicators for FY 2023, Arlington County (revised in January 2024).

CAFs <= 50% AMI includes units at 30% and 40% AMI.

Impact of AHIF and LIHTC

How would this goal be achieved?

Addi�onal subsidy is needed to achieve 30% AMI units. Our 2019-2022 pilots demonstrated that an addi�onal upfront subsidy of $170,000 was needed to reduce rent on a 60% AMI unit to the 30% AMI level. This would mean that an AHIF alloca�on of $100,000 per unit for a 60% AMI unit would increase to about $270,000 per unit for 30% AMI units. We found this method of upfront subsidy, which reduces the debt needed to finance the project, to be more cost effec�ve than using Housing Grants to house a similar number of 30% AMI households.

Although the per-unit cost for a 30% unit is much greater, our recommended 10% of units is a small share of the total units in a project, so the impact on a project’s overall costs is rela�vely small. For example, a theore�cal project of 100 units at 60% AMI that shi�ed 10 units (10%) to 30% AMI would see an increase in the average AHIF per unit from $100,000 to $117,000, as shown below.

90 units x $100,000 = $9,000,000

Shi�ing the expecta�ons for local funding sources such as Arlington’s Affordable Housing Investment Fund (AHIF) can fundamentally change the profile of newly developed, renovated and refinanced affordable housing in the County. AHIF helps finance nearly all affordable housing units in the County by filling gaps in development budgets of projects that are primarily financed through the federal Low-Income Housing Tax Credit (LIHTC) program, administered by Virginia Housing.

The LIHTC’s long-standing cap at 60% AMI* is the leading reason that commited housing affordability in Arlington (and elsewhere in the US) typically clusters at the 60% AMI level.

* The maximum income was recently increased to 80% AMI as long as the average income served is no greater than 60% AMI, a policy referred to as “income averaging.”

10 units x $270,000 = $2,700,000 Total AHIF = $11.7 million, or $117,000/unit 3

How would this 30% AMI goal impact the AHIF budget?

Our analysis shows that an increase of only 11% in AHIF project alloca�ons above typical levels would more than double the growth in 30% AMI CAFs. This conclusion is based on ACF’s model of the poten�al growth in the CAF por�olio achievable over the next 10 years using a number of different scenarios. To simplify the analysis, we assume that the only change over the 10-year period is the affordability distribu�on of any new, rehabbed or refinanced CAFs funded by AHIF, as shown in the chart below. The “business as usual” scenario is based on the recent affordability levels of AHIF-funded projects over the past five years. Our recommended distribu�on shi�s units from the 60% level to the 30% level while leaving the other categories the same.

Proposed Change in Annual Distribution of CAFs 75.0%

80.0%

68.0%

60.0% 40.0% 20.0% 0.0%

3.0%

14.0%

10.0%

30% AMI

14.0%

40-50% AMI Business As Usual

8.0% 8.0% 60% AMI

80% AMI

Recommended Distribution

To illustrate this impact, consider a scenario in which the County allocates $22.4 million in AHIF annually (the average over the past 5 years) to help finance 212 CAF units per year. 2 Under the “business as usual” approach, the County would add only 6.4 units per year to the CAF por�olio at the 30% AMI level, or a total of only 64 units throughout a 10-year period, bringing the County to a total of 153.

Increasing the share of 30% AMI units to 10% would add approximately $2.5 million to AHIF alloca�ons each year, 11% more than the “business as usual” scenario. This approach would increase the number of 30% units created each year to 21.2, yielding a growth of 212 units at the 30% AMI level over the decade, or 233% more than the “business as usual” outcome. This would bring the total number of CAFs at 30% AMI to 301 units, or 435 when including the units already funded at Barcro�. These scenarios are illustrated in the chart below.

While the exact numbers will differ in reality, the outcome is the same: a rela�vely small increase in AHIF alloca�ons will have a sizable impact on housing for the lowest income households in Arlington.

2 This analysis assumes an AHIF expenditure of $20,000 for an 80% AMI unit, $100,000 for a 60% AMI unit, $150,000 for a 40-

50% AMI unit, and $270,000 for a 30% AMI unit.

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10-Year Potential Growth in CAFs at 30% AMI 435

500 400 200 100 0

301

287

300 89

153

89

Business as Usual Scenario Current (2023)

Recommended 10% Scenario

10-Year Projection (2033)

10-Year Projection Including Barcroft (2033)

Recommendations To date, Arlington’s policy goals around deepening affordability of the affordable housing supply have lacked specific targets and the resources that would ensure a meaningful change. The pressures faced by the lowest income members of our community are only ge�ng worse. Arlington should strengthen its commitment to economic diversity by mee�ng the housing needs of extremely low-income working households.

ACF recommends that the County Board take the following four ac�ons: 1. Adopt an amendment to the AHMP that sets a policy goal of 10% of CAFs at 30% AMI rents on an annual basis in new, renovated and refinanced projects funded with AHIF. As the component of the Comprehensive Plan that sets the vision for housing policy in the County, the AHMP is the most appropriate tool for this goal.

2. Appropriate additional AHIF funding in each year’s budget to cover the increased costs of meeting a 10% goal. Our analysis shows that this goal could be achieved with a modest increase of about 11% above “business as usual” project-level AHIF allocations. Annual budget appropriations are the largest single source of revenue for AHIF, and the only component directly controlled by the County Board.

3. Give clear policy direction to the County Manager to align the AHIF Notice of Funding Availability (NOFA) with this policy using either threshold requirements or significant point allocations designed to favor projects with a greater share of units at 30% AMI. 4. Advocate for state level policy changes and increased funding to prioritize the creation and preservation of 30% AMI units. Virginia Housing’s Qualified Allocation Plan (QAP) for allocation of LIHTC provides points for 30% AMI units that are not subsidized by project-based rental assistance. This incentive should be strengthened, and similar incentives should be created within other programs such as the Virginia Housing Trust Fund.

Incorpora�ng these recommenda�ons into County policy will provide an important boost to efforts, as outlined in the latest Affordable Housing Master Plan Implementa�on Framework, to deepen affordability within the CAF por�olio. Deeper “hard-wired” affordability levels is a cost-effec�ve way to assist low-income working households who are experiencing severe rent burdens despite living in Arlington’s commited affordable units. Arlington can and should commit the resources needed to make this a reality.

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