The Tools of Redevelopment and Densification

In this section, we describe in detail the tools used by our sample PHAs to preserve, develop, and densify affordable housing. In any description of this length many of the details will necessary be left out.10

The Low Income Housing Tax Credit

The Low Income Housing Tax Credit (LIHTC) is the largest housing production subsidy program in the United States. Between 1987 and 2006, it accounted for 30% of all multifamily housing starts, affordable or otherwise (Khadduri, Climaco, and Burnett 2012), and currently serves over twice the number of households as public housing (Schwartz 2015).

At a superficial level, the program is quite simple. Builders who agree to make their rents affordable to low-income families (roughly 60% of Area Median Income, although complexities certainly apply) can earn tax credits equal to a portion of the eligible development costs for 10 years. Generally developers receive either the 9% credit (and thus receive roughly 9% of their development costs each year for 10 years) or a 4% credit (and thus receive roughly 4% each year).

Unlike Public Housing and Vouchers, the developer agrees only to set rent at a level affordable to a particular income bracket and to rent to families who fall in that range. After leaseup, families are required to pay the full amount of the rent each month regardless of how their income fluctuates. Of course, good management practice requires that tenants are screened for their ability to pay, making most LIHTC developments available only to a band of incomes that fall below the mandated eligibility level and above what a property manager thinks reasonable to avoid operating shortages.

Tax credits are not unlimited (particularly the more valuable 9% credits) and are granted to each state on a per capita basis. Stage agencies such as Hawai‘i Housing Finance & Development Corporation allocate these credits based on a ranking system available in their Qualified Allocation Plans (QAP) that scores proposed developments based on their feasibility, their developer expertise, and whether or not the projects location and target population aligns with identified areas of need.

The complexity arises based on two issues. First, many affordable housing developers are nonprofit organizations who have no use for tax credits. Second, even if the developer is a for profit company, the funds for development are needed within the first year of the project, not spread out over ten years. To resolve this issue, affordable housing developers essentially sell a portion of their development to a limited partner, who front the money and receive the tax credits over 10 years as repayment (along with some other benefits such as a depreciation allowance). Because of the complexities of this relationship, the amount that the limited partner is willing to pay for $1 in tax credits varies over time. In the early 1990s, when the program was new and thus appeared risky, tax credit investors paid only $.50 on the dollar for tax credits. This amount steadily increased until it peaked at over $1 for a dollar in credit (Schwartz 2015; Novogradac 2019). In 2019, a dollar in LIHTC credits was worth roughly $.94 cents to investors (Novogradac 2019).

Two related questions remain to be answered. First, why would an investor ever pay more than $1 for $1 in tax credits when there is risk involved in the transaction? And second, who buys tax credits? The answer to the second answers the first: banks. Banks are the largest investors in Low Income Housing Tax Credits (with insurance companies coming in second). The reason why tax credits are appealing to banks is because they help fulfill the bank’s obligation to the Community Reinvestment Act which requires banks to affirmatively invest in minority communities as remediation for discriminatory practices. Tax credits represent an efficient way to meet these obligations.

Project Based Vouchers And Project Based Rental Assistance

The Project Based Voucher program (also known as Project Based Section 8) and its kissing cousin Project Based Rental Assistance, represent a hybrid between standard vouchers (which follow a particular household that is privately owned) and Public Housing (in which the housing is owned by the PHA). For PBV, the PHA agrees to subsidize a certain number of units in a privately owned development.

Generally speaking, PHAs can allocate between 20 and 30 percent of their housing vouchers to PBV. These vouchers are allocated on a competitive basis and are generally used to support new construction or rehabilitation of affordable housing. Project Based Vouchers largely have the same eligibility requirements as Housing Choice Vouchers but do not follow the family if they choose to leave the unit. Instead they stay attached to a particular unit and are used to subsidize the next eligible family who wishes to occupy the unit. The tradeoff for the lack of residential flexibility is that the owners of the PBV development can be assured of a steady cash flow month after month regardless of the vicissitudes of the labor market (as with most HUD programs, families pay 30% of their income in rent and the voucher makes up the difference).

Mortgage Revenue Bonds

Each year state housing agencies are permitted to issue tax-exempt bonds, the proceeds from which they can use to fund affordable housing for low-income families. While often used to provide below-market mortgages to low-income homebuyers, multifamily housing bonds can be used to finance developments in which 40 percent of the units are affordable to families earning less than 60 percent of the area median income (or 20 percent for those earning less than 50% AMI).

The bonds are tax exempt, meaning that the proceeds to bond investors are not subject to federal taxes, but this means that the number of bonds is limited. The current formula for each state is $105 dollars per person in the state with a state minimum of just over $320 million dollars (NCSHA 2020).

Myriad other bond financing options exist beyond this federal program. California, for example, issues its own general obligation bonds to support fair housing development as do some local municipalities. In Hawai`i the Hula Mae Multi-Family (HMMF) bond program administered by HHFDC serves this function.

Local Gap Financing Programs

Despite all of these federal programs, many affordable housing developments require some form of local financing to pencil, particular those that target families earning below 50% of AMI. By design, these programs differed from place to place, allowing local officials to target their funding according to locally identified needs.

Cdbg And Home

Both the Community Development Block Grant Program (CDBG) and the HOME Investment Partnerships Program (HOME) are block grants administered by HUD. Block grants are designed to give local municipalities (both states and smaller jurisdictions) more authority to customize their expenditures to local needs. For example, HOME funds can be used for a range of purposes related to affordable housing or homeownership, such as “tenant-based rental assistance; housing rehabilitation; assistance to homebuyers; and new construction of housing. HOME funding may also be used for site acquisition, site improvements, demolition, relocation, and other necessary and reasonable activities related to the development of non-luxury housing” although they cannot be used for public housing (HUD 2020). CDBG funds have even more latitude as they are not limited to housing related uses and can be used for a plethora of activities supporting poor and low-income populations.

As noted above, as the housing crisis has worsened increasing number of jurisdictions have allocated these flexible funds to catalyze the development of affordable housing.

Most of the affordable housing developments identified in our sample were exclusively residential, but some of the larger, more urban, developments contained some form of on-site retail making them eligible for New Market Tax Credits. While the future of the program is uncertain, the NMTC currently operates much like the LIHTC except that the credits are allocated to commercial or industrial development in low-income census tracts. The ability to access these tax credits, plus the opportunity presented by commercial revenue, can make mixed-use development a powerful tool.

The Rental Assistance Demonstration

The impetus for the RAD program is to resolve the “backlog of unfunded capital needs” that exists for public housing (for a complete summary see Stout et al. 2019). As noted in the introduction, the federal government has, for years, failed to adequately fund capital improvements in Public Housing. In layman’s terms, there is generally sufficient resources for day-to-day management of public housing, but large scale repairs (a new AC systems, new elevators) have consistently been neglected. This puts a large share of the nation’s public housing stock at risk of being uninhabitable.

Clearly the easiest solution to this issue would be to adequately fund capital repairs, but this does not appear to be politically viable. RAD was designed to be budget neutral, meaning that it attempts to ensure the long-term physical viability of the public housing stock without adding the HUD’s budget.

It does so, to drastically over simplify, by transitioning public housing units into Project Based Vouchers units. In order to make the transition cost neutral, the amount of funding for the PBS8 is limited to the amount that was being provided to the public housing program (although this is generally sufficient).

The reason that this conversion helps solve the capital repairs issues is that it allows PHAs and their partners access to sources of financing that they are prohibited to access through the Public Housing Program. For every dollar of PHA funds invested in the RAD conversion, the most recent evaluation suggests that PHAs are able to leverage $7.47 in other financing sources. The bulk of this money comes from other public funding sources. Even when considering the contributions of all public entities combined, these investments still leverage $1.59 for every $1 spent (Stout et al. 2019). In other words, the conversion of a property from public housing to PBS8 results in a large multiplier effect in terms of the development’s ability to leverage other dollars.

PHAs and their partners are given wide latitude in what the conversion looks like. In instances where the property is in good repair and lacks significant capital needs, the development can essentially be a change in subsidy type without any additional changes. In other cases, a RAD conversion can result in the renovation of a public housing structure but otherwise not change the building footprint. At the more intensive end, a conversion can result in the demolition of existing structures and the subsequent construction of new structures. In such cases, the PHAs are required to ensure that deeply affordable units are rebuilt, although many of these major redevelopments will add additional units either targeted to low income families (via LIHTC) or market rate housing.

Tenants living in public housing undergoing a RAD conversion are protected in a number of ways representing a vast improvement over HOPE VI. All tenants have a right to return to their units after rehabilitation or a similar (or larger) unit in the new development. They cannot be re-screened and retain the rights available to them as public housing residents. The programs require a certain level of community engagement, and that families be relocated not unduly prematurely and can return within a reasonable timeline.

Families that wish to do so can also opt in to the “Choice Mobility” option which provides them with a Housing Choice Voucher which they can use to move elsewhere. Such decisions do not obviate the requirement for the replacement of all public housing units with PBS8 units in the post-RAD development.