In today's parlance, the term Affordable Housing generally refers to housing that is subsidized by the taxpayers. This housing is constructed using equity raised from the sale of Low Income Housing Tax Credits (LIHTC), tax exempt bonds, CDBG (Community Development Block Grants) and FHLB (Federal Home Loan Bank) funds to name a few. Often times, especially in the rehab of already existing affordable housing projects, the rents are also subsidized with Section 8 vouchers or a project based Section 8 Housing Assistance Program (HAP) contract provided by the United States Department of Housing and Urban Development (HUD).
Since this article is about the high cost of affordable housing, especially as it directly relates to the taxpayer, the focus of the article will be to provide a concise explanation of LIHTC's and Section 8 as a background to explain why providing affordable housing is anything but affordable to taxpayers. Of course, one can dig deeper and argue whether or not there is an actual need for subsidized housing or whether the invisible hand of the market would fulfill the need through simple supply and demand. Others might argue that, as a society, we must take the morally appropriate action of providing for the needy. Although these are relevant topics on the subject of affordable housing, it is by far way beyond the means and scope of a single article.
Affordable Housing Funding: A Brief History
The LIHTC program was created in 1986 and is regulated under Internal Revenue Code Section 46. Each year the IRS allocates a set LIHTC amount to each state based on that state's population. In 2011 that amount is expected to be .15 per resident, so a state like New York will receive a greater allocation of LIHTC's than a state like Arizona which has a smaller population. States, in return, hold one or two highly competitive funding rounds per year in which developers submit their projects in hopes to receive LIHTC's which they can then sell to an outside investor for pennies on the dollar and raise equity for their project. In exchange for the LIHTC's the project is required, by government mandate, to maintain rents that are affordable to residents making at the most 60% of the area median income (AMI) while limiting tenants to pay no more than 30% of their gross monthly income (GMI) towards rent.
Section 8, unlike its counterpart LIHTC, is directly subsidized rent payments made either on the behalf of the tenant regardless of housing location, (Section 8 Voucher), or directly to the housing project (Project Based Section 8 or HAP). It is important to note that many projects receive Section 8 HAP contracts in addition to LIHTC's. The HAP (Housing Assistance Plan) contract ensures the property collects rents equal to market rate rents by paying the difference between what the resident can afford and the market rent. A HAP contract is assigned to a property so that when one tenant moves out the next tenant still receives the rent subsidy. A Section 8 voucher, unlike HAP, is a portable voucher that a resident retains and can use on their housing of choice.
Far from the government subsidized ghettos' of the 1970s, the development quality of today's affordable housing has greatly improved and is now virtually indistinguishable from market rate development housing; however, the cost to develop affordable housing still far exceeds that of market rate housing. In order to understand the cost variables between affordable and market rate housing it is important to look at the different development financing structures used by both and how these costs can vary.
Affordable Housing Financing of Today
Developers and bank underwriters determine allowable first mortgage debt by calculating the property's potential income and expenses. Based on those amounts and the prevailing interest rate on the debt, financiers can determine a monthly mortgage payment able to be serviced (paid) by the property. As a result of the government mandated 30% cap of tenant payable rent calculated off GMI (Gross Monthly Income), it follows that an affordable housing owner's property will have substantially less income than its market rate counterparts. Additionally, State and Local agencies often require the owner to provide auxiliary services to the residents which increases the operating costs and again reduces the amount of debt that can be supported. If a typical 100 unit affordable apartment property collects 0 less/unit per month on average than a market rate property and has an additional 0/unit per month in expenses, this ultimately translates to 0,000 in less debt that would otherwise go to develop the property.
Equity, as opposed to debt, is required by lenders so that the owner has skin in the game' (as the saying goes) or is financially liable for their product. Equity, on a market rate project, is contributed by the owner or investors. On an affordable housing project, equity is obtained by the owner via the sale of LIHTC's to an outside investor. These LIHTC's are purchased for as low as 50 cents on the dollar up to the mid 80 cent range based on market conditions. For example, an investor can pay 65 cents on the dollar for million worth of LIHTC for a total cost of .5 million. In turn, that investor is allowed to reduce his tax liability on a dollar-for-dollar basis through the use of LIHTC. It his helpful to note that the investor for this example is only able to use 1/10th of the total tax credits purchased per year for 10 years to offset taxable income. Nonetheless, the cost burden of the project is entirely born and paid on the backs of the taxpayers whose money is used for the development.
Affordable Housing Construction Costs and Development Example
Higher construction costs, outside of reduced debt and equity funding capability, are a debilitating hallmark of affordable housing development. Increased construction costs are realized in various ways throughout the development. For example, affordable housing projects, unlike their market rate counterparts, are forced to comply with federally mandated Davis-Bacon labor wage laws. Although Davis-Bacon wages are not union per se, they do increase the costs of construction by a minimum of 20% above market. Additionally, costs are increased due to less competition among subcontractors. For example, many funding agencies will not fund projects unless the developer, as a matter of fairness,' only hires subcontractors that are minority or women owned, as opposed to the subcontractor that provides the most qualified bid.
If decreased funding and arbitrarily higher construction costs weren't enough, affordable housing projects are saddled with exceptionally higher legal fees which can run into the hundreds of thousands of dollars as a result of structuring multiple notes and working around funding agencies guidelines (which are often times incompatible with each other). Accounting fees, too, are significantly higher in order to certify costs that qualify for tax credits, and the funding agencies themselves charge application fees for both construction and asset monitoring. The list of increased costs can continue, however, the ones referenced above are sufficient for you, the reader, to understand that the perfidy of rules and regulations not only impacts the development costs, but, most importantly, amounts to a confiscation of taxpayer money. It's not unheard of for the funding gap on a 100 unit development to exceed million dollars.
The example 100 unit apartment development above has cost the taxpayer million in uncollected tax revenue (LITHC funding) and million in locally spent funds due to arbitrarily increased construction costs and reduced supportable debt. Lastly, if this property has a Section 8 HAP contract, which pays the owner 0/unit per month (difference between the affordable and market rents), it will cost the tax payer another 0,000 per year with annual consumer price index (CPI) increases with contracts often running for 20 years.
If providing economic, quality housing for the working poor is our goal, then how many will continue to be homeless due to feckless rules and costs mandated by both federal/local governments? Furthermore, why not take all the money that is wasted and greatly expand the Section 8 tenant based voucher program? Let the tenants decide where and how they want to live. If a project is subpar, it is a fairly safe assumption that tenants will move elsewhere. All of these issues sum up to one conclusion; affordable housing' is an Orwellian oxymoronic moniker used to obfuscate the bureaucratic largesse and government waste it was meant to cover-up.