Rethinking Funding for Affordable/Workforce Housing

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Rethinking Funding for Affordable/Workforce Housing

The lack of affordable/workforce housing can dramatically impact the health and well-being of communities. The report, America’s Rental Housing: Evolving Markets and Needs, finds that half of U.S. renters pay more than 30 percent or more of their income on rent, up an astonishing 12 percentage points from a decade earlier. Much of the increase was among renters facing severe burdens (paying more than half their income on rent), boosting their share to 27 percent.  These levels were unimaginable just a decade ago, when the share of American renters paying half their income on housing, at 19 percent, was already a cause for serious concern.

The shortfall in the number of units affordable/workforce to extremely low-income renters in the U.S. (those earning no more than 30 percent of the area median) more than doubled from 1.9 million in 2001 to 4.9 million in 2011. The situation is getting worse with not much changing in the way of strategy to address this issue. The focus for decades has been on two main income tested approaches that alone cannot meet the challenge.

The first of the approaches is Public Housing Authorities  (PHA) funded by the federal government in the form of operating and administrative support, capital funding for maintenance and repairs and housing choice vouchers to be used in project based developments or by private landlords to support housing the neediest.

This long standing approach has witnessed declining in funding for decades and is in the mist of its having its support shift from direct grants and capital funding toward a focus on housing choice vouchers, moving PHAs toward a greater reliance on private landlords to participate in the housing voucher program to meet housing needs for the lowest income market.

As an example of this shift, according to the U.S. Department of Housing and Urban Development, PHAs received $3 billion in capital funding in 2001 and has seen this figure reduce to $1.8 billion in 2014 with PHAs reporting needed repairs in excess of $26 billion dollars. During the same period, PHAs have witnessed a surge in housing voucher allocations that do not come with capital funding. PHAs are now in a position, which many are not prepared to do so, to perform like private sector developers in their practices to generate revenue from their development projects to meet the ongoing housing challenge.

The second approach calls for the private sector to build affordable units with subsidy from the government, mainly state and local support providing gap funding, tax credits and discounted land to support private developers in reaching their targeted profit margins.

This approached in many respects has been skewed toward the benefit of the private interests over the public interests in development deals and has not supported revenue generation for public agencies. To be fair to the private interests, it can be argued that public entities historically have not been overly interested in revenue generation via affordable housing developments but instead were more concerned with unit production over sustainability.

More importantly, and a key point to remember, this approach sets in motion hyper competition pitting communities and organizations against each for a limited number of funding awards and limited gap funding allocated locally. In addition, add to this the reality of the NIMBY (Not in my Backyard) effect at the neighborhood level and that local governments, many of which are already operating in a strained fiscal environment no longer have the financial tools needed to support affordable/workforce housing. Lastly, this problem is further exacerbated by the fact that the private sector without subsidy support and the ability to make a profit suggests the likelihood that affordable housing production will increase appears highly unlikely.

It’s also important to remember that while the income tested approaches limit the range of participation up to 60 to 80% of area median income, there is an entire population who do not meet any the programmatic requirements due in large part to making above the threshold but are struggling to afford market rate housing given rising costs and stagnant wages.

The response of local communities by in large to this situation is reactive suggesting a disconnect exists where the strategies are not matching reality of the situation, which in the case of affordable/workforce housing is the need for ongoing resources beyond the government which support unit production developed by development partners that emphasize a shared value and triple bottom line approach to affordable/workforce housing development.

So, with all this being said, what should be the basis for a new funding model? Any discussion on the development of a new funding model should begin with sustainability beyond government funding. A new model centered on infusing within the operating policies and development practices of community housing and economic development entities and their subsidiaries or private development partners the creation of a sustainable revenue source through its development projects which generates revenue and begins to move a community past the reliance on government funding to support affordable housing production should be the focus. And, in doing so, realign the profits of a development entity, subsidiary or private development partner in such a way to mitigate growing social and economic inequality issues at the community level.

This requires solid local public policy leading the way, looking at project hurdle rates, development fees, internal rates of returns, equity distribution, debt to income ratio requirements, how land is utilized, leveraging public assets and development tools and the identification of both private development partners and financial institutions willing to work with communities on this issue given the limited resource base to support its mitigation.

In the final analysis, the creation of a new funding model which assists communities in matching their affordable/workforce housing development strategies to reality of limited resources and reduces the reliance on governmental funding can begin to serve as a new framework for assisting communities in reexamining how they approach addressing pressing social and economic issues in the context of declining and limited government support.

 

Eric Anthony Johnson, Ph.D

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