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Tuesday, December 19, 2017

Tax Reform: Affordable Housing Programs Preserved, But Dark Clouds Loom on the Horizon

The Tax Cuts and Jobs Act has been approved by the House and Senate, and it is on the way to President Trump for signature. Fortunately for affordable housing advocates, the worst case scenario that was presented in the House version of the bill has been averted. The House version proposed elimination of tax-exempt bonds and 4% tax credits, which are two of the primary financing mechanisms currently used to produce affordable housing. In addition, the House version proposed elimination of New Markets Tax Credits and Historic Tax Credits- two other tax credit programs that are used to develop affordable housing, revitalize neighborhoods, and achieve economic development goals for low-income communities. All of these programs have been preserved in the current version of the bill approved by the House today, and to be voted on in the Senate tonight.

For now, federal housing programs have been saved. In the long term, the Tax Cuts and Jobs Act diminishes the ability of those federal housing programs to produce affordable housing.

First, the tax reform bill weakens the value of the Low Income Housing Tax Credit. It does this by reducing corporate tax rates from 35 percent to 21 percent. Reduced tax liabilities weaken corporate incentive for tax credits. As a result, the amount of equity put into housing projects per tax credit dollar will diminish, raising fewer funds for housing and leading to fewer affordable units built. This trend began when the reduction in the corporate tax rate was anticipated, but prior to even drafting the bill. Tax credit investors that had already committed to a price on projects in development began to reduce the price of their offers. The devaluing of the credit will only accelerate after the bill becomes law.

Second, a potentially more significant and longer term impact of the tax reform bill is the downstream consequence of rising deficits and imbalanced budgets. The tax bill increases the federal deficit by at least $1 trillion over the next decade. The effect of this may be felt by federal housing programs as soon as next year, as The "Pay-As-You-Go Act of 2010" may be triggered by significantly reduced government revenues. This Act forces automatic cuts to discretionary spending programs that must be approved in annual federal budgets in order to limit increases to the federal debt. This act forced budget sequesters after it was enacted, cutting HUD programs by 10%-15% annually. These sequesters are likely to return if the Tax Cuts and Jobs Act remains in place.

Beyond sequesters, the large deficit increases are likely to create larger imbalanced budgets in future years, and House Majority Leader Paul Ryan's stated goal is to balance the budget by cutting entitlements and domestic spending, which would include the HUD budget. Such cuts would further reduce funding for HOME, CDBG, Section 8, homeless housing and services, and other federal housing and community development programs. Cuts to these programs will further diminish the capacity of tax credits to produce housing, as programs such as HOME and Section 8 leverage additional tax credit equity and private debt to produce more units.

Those that depend most on entitlements and domestic programs are lower income households. In effect, the tax reform represents a transfer of resources from the "have-nots" to the "haves". As a result, affordable housing and community development for low-income communities are likely to receive low priority in future budgets if the political environment does not change significantly.

This assessment, of course, assumes that the Act will not be amended, revised or repealed in the coming years. However, if recent history is any indication, there are likely to be shifts in congressional priorities over the next decade.

Tuesday, November 7, 2017

How Would Federal Tax Reform Impact Housing?

From a historical economic perspective, the Tax Reform Bill called the "Tax Cuts and Jobs Act" released by the House of Representatives, has been unveiled at a unique time. As a nation, we are experiencing extreme wealth maldistribution not seen since before the Great Depression. In California, more than one-third of residents live near or below the poverty line. While poor and working class incomes have stagnated since the recession eight years ago, rents have escalated at an alarming and unaffordable pace. One in five renters struggles to pay rent, and eviction is becoming a growing problem with many downstream consequences. Income inequality and stagnation, combined with rising rents and shrinking affordable housing resources, have created a massive housing crisis across the country.

How does the tax reform address these pressing problems? It either ignores or exacerbates them. Below is an overview of the tax reform proposal's impact on housing.

  • It would eliminate bond tax exemptions and 4% tax credits that provide critical funding for affordable housing production and preservation. In California, the State Treasurer's Office projects that loss of these funding sources would lead to about 20,600 fewer homes annually statewide that are affordable to low income households. Tax-exempt bonds and 4% tax credits were by far the largest source of funding for affordable housing in California last year, providing twice as much funding as 9% tax credits.
  • It would lower the top corporate tax rate from 35% to 20%. This will significantly reduce investor interest in the 9% Low Income Housing Tax Credit. The amount of equity that investors are willing to put into affordable housing will make many projects infeasible. This program has been the primary funding source for new affordable housing production nationwide.
  • It would eliminate the mortgage interest deduction on homes valued over $500,000, and limit deductions for property taxes. This would not impact low income households or renters, but homeowners in high land value areas such as the California coast and metropolitan centers don't like it. For example, almost all new homeowners in the Bay Area would be affected. The National Association of Realtors and National Association of Homebuilders have publicly opposed the bill for this reason. I personally believe this concept is worth considering as a way of directing more resources to households that really need help, as the mortgage interest deduction is currently a highly regressive tax break that overwhelmingly benefits the wealthy.
  • It would eliminate the New Markets Tax Credit and Historic Rehabilitation Tax Credit. These programs do not exclusively fund affordable housing, but many housing projects rely on these programs, and their implementation have helped to implement community development and community revitalization efforts across the country.

Tuesday, August 22, 2017

California's Housing Crisis: How Did We Get Here and How Do We Get Out?

California is in a housing crisis. According to State Housing Officials, we need to build about 180,000 unit each year to keep up with demand, but we are building less than 80,000 annually on average (See Sacramento Bee Article on this). Median home prices and rents are far above what a household earning median income can afford in most parts of the State. Homelessness continues to be a major problem.

How did we get here? To answer that question, it can be helpful to look at the three major elements of home building: land availability and price; land use regulation; and construction cost. In all three areas, we are fighting an uphill battle. The steepness of that hill has been created by choice, and by market forces outside of our control.

The price of land is driven by availability and demand. California land that is available for residential use has been limited by geographical features, such as sea and mountain, and by environmental and land use restrictions. At the same time, demand continues to be strong, and only grows stronger as supply shrinks. California is an attractive place to live and work, and while it is prohibitively expensive for many, it is in high demand by those that can afford it, and that money drives up land prices.

Land Use Regulation
While land is limited, there are ways to maximize the use of land for greater efficiency by building more densely in locations proximate to transit and other services, while minimizing wasted space used for parking or lawns. While some progress has been made in terms of city planning processes in this area, decisions at the State and local levels have further exacerbated the land shortage. There is little financial or political incentive for localities to encourage or accommodate housing development. Instead, the State's tax system provides a disincentive. Most significantly, Proposition 13 limits revenue from residential properties, and forces localities to rely on commercial development to pay for their services. Further, the State has not implemented any effectual sticks or carrots that would make it attractive for localities to facilitate housing development. Instead, localities feel compelled to address local economic and NIMBY concerns over and above housing construction. Residential project opponents also use the State's California Environmental Quality Act (CEQA) to stymie housing proposals. Limited residential property tax revenue has also caused localities to increase impact fees on residential development, which presents another regulatory barrier to housing construction. The LA Times did a nice in-depth article on this topic.

Construction Cost
California has a high cost of living, which translates to high labor costs. In addition, California has a labor shortage. Many construction workers left the industry during the recession. Furthermore, government prevailing wage and labor requirements, and unions, drive up cost. In response to economic and political pressures, localities have implemented regulations that also add to housing cost, including impact fees, lengthy entitlement review processes, extensive design review requirements, and strict building code standards. The State has further driven up cost with its own strict building code standards, and implementation of CEQA. Given these high costs, extensive public subsidies are required to make housing affordable to lower income households who are critical to the California economy. However, State subsidies have been cut dramatically since the recession.

So, high demand + limited supply + regulation that further reduces supply and increases cost + high construction cost - public subsidies = housing crisis.

Because there are a wide range of factors impacting housing availability and cost, there is no silver bullet that will solve the housing shortage. However, we can make progress by addressing its causes. Below is a summary of State legislation that is attempting to do that. Effectively addressing the crisis will require regulatory reform in a wide variety of areas, including tax, land use, building code, environmental, and labor law, as well as increased funding for affordable housing.

Legislation Addressing Local Regulations
  • Senate Bills 35 and 540 require streamlined approval processes for affordable housing development.
  • Senate Bills 166 and 167 would require land be set aside for affordable housing and strengthen State law prohibiting cities from denying low-income housing projects.
  • Assembly Bills 72 and 1397 would require jurisdictions to property zone for affordable housing.
  • Assembly Bills 2502 and 1505 would allow local government to require a portion of new market-rate development be set aside as affordable.
  • Assembly Bill 73 would provide incentives for affordable and higher-density housing in city centers and near transit.
  • Assembly Bill 352 would require cities to permit development of smaller units.
  • Assembly Bill 1585 would establish a statewide appeals board for developers whose low-income housing was rejected.

Legislation Addressing Funding
  • Senate Bill 2 would create a permanent source of funding for affordable housing through a $75-$225 fee on real estate transactions other than home purchases. This would generate about $250 million per year.
  • Senate Bill 3 would put a $3 billion housing bond on the November 2018 ballot.
  • Assembly Bill 71 would end State mortgage interest tax deductions on second homes and direct those funds, estimated at about $300 million per year, to the State's affordable housing tax credit program.
  • Assembly Constitutional Amendment 4 would lower the voter threshold to raise taxes or pass a bond to fund low-income housing from a two-thirds supermajority to 55%.

Monday, July 10, 2017

Rays of Hope for Eliminating Homelessness

You have probably noticed an increase in attention that homelessness has been receiving in the news lately. You may have also noticed an increase in visible homelessness in the community where you live. The problem has escalated to a point that it is difficult to ignore.

The crisis is forcing individuals and institutions to get desperate. And sometimes desperation is just the motivation needed to try something new. We have realized that the status quo was not working. Therefore, new approaches and partnerships are necessary, and with the status quo de-legitimized, some communities have been willing to take some risks and break new ground. This has led to implementation of some innovative new strategies that show promise for moving the needle. Below I summarize four new strategies that a growing number of communities are adopting.

1.  Meet Homeless Individuals Where They Are
Up until about five years ago, the homeless care system in our country was largely built on the premise that homeless individuals must show that they deserve our help by demonstrating sobriety, cleaning up negative housing history, etc. The assumption was that if homeless people were given something they didn't "earn", they would be too dependent on the system and not have the determination to move out of homelessness. This created barriers to entering housing that many homeless individuals were unable to overcome, and exacerbated the problem because studies have shown that the longer someone is homeless, the more difficult it is for him/her to secure housing. As the number of chronically homeless individuals increased, we attempted to address the problem by funding emergency shelters and transitional housing programs instead of permanent housing. While there are many shining examples of these programs moving people out of homelessness, for a large segment of the population, they were temporary band aids or inaccessible, with many individuals cycling in and out of shelters and transitional housing, or avoiding them altogether.

In the early 2000s, a new approach began to show promise. This is an approach of meeting the homeless where they are, and accepting them into housing with drug and alcohol addictions and/or untreated mental illness. The data on outcomes for these programs has shown that once individuals are safely and permanently housed with support services, they are more likely to reduce drug and alcohol use, demonstrate a variety of health improvements, including mental health, and most are able to maintain their housing. This approach has more recently been extended to outreach, where programs are proactively seeking out homeless individuals on the street and in encampments, not to relocate them, but to build relationships of trust and offer help. Some cities have also opened "come as you are" centers in neighborhoods that are more accessible than the typical government institutions, where anyone can get help regardless of whether they have the proper paperwork. Examples of this approach include the 100,000 Homes Campaign and San Francisco's Navigation Centers (see my blog post- A New Strategy to Reduce Homelessness).

2.  Build Housing Authority Partnerships
Housing Authorities have traditionally restricted their role to operating public housing and Section 8 vouchers. However, more housing authorities are beginning to harness their resources in meeting the challenge of homelessness. The most significant way this is being addressed is by prioritizing Section 8 vouchers for homeless individuals and families, and project-basing Section 8 in permanent supportive housing projects. This addresses the most significant barrier in developing and operating permanent housing for homeless individuals- limited operating revenue. It also provides developers of permanent supportive housing with another tool to finance projects. In addition, Housing Authorities are becoming more involved in affordable housing development, bringing their resources to projects, which include buildings, land, property management expertise, and rental assistance. Finally, Housing Authorities are increasingly dedicating their operational and administrative resources to assist with running the local Continuum of Care, which is the local coordinating body that procures federal funding for homelessness.

3.  Collaborate with Health Providers
Hospitals lose hundreds of millions of dollars providing unreimbursed care to homeless individuals every year. Much of this cost is associated with hospital visits that could be avoided if patients had stable housing and supportive services. To address the issue, major health care providers are beginning to invest money in homeless assistance and housing. They have also begun to partner with local governments and local housing trust funds to leverage their investments. As an example, the City of Sacramento recently created a program to keep homeless people out of emergency rooms. To accomplish this, the City received pledges totaling $5.7 million annually over four years from Sacramento Covered, Sutter Health, Dignity Health, Kaiser Permanente, and UC Davis Medical. The City combined this with $2.3 million annually of its own money, which positioned it to receive about $32 million from a State of California pilot program that uses federal Medicare and Medicaid funds. These funds will help homeless individuals move out of homelessness and into permanent housing. Specifically, the program will provide outreach workers to find frequent emergency room visitors and intervene before they use expensive critical care services. The program will also direct the expertise of mental health professionals toward those in need.

4.  Raise New Local Public and Private Investment
There is a growing consensus among government, business and citizens that homelessness negatively impacts the entire community, and that large financial commitments are required to make a difference. Los Angeles, San Francisco, and Sacramento voters have all approved tax increases to fight homelessness. In addition, business leaders are starting to take on a more significant role in many communities; some contributing to local housing trust funds, and others donating to specific projects or donating land. In one example, a business leader in Honolulu is funding the development of an 100-home village to house homeless individuals and families.

I will be tracking the outcomes of these strategies in the coming years. These developments introduce welcome changes to a broken system. The first step is figuring out what works. The second, more important step, is building the political will, and new collaborations, to implement what works. In many communities, that appears to be beginning to happen.

Tuesday, February 7, 2017

The Fate of Fair Housing

In July of last year, the U.S. Department of Housing and Urban Development (HUD) issued new regulations to strengthen fair housing requirements for localities that receive their funding. The new regulations, named the Affirmatively Furthering Fair Housing Final Rule (AFFH), were a legacy of the Obama Administration's sustained emphasis on fair housing. 

The goal of AFFH is to overcome historic patterns of segregation and reduce disparities in housing choice and access to opportunity. The overarching mission is expanded economic opportunity and enhanced quality of life. President Obama and HUD leadership believed that fair housing is critical to building complete communities with ladders to opportunity. The idea was that complete communities that provide equitable access to housing opportunities ensure that economic gains are broadly distributed and sustainable for groups traditionally left behind by economic growth.

Just four months later, America elected a President that is adamantly opposed to the fair housing approach of the previous administration. President Trump and his selection for HUD Secretary, Ben Carson, believe that localities should determine how they will address fair housing issues on their own, without top-down direction from the federal government. Indeed, fair housing seems to be squarely in the cross hairs as the HUD program most likely for significant alternation under the Trump Administration. 

Legislators have already begun to attack AFFH. The Local Zoning Decisions Protection Act of 2017 would nullify the AFFH Final Rule. While this is an immediate threat to AFFH, this act would need 60 votes in the Senate for passage and it would be difficult to secure votes from eight Democratic Senators.

It is unknown how this will play out over the next four years. Carson will be embarking on a "listening tour" at the start of his tenure, so he is not promising immediate action. Given that it would take some time for a large bureaucracy to change course, it will most likely be at least a year before there are major changes to the program. In the meantime, you should be aware of the following key elements of AFFH.
  • Replaces requirements that a Participating Jurisdiction (PJs) complete an Analysis of Impediments to Fair Housing Choice (AI) with a more rigorous process called the Assessment of Fair Housing (AFH);
  • Requires HUD to provide additional data that will help PJs improve fair housing assessment, planning, and decision making;
  • Facilitates regional approaches to Fair Housing that encourage collaborations between jurisdictions and housing authorities; and
  • Encourages greater public participation in AFH development.
A common misunderstanding is that AFFH gives HUD the authority to tell localities where they can build multifamily housing. However, this continues to be a local decision under AFFH.

Who is required to submit an AFH?

Jurisdictions that are required to submit Consolidated Plans for CDBG, HOME, ESG and/or HOPWA programs; and Public Housing Authorities receiving assistance under Sections 8 and 9.

When will PJs be required to implement AFFH plans?

Generally speaking, the first AFH must be submitted 270 days prior to the start of:
  • For Insular Areas, States, and PJs with a FY 2015 CDBG grant of $500,000 or less, the program year on or after January 1, 2018 for which a Consolidated Plan is due; or
  • For Public Housing Authorities, the program year on or after January 1, 2018 for which a 5-Year Plan is due; or
  • For all other PJs, the program year on or after January 1, 2017 for which a Consolidated Plan is due.
For most program recipients, the next Consolidated Plan will be due in 2020, with the AFH due 270 days prior in 2019. It will be interesting to see if and how much AFFH is altered prior to 2018, when program recipients will need to begin working on an AFH in order to meet the deadline. Regardless, PJs should become familiar with AFFH, plan for compliance, and pay close attention to any program changes.