March 31, 2017

How Local Governments Can Raise Much-Needed Resources for Affordable Housing

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States and local governments across the country are taking meaningful steps to address the housing problems in their communities. According to the Center for Community Change, more than 770 states, cities and counties have created dedicated housing trust funds, collectively generating more than $1 billion each year for affordable housing initiatives.

Those local resources have never been more important. Today more than one in four families who rent their homes – an unprecedented 11.4 million renter households in total – are “housing insecure,” meaning they pay more than half of their monthly income on housing. Another 550,000 Americans are living either on the street or in homeless shelters, prompting some major cities like Seattle, San Francisco and Los Angeles to declare a state of emergency on homelessness.

As needs have skyrocketed in recent years, Congress has slashed funding for crucial federal programs that help local governments meet their local housing and community development needs. The HOME Investment Partnership program, a crucial source of gap financing for affordable housing developments, has been cut by more than 50 percent since 2010, while the Community Development Block Grant (CDBG) program has been cut by 25 percent over the same period.

To make matters worse, earlier this month the Trump administration proposed eliminating both the HOME and CDBG programs, among other draconian cuts to federal housing programs. The proposed cuts would be devastating for cities and towns across the country, who are already being asked to address a growing problem with fewer federal resources.

Below is quick summary of the policy tools available to cities and counties to raise local housing resources.

  • Local Housing Bonds, which are debt securities issued by states or local governments, usually backed by future tax revenues, to raise money for affordable housing development. For example, in 2015 voters in San Francisco approved a $310 million housing bond backed by a modest property tax increase. The city competitively bid out the first $75 million in those bonds in October. Similarly, in November voters in the City of Los Angeles overwhelmingly approved a $1.2 billion general obligation bond to fund the development of permanent supportive housing for the city’s homeless. That same month voters passed similar bond measures in Santa Clara County, Alameda County the City of Oakland in California, as well as the City of Portland in Oregon.
  • Dedicated Sales & Property Taxes. Instead of issuing bonds, some cities and counties have simply dedicated a portion of annual tax revenues to affordable housing programs. In Seattle voters have approved five dedicated levies for affordable housing since 1981. Most recently, in August residents voted to double the city’s existing $290 million levy, which amounted to an annual tax increase of roughly $120 per homeowner. Similarly, in March voters in Los Angeles County approved a quarter-cent sales tax increase to fund homeless services and prevention, which is expected to generate $3.5 billion over the next decade.
  • Linkage Fees, which are typically a per-square-foot fee on new commercial or residential developments, with all proceeds dedicated to supporting affordable housing. For example, in September the Denver City Council passed a mandatory citywide linkage fee ranging from 40 cents to $1.70 per square foot, depending on the type of development. Combined with a modest property tax increase, the fee is expected to generate $150 million over the next decade for the city’s first dedicated affordable housing fund. Linkage fees have been implemented in San Francisco, Oakland, San Diego, Seattle, Boston and Santa Fe, and the City of Los Angeles is currently considering a similar proposal.
  • Document Recording Fees & Real Estate Transfer Taxes, which are assessed whenever a property is bought or sold in a city, typically in the form of either a flat fee or a percentage of the assessed value (or both). For example, the District of Columbia dedicates 15 percent of the proceeds from both its recordation fee and transfer tax to the city’s Housing Production Trust Fund. In addition to this dedicated revenue source, in recent years the city has guaranteed that at least $100 million goes into the trust fund each year, with general funds filling the gap as necessary.
  • Tax Increment Financing (TIFs) are particularly useful when a city expects future property values – and thus future tax revenues – to increase significantly in a particular area, perhaps due to a massive infrastructure investment or comprehensive rezoning effort. Under a TIF, the city identifies a targeted area and sets a baseline for tax revenues in that area, then earmark all future revenues beyond that baseline for a particular public purpose (such as affordable housing). For example, the City of Atlanta implemented a TIF initiative for areas impacted by the Atlanta BeltLine, a multi-year project to connect 45 neighborhoods via a 22-mile loop of multi-use trails, a streetcar, parks and other public amenities. Over the past decade the BeltLine’s Tax Allocation Districts, or TADs, have allocated $13 million to help preserve and develop affordable rental housing and provide down-payment assistance for low- and moderate-income homebuyers in targeted neighborhoods.
  • Hotel and Short-Term Rental Taxes. Many cities, particularly those with strong tourism industries, have struggled in recent years to effectively regulate Airbnb and other short-term rental platforms.  Some cities like New York have effectively banned Airbnb altogether, while others like New Orleans and Chicago have taken a more balanced approach to legalize, register and tax certain types of owner-occupied short-term rental properties. Notably, in 2016 the City of Portland, Oregon, passed new rules to legalize certain types of short-term rentals, impose certain citywide limitations and require all operators to register with the city and pay relevant occupancy taxes. Any surplus revenues from those registration fees – which range from $100-$4,000 per unit – are allocated to the city’s affordable housing trust fund.

Of course, local revenue sources are just one tool in the housing policy toolkit. Local policymakers should consider a comprehensive approach to developing and preserving affordable rental housing in their cities. Other local policies to consider include: mandatory inclusionary housing ordinances (with or without the option to opt out by paying an in-lieu fee), voluntary incentives for affordable housing development (density bonuses, reduced parking requirements, tax abatements, etc.); strategies for developing affordable housing on public lands; partnerships with local impact investors and anchor institutions; and strong legal protections for renters.

For more details on each of these policies, see Enterprise’s long-term policy platform, An Investment in Opportunity.

(NOTE: a version of the above content was presented on March 29 at the Broward Housing Summit.)