A Primer on Affordable Housing
There have always been portions of the population unable to afford market rate housing. At one time, the government directly financed, owned and managed housing projects for these populations, commonly referred to as public housing. While the government still manages some housing projects it often doesn’t do a good job at this – just look at Golden Gate Village as an example of a public project that has been allowed to deteriorate to the point that millions will be required just to bring it back up to basic standards! The government more recently has largely outsourced the development and management of new affordable housing projects to the private sector.
For any housing to be built, two things need to happen:
- The developer needs to secure funding to pay for the project costs, including the land acquisition, materials and labor; and
- The operating revenue of the project needs to cover the operating costs of the project, including the debt service.
All housing projects in Marin face challenges. We have high land and labor costs, lengthy and unpredictable approval processes and environmental challenges. Accordingly, we have had one of the lowest rates of housing production in California for years.
Affordable housing is even more challenging. Affordable housing is provided through two methods: inclusionary housing ordinances, which rely on the inclusion of affordable housing in market rate housing developments and affordable housing projects, which are typically developed by non-profit housing developers.
Inclusionary housing ordinances require that market rate developments include a specific percentage of affordable units. The affordable units are subsidized by the market rate units in the development. For example, the proposed Magnolia Village project in Larkspur will have 20 units – 16 market rate units and 4 affordable units. These projects are funded by private financing sources, including market-rate real estate investors and bank financing. Critics often complain that these projects offer too few affordable units or that the units are not affordable enough. However, the subsidy is limited by what the other tenants in the building can support. Requirements for greater affordability can make it impossible for a developer to find interested investors or lenders. Consequently and counterintuitively, reductions in affordability requirements can result in more affordable units being developed. We saw this happen when San Rafael lowered its inclusionary requirement from 20% of units being affordable to just 10%. There were few proposals with the 20% requirement, and many more with the 10% requirement.
However, because inclusionary housing ordinances are self-subsidizing, they will never be able to house the most vulnerable or provide affordable housing at scale, especially given Marin’s very low rate of housing production.
Affordable housing developments are used to provide larger numbers of affordable units to lower income populations.
Because affordable housing has lower monthly rents, there is less revenue to cover debt service and so less debt financing can be used. As a result, more “equity” needs to be raised. However, the lower income potential of these projects means that developers need to look for sources of funding other than market rate real estate investors. The largest source of affordable housing “equity” is the Federal low-income housing tax credit (LIHTC) program, which is an indirect subsidy used to finance affordable rental housing. When available, this source will typically cover 50-60% of the needed “equity” for an affordable project. California also has a Super-NOFA (notice of financing availability) program, which provides affordable housing funding through the administration of four different state housing programs. This program is vastly oversubscribed, with demand for funding 10x than the availability. Sometimes some of the equity is provided through government land donations, such as for 1 Hamilton in Mill Valley or Oak Hill Apartments near San Quentin. While helpful, land donations are not enough to make a project viable. The additional funding is typically cobbled together from a variety of governmental and non-profit sources. According to Bianca Neuman of EAH, the typical affordable project combines funding from 6 – 8 different sources.
The cobbling of these different sources causes all sorts of problems. It takes much longer to assemble the financing using these different sources than for a comparable market rate project. There are a myriad of different requirements the sources require. The developer has to shape the project to meet all the various requirements. For example, a funding source may require a specified mix of apartment sizes to qualify for funding. This may require changes to project plans to comply. The funding sources typically have different requirements, all of which add costs to the project. For example, funding sources may require free WiFiwifi, after- school programming, case management for older residents, green construction materials, and/or union labor and labor agreements. While the goal of each of these requirements are commendable, they are requirements outside of city code and that don’t apply to market rate development. Overall, they are a tax on affordable housing development.
And if all this wasn’t challenging enough, the cobbling of sources (sometimes referred to as funding stack) creates other challenges. The sources are typically competitive. You don’t get funding because you meet the requirements. You get funding by “beating” competitive proposals. Some programs are vastly underfunded. As mentioned earlier, the California super-NOFA is vastly oversubscribeding. The timing to qualify for some of these funding sources is critical. If you get your entitlements a month too late, your project may have to wait another full year to get its funding. In the meantime, construction costs are often escalating, and building codes may change, requiring additional redesigns.
There is little funding available to cover the costs of being able to put the funding stack together. Funding gained during this time helps make projects competitive for the various funding sources, but rarely makes a dent in the overall capital required. EAH estimates it will spend $1,000,000 of its own capital prior to receiving funding for the 1 Hamilton project. While they expect the $1,000,000 in capital to ultimately be repaid, very few organizations have sufficient capital to navigate these funding options. And each funding source has its own requirements for monitoring and reporting progress.
The fracturing of funding sources and competitive nature of funding make the financing of affordable projects risky and extremely costly. It vastly increases the costs of affordable housing, not just due to time delays and added requirements, but also to support the array of specialists and agencies that make the system function.