How OZs Can Support Affordable Housing Creation, Preservation
In the two-plus years since enactment of the opportunity zones (OZ) incentive, much attention is on how OZ investment can be used to address the affordable housing crisis plaguing the nation.
Even with standard funding streams—affordable housing properties often rely on the combination of bank financing and tax credits—budget gaps remain. Federal sources of funds for construction and preservation, such the Community Development Block Grant Program and the HOME Investment Partnerships Program, have been traditionally used to cover funding shortfalls. However, those funds are in shorter supply in recent years, making it necessary to find funding alternatives. This is where the OZ incentive can make a difference.
State housing finance agencies (HFAs) use qualified allocation plans (QAPs) to promote their LIHTC priorities and practices. By providing specific set-asides, directives for the location of affordable housing using LIHTCs and other preferences, HFAs can use QAPs to incentivize investments in OZs.
There are numerous examples of how HFAs are using their policies to increase investment in OZs. The most common is awarding additional points if the LIHTC development is in an OZ. The LIHTC application process is extremely competitive in every state and as a result, developers pay close attention to scoring criteria. However, an important caveat is how these points fit into the overall QAP scoring system. In some circumstances, an application could earn more for an alternate option. Plans to develop properties in OZs could place specific requirements on developers (the Virginia Housing Development Authority requires the application to include a letter from an OZ investor).
Other policies allow a development to generate the discretionary basis boost–Section 42 of the Internal Revenue Code gives agencies the authority to designate properties as qualifying for an increase of eligible basis up to 30 percent. Developers also pursue this allowance because of how it allows for greater feasibility.
The Mississippi Home Corporation took the enticements a step further, creating an entire set-aside of its LIHTCs. In Mississippi, the QAP allocates this amount to developments in OZs.
The following examples illustrate how other states incentivize OZ activity in their QAPs:
- Delaware: Provides two points for developments in an OZ, 10 if it also contributes to a concerted community revitalization plan.
- Mississippi: Provides a set-aside of 12.5 percent of the state’s LIHTCs for developments in an OZ.
- Missouri: Lists OZs as one of 11 “housing priorities.”
- North Carolina: Makes OZ developments eligible for a discretionary 10 percent basis boost.
- Oregon: Awards one point for developments in an OZ.
- Texas: Makes OZ developments eligible for a discretionary 30 percent basis boost.
- South Carolina: Awards 5 points for developments in an OZ.
- Virginia: Awards 15 points for developments in an OZ with a binding commitment from an OZ fund/investor.
With the extreme shortage of affordable, decent, and accessible housing in the United States, the time to act is now. According to a March 2019 report issued by the National Low Income Housing Coalition, extremely low-income renters in the U.S. face a shortage of 7 million affordable and available rental homes, which translates to approximately only 37 affordable and available homes for every 100 extremely low-income renter households. This issue is not only limited to the creation of new affordable housing, but includes the preservation of the existing affordable housing stock which is shrinking as aging properties are demolished largely due to the result of unmet capital needs or converted from subsidized to market-rate rentals.
The OZs incentive can be an effective tool in this process.