Tax Credits in the Housing Authority World: Opportunities and Challenges
The low-income housing tax credit (LIHTC) has been critical to public housing authorities (PHAs) to address preservation, development and redevelopment goals.
To achieve these goals, LIHTCs complement other programs created by Congress and administered by the U.S. Department of Housing and Urban Development (HUD), including Moving to Work (MTW), the Choice Neighborhoods Initiative (CNI) and the Rental Assistance Demonstration (RAD). PHAs use these programs and LIHTCs to address a variety of objectives:
- preservation of existing public housing through recapitalization,
- demolition and redevelopment where needs extend beyond rehabilitation,
- neighborhood revitalization if needs extend beyond a public housing site,
- demolition and production of replacement housing at alternative locations, and
- production of special needs housing.
Chronically inadequate appropriations have created the need for LIHTCs to partially address capital shortfall. The Public Housing Authorities Directors Association (PHADA), a nonprofit association representing approximately 1,900 agencies, provided analysis to support the Housing is Infrastructure Act of 2019, which calls for $70 billion in public housing capital funding. This legislation, together with the provisions proposed in the Affordable Housing Credit Improvement Act (which PHADA also supports), were rolled into a $1.5 trillion infrastructure package, the Moving Forward Act, that was approved by the House of Representatives in 2020.
PHADA is hopeful that the administration of president-elect Joe Biden will support an infrastructure package to address the capital backlog. While this investment in long-neglected public housing would certainly relieve pressure on LIHTCs to preserve public housing, the credits would continue to be an important tool for redevelopment efforts and for production of incremental units. PHADA supports a LIHTC set-aside for deals undertaken directly by PHAs or by their development partners.
Moving to Work
MTW, where authorized, provides regulatory relief and fungibility of funds, which in turn allows PHAs to convert voucher rent subsidies into gap funding in development deals, often where LIHTCs are used. Production of hard units, as opposed to tenant-based subsidies, is particularly helpful in areas with a limited supply of decent private-market rental housing, where HUD’s fair market rent limits fall short of the market, or where high levels of housing discrimination exist.
Only a limited number of PHAs have full MTW authority. Currently authorized expansion of the program offers limited benefits and is therefore inadequate for development efforts. PHADA would like to see the full authority of MTW extended to all agencies.
Lacking adequate funding and flexibility, many PHAs have found RAD to be a highly effective tool for making capital improvements to public housing. According to Thomas R. Davis, the director of HUD’s Office of Recapitalization for Multifamily Housing Programs, PHAs in 47 states and the District of Columbia have converted 141,648 public housing units through 1,300 transactions. Of these converted units, 61,292 received LIHTCs (together with 11,210 non-RAD LIHTC units in those same transactions), securing $7.29 billion in LIHTC equity.
“PHAs have done an incredible job leveraging RAD and securing funds to improve living conditions for residents,” Davis said. “Housing credit equity has been a major part of this picture, particularly for the properties in need of the deepest levels of investment.”
Notwithstanding the successes, concerns with RAD include:
- The RAD cap of 455,000 units does not allow all PHAs to participate for all units.
- RAD is not feasible for all PHA properties because the executive branch and Congress have insisted on cost neutrality, which means that RAD rents are established using only funding available at time of conversion.
- Adequate RAD rents (to cover operating expenses, debt service and reserves) require adequate funding, but historically appropriations have failed to address needs, particularly for the Capital Fund.
- If all public housing were converted through RAD, the Section 8 budget would expand exponentially, creating risk of inadequate Congressional appropriations.
- LIHTCs need to be available for RAD deals on a predictable basis to recapitalize public housing over a defined period; uncertainty inhibits comprehensive planning and a strategic approach.
Choice Neighborhoods Initiative
CNI has proven to be an effective, albeit extremely underfunded, tool to address neighborhoodwide distress that goes beyond the boundaries of a public housing development and also goes beyond the physical condition of housing stock to address a range of socioeconomic issues in a holistic way. The initiative has built upon and dramatically expanded the scope of transformation sought and achieved under HOPE VI. LIHTCs have been critical under both programs. The greatest challenge of CNI is that only a handful of projects are funded each year.
Other Neighborhood Revitalization
PHAs have undertaken targeted transformation efforts, without CNI awards, to address widespread neighborhood decline, including distressed public and FHA insured housing, deteriorated private unassisted stock and inadequate community amenities. Some PHAs have collaborated with their municipalities and state housing finance agencies to cobble together resources, including LIHTCs and tax-exempt bonds, municipal bonds, Community Development Block Grant (CDBG) and HOME funds, Housing Choice Vouchers, RAD, and, where authorized, MTW funds.
Case Studies in Two Very Different Cities
The Housing Authority of Baltimore City selected Telesis Corporation, a Washington, D.C.,-based developer, to serve as master planner and developer for the multiphased revitalization effort in the Barclay neighborhood. Barclay was a severely distressed community with high levels of vacancy and abandonment, including a failed FHA development, underoccupied, scattered public housing in need of major capital repairs, city foreclosed vacant structures and trash-strewn lots. Despite the challenges, there were key strengths, including a motivated community and a strategic location between Penn Station, Johns Hopkins Hospital, Johns Hopkins University and the downtown/inner harbor area.
A range of public and private resources have been used, including LIHTCs and new markets tax credits, CDBG, city bonds and MTW funding. The RAD program, 4% LIHTCs and FHA 221(d)(4) financing were used in the $15 million renovation of the 150-unit Brentwood high-rise, which houses seniors and person with disabilities. The historic Homewood House was fully renovated with LIHTCs, as were several blocks of existing row houses. Other blocks were cleared of blighted properties, which were replaced with newly constructed LIHTC homes. Neighborhood Stabilization Program funds were used to renovate 47 houses for homeownership at a cost of $260,000 each.
Marilyn Melkonian, president of Telesis, explained the project’s success.
“The Barclay redevelopment plan of 500 homes was created and succeeded because of the strong and long collaboration with the people who live in the neighborhood and the focus on strategically located rental housing and homeownership which has begun to mend the fabric of their neighborhood,” she said. “We hope to continue to be part of the mending.”
The development is nearly 80% complete and has resulted in rehabilitation or new construction of 348 rental units, including the renovation of 203 public housing units and the creation of more than 28,000 square feet of community/retail space. Development cost to date is $103.4 million, including construction costs of $62.6 million, with $45.7 million in LIHTC equity. The remaining pipeline includes 55 for-sale and 50 rental units, which have been stalled due to low pricing of 4% credits. Establishment of a minimum 4% credit rate, as proposed in the housing credit reform legislation, would make this rental project feasible.
In Cambridge, Massachusetts, where citywide median home prices approach $1 million and the average one-bedroom rent in the project neighborhood is $2,600 per month, more than double the average monthly income, the Cambridge Housing Authority (CHA) plays a critical role in providing affordable housing. Sandwiched between the Massachusetts Institute of Technology and Harvard in Central Square, the Frank J. Manning Apartments, a 199-unit elderly/disabled public housing development, converted to project-based rental assistance under RAD in 2016. Financing for the $85.5 million development included $38.5 million in LIHTC equity. Improvements included a new façade and gut renovations to all apartments. CHA added six new units by repurposing office space.
“Manning’s renovations are just a part of the $586 million in construction completed by the CHA over the past 10 years and only made possible through use of the housing tax credit program, largely in combination with RAD,” said Michal J. Johnston, the CHA executive director. “Without the availability of these tools, the 199 deeply affordable units at Manning were clearly on borrowed time.”
Recommendations to improve HUD programs and the use of LIHTCs for PHAs include:
- Adequate appropriations for public housing operating and capital funds to ensure feasible RAD rents and address the Capital Fund backlog of more than $70 billion.
- Expansion of MTW flexibilities to all PHAs.
- Increasing Choice Neighborhoods funding to allow for greater PHA participation.
- Enactment of the Affordable Housing Credit Improvement Act, including a permanent minimum 4% LIHTC rate for developments using tax-exempt bonds.
- Authorization of a set-aside of LIHTCs for projects undertaken directly by PHAs or their development partners, and/or points on LIHTC applications for PHA deals.
- Full funding of Voucher administrative fees to ensure maximum program use and address stated goals of the program, including moving families to areas of opportunity.
- Elimination of the RAD cap.