CommentaryPrivate developers of market rate property can receive government subsidies for making 20 to 60 percent of its units affordable, meaning below the fair market rent in the area. These developers may also receive federal tax credits for doing so. The most popular tax incentive is the Low Income Housing Tax Credit (LIHTC). In exchange for setting aside units for at least 15 years, developers may receive a 4 or 9 percent tax credit towards the costs of building the real estate project. However, private developers and property owners, the main sources of affordable housing, are tempted to rent and sell their property to consumers who are able to pay market rate prices. It is not necessarily the poor who suffer at the expense of capitalism when this happens.
The connotations most people make with affordable housing are poor people and public housing. However, there is a distinction between affordable housing and low-income housing. The US Department of Housing and Urban Development (HUD) has determined that spending over 30 percent of monthly income in housing is burdensome, and Americans who do so are eligible for affordable housing. This standard was mandated by the US Housing Act of 1937. However, one in five households making between $45,000 and $75,000 a year are spending more than 30 percent of their income in rent. So what does this mean? It means the middle class benefits from affordable housing. Senior citizens, the disabled and the chronically ill are also eligible for affordable housing. Low income housing on the other hand, is reserved for poor individuals and families who make 50 to 80 percent less than the median income in a metropolitan area. Public housing is usually reserved for those individuals, not affordable housing. Low-income housing is an entirely different subject with its own issues.
Developer Pushback Has Increased With Affordable Housing Mandates
A 2012 study [PDF] indicated that although 11 million people were in need of affordable housing, there were only 3.3 million units available. With the changing landscape of neighborhoods and income levels, developers no doubt are wishing to cater to upwardly mobile residents without the extra conditions attached to federal funds and tax incentives. States and cities have also instituted their own regulations in order to preserve and increase affordable housing, but real estate developers often fight back. For instance, Chicago recently revised its affordable housing ordinance. Developers wishing to build in downtown Chicago are required to set aside at least 10 percent of their units at below-market rates or pay a opt-out fee of $175,000 per unit to the city. The ordinance only applies to developments that have requested zoning changes from the city and the opt-out fee varies by area. However, one issue with the ordinance is that developers can simply abandon the zoning changes and sell the property at a lower rate. For other real estate developers with more disposable income and assets, it may be easier to pay the opt-out fee.
Developers in other cities and states have challenged the constitutionality of similar ordinances. In CBIA v. City of San Jose [PDF], developers challenged an ordinance in San Jose that required them to allot at least 15 percent of their units to low or moderate income if the property contained a total of 20 or more units. They alleged it was a facial violation of the Takings Clause. The California Supreme Court disagreed with the argument because the ordinance did not deprive the developers of all economic use and the ordinance was reasonably related to decreasing adverse effects on the economy and the public.
Federal agencies such as HUD have also examined whether the properties that are no longer under the 15-year compliance period are converting to market rate properties. It found that many of the properties continued participating in the LIHTC program by entering into another 15-year contract. It appears that many of the federal initiatives created by HUD, the Internal Revenue Service (IRS) and other agencies are working. LIHTC is one of the most significant and critical tools to producing affordable housing. But does producing affordable housing solve the problem of community displacement? Only a small percentage of affordable housing units have to be reserved in private developments and this only applies to developers who accept government subsidies or tax incentives in exchange. As a result, current affordable housing initiatives will not prevent every family or individual from being displaced and priced out of their neighborhoods.
Affordable Housing Preservation May be the Key
Affordable housing is important for a number of reasons. It reduces the rate of homelessness and therefore cuts costs that taxpayers are left to bear. Property taxes increase overall, and perhaps many feel it is a social responsibility to help those in need. The economic disadvantages that the elderly and sick face are often uncontrollable, and considering that housing affordability largely affects the middle class, this is an issue that does not just affect the poor. Increasing the percentage range of incentives that LIHTC participants receive to 9 or 15 percent may be one solution to attract more developers and investors. Nevertheless, America is a free market society and regulating the private real estate sector too heavily may undermine this freedom. Also, increasing tax percentages for this program ultimately means increasing taxes on the public.
The real solution may lie in the community itself. State and the federal governments may be able to create more affordable housing and reduce displacement rates by preserving the affordable housing that already exists, and focusing more on renovating and restoring vacant properties. Many grants and public finance programs already exist such as Community Development Block Grants (CDBG) and Tax Increment Financing (TIF), which finance the rehabilitation of blighted areas through grants or property tax revenues that will be generated from new real estate developments in those areas. Similar programs can be developed solely for affordable housing. In addition, although program participants abide by the compliance period, one of the issues they face is that they often have major renovation expenses at the end of the term. One of the incentives that could be included along with LIHTCs for example, could be additional funding to help maintain and renovate the rental property over the 15-year period.
The most important key to ensure the future of affordable housing is by working with the stakeholders, the community and all of society by reminding them that affordable housing is not about entitlement or providing handouts. It is about the common bond we share with those in need of low-cost housing: the circumstances that led their economic disadvantage can befall anyone of us.
Azariah Jelks is a third-year law student at Valparaiso University. She is a former legal intern with the U.S. Department of Housing and Urban Development. Azariah would like to pursue a career in affordable housing and community development law and housing discrimination law.
Suggested citation: Azariah Jelks, A Common Bond: How the Community and existing Regulations Can Solve America’s Affordable Housing Shortage, JURIST – Student Commentary, Dec. 28, 2015, http://jurist.org/student/2015/12/Azariah-Jelks-Affordable-Housing.php.
This article was prepared for publication by Marisa Pereira Rodrigues, an Assistant Editor for JURIST Commentary. Please direct any questions or comments to [HIM/HER] at
