Today, the term “affordable housing” usually refers to housing that is subsidized by taxpayers. This housing is built using funds raised from the sale of low-income housing tax credits (LIHTC), tax-exempt bonds, CDBG (community development grants) and FHLB (Federal Home Loan Bank) funds to name a few. Often, especially in the rehabilitation of existing affordable housing projects, rent is also subsidized by Section 8 vouchers or Section 8 “Assistance in Housing Assistance” (HAP), provided by the United States Department of Housing and Urban Development (HUD),
Since this article deals with the high cost of affordable housing, especially in relation to the taxpayer itself, the article will focus on a brief explanation of LIHTC and section 8 as a basis for explaining why housing provision is anything but affordable for taxpayers. Of course, one can go deeper and argue about whether there is a real need for subsidized housing or whether the invisible hand of the market will not satisfy the need through simple supply and demand. Others may argue that, as a society, we must take morally appropriate measures to ensure the needy. Although these are relevant topics on affordable housing, it is far from being limited to the means and scope of application of a single article.
Affordable Housing Finance: A Brief History
The LIHTC program was established in 1986 and is regulated in accordance with section 46 of the internal tax code. Each year, the IRS distributes a set amount of LIHTC to each state based on that state. In 2011, this amount is expected to be $ 2.15 per capita, so a state like New York will receive a greater LIHTC distribution than a state like Arizona, which has a smaller population. States, in turn, spend one or two highly competitive rounds of funding per year, during which developers submit their projects in the hope of getting LIHTC, which they can then sell to an outside investor for a penny per dollar and increase equity for their project. In exchange for a project LIHTC is required, under the government’s mandate, to maintain rent available to residents of not more than 60% of the median income (AMI), while limiting tenants to pay no more than 30% of their gross monthly income to ode (GMI) for the lease.
Section 8, unlike its LIHTC colleague, is a direct subsidy of rental payments made either on behalf of the tenant regardless of the location of the housing (Section 8 of the Voucher), or directly in the housing project (Project 8 or HAP). It is important to note that many projects receive HAP contracts under section 8 in addition to LIHTC. The HAP (Housing Assistance Plan) contract ensures that the property collects rent equal to the rent for the market rate, paying the difference between what the resident can afford and the market rent. The HAP contract is assigned to the property, so that when one of the tenants leaves, the next tenant still receives a rental subsidy. The voucher in section 8, unlike the HAP, is a portable voucher that the resident saves and can use on his or her home of choice.
Far from the government, ghettos of the 1970s were subsidized. The quality of the development of modern affordable housing has improved significantly and is now almost indistinguishable from housing construction at a market rate; however, the cost of developing affordable housing is still much higher than the cost of housing on the market. To understand the variable costs between affordable and market-based housing stock, it is important to consider the different development financing structures used by both and how these costs may vary.
Affordable housing finance today
Developers and bank underwriters determine the permissible first mortgage debt by calculating the potential income and expenses of the property. Based on these amounts and the prevailing interest rate on debt, financiers can determine the monthly payment on mortgage loans, which can be serviced (paid) by property. As a result of the fact that the government sanctioned a 30% rental payment of the tenant, calculated on the basis of GMI (gross monthly income), it follows that the property of affordable housing will have a much lower income than its comparable market rates. In addition, state and local agencies often require the owner to provide support services to residents, which increases operating costs and again reduces the amount of debt that can be supported. If a typical 100-room affordable apartment ownership charges an average of $ 400 per unit per month compared to the market price and has an additional cost of $ 100 per month per month, this fully translates into $ 600,000 less than otherwise developed. own.
Capital, unlike debt, is required by creditors, so the owner has a skin in the game; or for financial responsibility for your product. Equity for a market rate project is provided by the owner or investors. According to the affordable housing project, the owner receives his own capital through the sale of LIHTC to another external investor. These LIHTCs are bought for as little as 50 cents per dollar to the middle of the 80 percent range, depending on market conditions. For example, an investor may pay 65 cents per dollar for LIHTC worth $ 10 million for a total of $ 6.5 million. In turn, this investor is allowed to reduce his dollar-per-dollar tax liability through the use of LIHTC. It is useful to note that an investor for this example can use only 1/10 of all tax credits bought per year for 10 years to compensate for taxable income. However, the costs associated with the project are fully born and paid on the backs of taxpayers, whose money is used for development.
Affordable construction costs and housing example
Higher construction costs, with the exception of debt reduction and equity financing, are a debilitating sign of affordable housing development. Rising construction costs are carried out in various ways through development. For example, projects with affordable housing, unlike their competitors in the market, are forced to comply with the federal laws of Davis-Bacon on labor wages. Although the wages of Davis-Bacon are not a union as such, they increase construction costs by 20% above the market. In addition, costs are increasing due to less competition between subcontractors. For example, many funding agencies will not finance projects without a developer, like equity, only hiring subcontractors belonging to minorities or women, unlike a subcontractor who submits the most qualified application.
If funding cuts and arbitrarily higher construction costs were not enough, affordable housing projects are burdened with exceptionally high legal costs, which can cost hundreds of thousands of dollars as a result of structuring several notes and working on the guidelines of financial institutions (which are often incompatible with each other). ). Accounting fees are also significantly higher in order to certify costs that correspond to tax credits, and the funding agencies themselves charge for services both for construction and for control over assets. The list of increased costs can go on, but the ones listed above are enough for you, the reader, to understand that treachery of rules and regulations not only affects development costs, but, most importantly, comes down to confiscating taxpayer money. This is not unheard of, since the gap in the fund is 100 units of development exceeded $ 3 million. Dollars.
An example of a 100-storey apartment building above cost the taxpayer $ 10 million. United States in hopeless tax revenues (funding LITK) and $ 3 million. US funds spent locally due to arbitrarily increased construction costs and reduced debt support. Finally, if this property has a HAP contract under section 8, which pays the owner $ 400 per unit per month (the difference between the available and market rents), it will cost the tax payer another $ 480,000 per year with an annual index Consumer price (CPI) increases with contracts that often run for 20 years.
Conclusion
If providing economic and quality housing for the working poor is our goal, how many of them will remain homeless due to the messy rules and costs provided by the federal / local governments? In addition, why not take all the money that was wasted, and significantly expand the program of the voucher based on the tender on the basis of section 8? Let tenants decide where and how they want to live. If the project is a sub clause, it is a rather safe assumption that tenants will move elsewhere. All these questions boil down to one conclusion; Affordable housing is the Orwellian nickname used to entangle bureaucratic generosity and government waste intended for cover.
