Jon Webb’s Affordable Housing Primer (part 1)
by Jim Washburn
After having written about affordable housing for several months, it occurred to me that it might be of some advantage to know something about it. Affordable housing for low-income folks is a good idea, I’d surmised, and there’s nowhere near enough of it. Beyond that, any concept of how such housing comes to be—how it’s financed, what public and private forces influence it, who qualifies for it, and so forth—eluded me. When I’d interview people, they’d use terms like Section 42 and SCAG and I’d nod wisely, while actually comprehending about as much as your dog does when he gives you that attentive cocked-head look.
So I asked some questions of Jon Webb, founder and executive producer of FourStory, which he comes to by way of being the Executive Director of the Foundation for Social Resources—a non-profit which has created affordable housing in four states—as well as being a co-founder and Board President of Project Access, which provides educational and social services to persons in affordable communities.
This is the first of two parts. Part 2 shows up next week.
To simulate the experience of watching this on video, just picture Jon looking erudite and speaking from decades of experience, and me nodding sagely.
What’s the backstory on affordable housing?
The earliest efforts I know of were New Deal programs. The federal government back then created secondary markets for mortgages (principally through creation of the Federal Housing Administration), so pools of mortgages could be sold and provide liquidity for the originating banks. The same thing Fannie, Freddie does today, except with strict underwriting guidelines. It’s no surprise that today’s single-family housing mess hasn’t included much, if any FHA insured loans because unlike the other two mortgage giants, FHA maintained consistent, strict underwriting standards before insuring loans.
As far as I’m aware, the government stayed mostly out of direct housing production until the late ’60s. First came the so called 236 program which subsidized interest rates, then in the early ’70s the Nixon administration had a big a program—probably started under Lyndon Johnson—called Section 8 that was project-based (the subsidy ran with the property). It subsidized both the tenants and the landlord.
The Section 8 project-based program was a grant to the owner of the property that said as long as you maintain the unit in a decent, safe and sanitary condition and it is offered for rent to a poor person—it doesn’t even have to be occupied—we’ll pay you the difference between the tenant’s share of the rent and the actual pro-rata share of the cost of the operating expenses and the debt service. So the government would pay the difference between what the tenant could afford—they were expected to pay initially 25%, now 30% ,of their income—and the amount that was needed to pay for operating expenses and to service the mortgage. It was a program that generated a large number of affordable units, while it was a very safe investment for developers. They had lower interest rates on the one side and the rents subsidized from the other side, from the best credit source around. But the program was a very costly way to create housing, one that required a lot of direct subsidy for a long time, so taxpayers became less in favor of it as the ’70s progressed.
Today there are almost no new project-based Section 8 housing projects. There are a few direct loan programs for rural housing, for non-profits and seniors, but most affordable housing on the rental side now is produced under the Tax Reform Act of 1986, specifically Section 42. It’s the largest section of the tax code, and governs the production of low-income housing by creating a method for providing tax-advantaged equity investments—from big players, corporate investors—below market interest rates in the form of federally tax-exempt bond loans. In California, non-profits play a big role in the process by generating tax relief from property taxes.
Those two sources plus (in California, at least) relief from the basic levy of property taxes are supposed to equal 100 percent of the cost of acquiring, rehabilitating and operating an affordable apartment complex. Because apartment prices have been going up so much the last four or five years (at least until recently), other sources need to be cobbled together to add up to all we need—home funds, city or county subsidies, soft loans etc. For the most part it works out pretty well. Section 42 is by far the biggest source of funding for affordable housing in California. The state (through its Debt Limit Allocation Committee) issues approximately two billion dollars of tax-exempt bonds every year, which is its tax-exempt bond capacity as determined by population. Having the largest population, we have the biggest bond allocation, and the largest allocation of bond capacity goes to housing of any state.
What is the public cost of Section 42 housing?
It’s an income loss for the state and federal governments, because people who own tax exempt bonds are not paying tax on that income, and for the people who invest in the housing to get the tax credits, it’s not just a deduction, it’s a credit against taxes due. If an investor puts a dollar into low-income housing tax credits, that’s a dollar in taxes the state doesn’t get, so there’s indirect loss.
Who qualifies for low-income housing?
In the Section 42 program, which creates probably 90 percent of all affordable housing, participation is income-restricted according to a federal formula. To generalize, most properties can only be rented to people whose household incomes are below 60% of the median. There are some properties where it’s skewed to 50% or even 30% of the median, but the deeper it goes the fewer units there are to be rented, because at the very low income ranges, the rent tenants pay doesn’t even cover operating expenses, let alone the debt service or profit.
The definition of what constitutes 60% of the median income varies by county. To qualify as a low-income person in Siskiyou County you might be making $20,000, while in Santa Clara County that number might be $50,000, because the median income in Santa Clara County is over $100,000. In Orange County the median income for a family of four is approximately $75,000.
The tenants pay 30% of their gross income; that’s the maximum rent that can be charged. In Orange County for someone who’s making 60% of the median income that might translate to about $1,100 for a two-bedroom apartment, and maybe $900 for someone making 50% of the median.
What if a tenant starts to earn more than that 60%?
They can stay there even if they win the lottery. As long as they qualified initially, they’re in. There are some exceptions, but under Section 42, once you initially qualify, you can stay there. Most people, however, if they start making real money, try to buy a house. Like most everyone else, they want to own their own homes.
Is there anything stigmatizing about living in a low-income apartment?
There shouldn’t be. You can’t really tell the difference between a subsidized apartment and any other apartment, unless you’re comparing them to some of the super-fancy Newport-Irvine projects. In a lot of ways, you’re getting a better-run place, because we just can’t have a run-down unit. If you do, the state has the power to take credits away, and that’s like a death sentence for the property owner and investors that created the housing.
The owner of a conventional apartment complex, once he’s closed the loan and as long as he’s paying the mortgage, won’t have anyone bothering him to inspect the apartments. But in an affordable situation, you get audited every year for the benefit of your limited partner. Then your lender will look at least once a year. If you have HUD involvement, their inspectors will visit all the units each year too. The California Tax Credit Allocations Committee and the Debt Limit Allocations Committee send out auditors every year. The limited partner inspects on an annual basis. So, on the management side, you have the obligation to rent units, to keep the place up and tour the properties, because everybody wants to make sure your rents aren’t too high, your tenants are in compliance, and the property’s in good condition.
Is there a lot of turnover?
In typical times in a conventionally financed, market rate property 50% -70% annual turnover is pretty normal. Affordable units now are so far below market rates that we have almost no turnover, maybe 20%. We have one property in Cypress, Tara Village, with 170 units, where we haven’t had more than one vacant turn a month in two years. The rents there are $1050 to $1100 a month in a market that’s $1600 to $1700.
Do you get many tenant problems?
There are always issues with tenants, wacky and true stories about bizarre stuff or people living like slobs, but I don’t think low-income units have it any worse. There are maybe a few more instances of cultural misunderstandings, for example, of people having to be told they can’t barbecue inside their apartments. But for the most part, they’re fine tenants.