It's Time To End LIHTC As We Know It

Inequitable Tools Produce Inequitable Results

Low Income Housing Tax Credits (LIHTC) have been the primary financing mechanism creating new affordable housing in the US since 1986. Their dominance as a financing method for affordable housing is well established. Given all its complexities, compliance rules and the way it functions like a full employment plan for accountants, attorneys, consultants and banks, you could be forgiven for assuming its an investment or equity financing of some sort, but you'd be wrong. LIHTC is not a loan, nor does it buy ownership in housing. It's a grant: free money to the developer. The credit comes in two flavors, 9% and 4%. If a developer gets a 9% award, the taxpayer pays for 70 percent of the project, but owns none of it. The developer pays effectively zero—the remaining 30 percent comes from a bank loan repaid by the rents collected from tenants over the term of a mortgage and various soft secondary financing sources such as HOME or AHP. Those are often structured like a loan to the project in order to appear to be in compliance with LIHTC, but its a wink wink transaction. Those funds are understood by all players to be an additional grant to the project, never to be repaid. LIHTC funds disappear into the developer’s pockets to become part of their net worth. All of this ostensibly to create more affordable housing, but even as we put more taxpayer money into LIHTC, we fall further behind in producing adequate amounts of housing.

As the housing supply deficit becomes more and more acute, we are experiencing brutally inequitable housing markets that wreak havoc on family formation and generational investment in communities by working and middle class families. Such a disparity really should not be surprising given the highly inequitable tool we employ. In the US, government-subsidized housing targets low and very low income families: public housing requires tenants to make less than 80 percent of the area median income (AMI) and Section 8 vouchers cap income at 50 percent of AMI. LIHTC caps fall between these limits. These tenants cannot pay rents that would cover the construction, operation, and maintenance costs of these developments, and therefore the taxpayer subsidizes the gap. We don't require that the rents of each new project cover its development and ongoing expenses, or that tenants have the capacity to pay those rents. This focus on specific income ranges is a further narrowing of where resources for housing production are allocated. This state of affairs isn't serving our objectives.

It's time to end LIHTC as we know it.

We vastly undersupply our housing markets when it comes to new units. We must drastically increase the amount of housing we are producing. How do we change the trajectory we are on? For starters, perhaps its time to rethink the approach of subsidizing rental housing only for low income families. That strategy assumes that private sector markets are adequately supporting housing production for working and middle class households. That's simply not true and hasn't been for decades. By focusing on housing for all rather than prescribing specific income ranges, financing could be structured that employs much more modest subsidies to developers in the form of low-interest, long-term loans. LIHTC deployed this way could result in a program scalable enough to actually produce housing in numbers sufficient to meet demand, and have the added benefit of greater sustainability. Our housing crisis is so acute, 80% AMI households are occupying housing units that would otherwise house families at 60-50% of AMI. Deploying LIHTC in this manner could increase the total amount of units available, bending the cost curve for all income levels.

The other inequity of LIHTC is the way it hands public resources to private developers with out any public ownership of the assets it creates. What's the rationale for a program handing millions of dollars of equity sourced from taxpayers to for-profit developers who have no affirmative obligation to create affordable housing, and which demonstrably doesn't produce the volume of housing needed? Housing authorities and non-profit housing developers should be more heavily centered in the production of housing. Having seen more than my fair share of ineffective, inefficient for-profit developers, I don't subscribe to the theory that the private sector is the best set of actors to rely on to supply the housing our communities require. Arguably, the constrained housing supply which characterizes our current state of affairs financially benefits for-profit developers, so why would we rely on that sector to vindicate the public interest in an equitable restructuring of our housing production system? Legislation isn't even necessary to address this. Under a states qualified allocation plan (QAP), states can prioritize funding for projects that give the equity either to local housing authorities or to nonprofits, entities with an obligation to use their revenues to produce more housing.

A side effect of the dominance of LIHTC is the way it has crowded out innovation in financing. The legal, technical and financing costs associated with LIHTC transactions are a barrier to scale. Local governments have a play here. They have municipal financing capabilities that could be used to provide capital that replaces LIHTC equity, gets repaid and secures public sector ownership in exchange for taxpayer sourced equity. This is being done in Maryland and its an entirely replicable approach. I've argued previously that local governments must take action to aggressively protect the health of their housing markets if they want families to lay down generational roots in their communities. This is a muscular strategy local and state governments can employ that would help them make meaningful interventions to correct the ruinous disparities for working and middle class families being strangled by the cost of housing.

In summary, the pressing issue of inequitable housing markets fueled by the shortcomings of affordable housing policy choices demands immediate attention and reform. The growing housing supply deficit and the adverse impact on family formation and community investment makes evident that current approaches are failing. We must end LIHTC as we know it, rethink the approach to subsidizing rental housing, and shift focus from specific income ranges to housing for all. Restructuring financing approaches could allow communities to scale up housing production to meet demand sustainably. Moreover, the call to action extends beyond financing to policy changes. Local governments must take a proactive role in reshaping housing markets. It's time for a transformative shift that empowers non-profit developers, housing authorities and individual families, while fostering innovation which dismantles and restructures the underperforming current system. The call is clear: we have to build a housing future that serves the needs of working and middle class families to ensure a fair and sustainable housing landscape for generations to come.