More than 1.5 million low-income California renters spend more than half their income on housing, according to a recent Center on Budget and Policy Priorities report. That’s up 28 percent since the housing market crash. There is a role for federal and local policy in trying to address this issue, but we cannot hope to seriously tackle it without the private sector, namely investors, developers and landlords.
From a simplified economic viewpoint, rental costs are high because demand outstrips supply. This suggests two approaches: 1) Increase the supply of affordable rental housing. 2) Lower the monthly rates paid by low-income renters.
First, the supply of affordable rental housing can be increased in a few ways, but the most often employed are programs with funding specifically targeted to low-income housing to support rental housing development. One commonly employed program is the Low-Income Housing Tax Credit (LIHTC), which offers both 9 percent and 4 percent tax credit programs.
Private investors that partner with nonprofit entities and/or housing authorities get a financial return on their investment. If the nonprofit is reputable, the guaranteed tax credits present a low risk for the investors and have been instrumental in making needed development feasible. Investment risk is further mitigated when the partnership includes a local housing authority commitment of project-based voucher rental subsidy, which guarantees market rents for the tax credit compliance period.
Developers have used the LIHTC to cover the lion’s share of the costs to build and maintain more than 300,000 affordable rental units over the past 30 years in California. It would be easy to opine, “If more investors were willing to…,” but the challenge is the significant competition for 9 percent credits. To compete you must achieve a “perfect” score, and then you need local subsidy to increase your “tiebreaker” score. So it is not that developers are unwilling to take advantage of the LIHTC programs, but that 9 percent tax credit competition is fierce. Additionally, it is hard to get a project to pencil out using the 4 percent credits, so housing authorities typically need another funding source.
To be awarded the 9 percent credits, a developer needs local funding to increase the tiebreaker score. Redevelopment funds used to be a great way to add local funding to a project, but those days are gone. Citizens need to increase advocacy with city councils and county boards and encourage the award of local funds to support low-income development projects. Matching private investment with local government funds is the kind of public-private partnership we need to develop more affordable housing.
Regarding the second approach, lowering the cost of affordable rental housing, some programs provide relief to low-income renters by providing rental assistance either directly to renters, or to the private property owners who lease affordable units to the families. A common example of this policy tool is the Housing Choice Voucher (HCV) program. More than 300,000 low-income Californians have a place to live because of this program. The HCV program uses federal money to pay a portion of the monthly rent to the landlord. The tenant enters a contract with the landlord but only pays 30 percent of their income toward rent and the balance is paid through the voucher contract with the housing authority.
While there may be a stigma against low-income housing that causes landlords to hesitate, those who participate report consistent on-time payments, the benefits of annual inspections of each subsidized unit and an easy time finding renters. This reduces the risk to the owners and landlords. Because the families can use these vouchers wherever private market rental units are available, as opposed to being dependent on the public housing stock with an inventory that is being reduced over time due to lack of congressional support, this system is also far more cost- effective than traditional public housing.
If more public-private partnerships took advantage of programs such as the LIHTC to work with housing authorities, we could build more affordable housing at more cost-effective rates. Likewise, if more landlords were willing to participate in the HCV program, more families could use this market-based public policy mechanism to more effectively utilize existing affordable housing.
• Andrew Pattison is a visiting assistant professor in the Department of Policy Studies in the School of Management at California Lutheran University.