Reversing the Trend of Dwindling Affordable Housing Stock

A recent follow-up to the National Low-Income Housing Coalition's study of national housing patterns indicates that in the four-year period from 2001 through 2004, more than 1.2 million housing units ceased to be affordable.

In some cities, such as New York, affordable housing is declining at an even faster rate. According to the Furman Center for Real Estate and Urban Policy, the number of New York City units that a family making $33,000 a year could afford fell by 205,000 between 2002 and 2005—an average annual loss of more than 50,000 units.

In metropolitan areas with high market rents, such as New York City, there is a crisis in affordable housing,” says A.J. Johnson, an assisted and tax credit housing consultant. Minimum wage workers can no longer afford to rent a one-bedroom apartment in Manhattan, which means the housing environment has changed drastically from that of the 1950s, he notes. And there is little hope that the number of affordable housing units will increase in the future, he adds.

“In some Manhattan neighborhoods, monthly rents for one-bedroom units start at $3,000, which is just unaffordable to a person whose income is less than $90,000 a year,” says Johnson. “Even bare-bones studio units can run $1,400 a month in those areas,” he adds.

Root Causes

The two major causes for the decline in affordable housing are obvious, Johnson says: First, subsidized housing stock nationwide continues to age and, therefore, is in need of rehabilitation. Second, many sites have reached the end of their compliance period under the low income housing tax credit (LIHTC) program, he adds.

Termination of the compliance period could mean the loss of thousands of units resulting from owners’ rights to convert those units to other uses or to demand market-rate rents for them as soon as the compliance period ends, Johnson says. Compounding the problem is the potential loss of a further three million affordable housing units nationally, because they are in such bad shape that they are facing municipal condemnation proceedings.

However, some affordable housing advocates are finding ways to maintain low-cost housing by taking matters into their own hands—literally, says Johnson. For example, former residents of the once defunct Meridian Manor in Washington, D.C., were able to convert the 34-unit site into a Section 8 cooperative.

Getting Help

The prior owner of Meridian Manor had let conditions deteriorate to the point that a heap of housing violations encumbered the site. Its residents sued the owner and won a $1 million judgment against him. But he could not pay it. Therefore, the residents compelled him to transfer ownership of the site to them.

Organizing themselves into a cooperative structure named “Arch Bishop,” the residents took over the site until the city condemned it for code violations, forcing the residents out. Undaunted, they put together a team of development and legal consultants to save the building—and their homes—from destruction. This is the story of how they went about it.

Seeking Expertise

The residents of Meridian Manor contacted The Harrison Institute of Public Law (HIPL), a housing and community development clinic run under the auspices of Georgetown University. They also approached a Washington, D.C., nonprofit called MiCasa, which had experience in developing affordable housing. Then, based on recommendations by HIPL and MiCasa, they located a developer, NHT/Enterprise, to join in partnership with them to rehabilitate the site. NHT/Enterprise was a valuable addition because its name lent credibility to the residents’ efforts to show lenders and investors that the project was worth funding.

Overcoming Obstacles

Basic problems emerged immediately: First, residents had low incomes—many were earning only minimum wage—so rents that could be charged were too low to convince banks that money should be loaned for rehabbing units. Also, their incomes were too low to support the financing charges associated with the type of ownership structure residents wanted—a cooperative. And they were unable to locate subsidies as part of financing the revitalization.

Residents settled on making use of the LIHTC program. Although the LIHTC process is extremely competitive in Washington, D.C., the District of Columbia Housing Finance Agency was willing to underwrite an issue of tax-exempt bonds, and to provide the project with a 4 percent tax credit.

Ownership structure. “Financing with tax credits in projects of this type can create new problems,” Johnson says. To obtain tax credit financing, a limited partnership or limited liability company must own the site. Under IRS regulations, a housing cooperative does not qualify, he notes.

The issue of ownership structure was handled adroitly by HIPL experts at Georgetown. HIPL combined two different property owner concepts to create a hybrid called a “rental cooperative.” Under its terms, residents had to wear two hats, as managers and as owners-in-the-making.

Putting a deal together. To comply with tax credit regulations, the cooperative was required to form a limited liability company, says Johnson. As such, it became managing partner of a tax credit partnership along with both Arch Bishop and NHT/Enterprise. Thus, the cooperative became an essential decision maker about the site's future. It became the site manager, drafting management policies, rules, and procedures for day-to-day operations. And it became the site's lessor, entering into a lease for an amount equivalent to the tax credit rents. Ownership potential existed, too.

When the 15-year tax credit compliance period expires, the cooperative is permitted to purchase the site for the equivalent of the debt owed on loans plus the balance remaining on investor exit taxes, Johnson says.

Financing methods. Rental subsidy was also part of the mix. Thanks to the District of Columbia Housing Authority (DCHA), the cooperative was able to enter into a Section 8 Housing Assistance Payments (HAP) contract for a 15-year term. Section 8 contract rents, which were underwritten to support $2.4 million in private activity bonds, were set at comparable market rents.

By combining the HAP contract for Section 8 subsidies with the LIHTC financing method, the cooperative not only solved operational problems but also gave itself a firm hold on eventual site ownership. Through its corporate structure, residents who started as site managers were given the chance to prepare themselves to become its owners as well. They were learning management skills, dealing with compliance issues, and understanding how to operate as a team, all the while pooling resources sufficient to purchase the site at the close of the LIHTC compliance period.

On the development side, NHT/ Enterprise was taking steps of its own to ensure the site's future viability. Through its efforts, the National Park Service approved the Meridian Manor's application for designation as a historic site, which meant that it could sell historic tax credits. Ultimately, the site realized $740,000 from the sale of the historic tax credits available to it.

Lenders at the federal and municipal levels also became involved in project financing. The Federal Home Loan Bank provided the cooperative with a grant/loan of $289,000 from its Affordable Housing Program (AHP). In turn, the cooperative loaned the full sum to the project at a zero percent rate of interest for a term of 17 years. And a city housing agency, the District of Columbia's Department of Housing and Community Development, provided a $400,000 low-interest loan to complete the project's financing requirements.

How it works. The cooperative must pay part of the developer's fee. But it gets a share in ongoing cash flow derived from site rentals, as well as all proceeds from the centralized laundry facility in the basement that serves the site's 34 units. Currently, revenues are sufficient not only to pay the site's daily administrative expenses but also to fund a set-aside that will let the cooperative purchase the site once the 15-year tax credit compliance period expires.

Part of the purchase money will come from repayment of the loan that the cooperative made to the site. Consequently, the residents are in a good financial position to buy a site—and their own homes—that they have worked so hard to preserve.

“Meridian Manor shows how people can be effective in saving affordable housing,” says Johnson. “Community involvement can change our current script of dwindling affordable housing stock,” he adds.

Insider Source

A.J. Johnson: President, A.J. Johnson Consulting Services, Inc.; Williamsburg, VA