CHAPTER 3: Best Practices in Affordable Housing
Cities and states across the country have created diverse partnerships and programs to address their unique housing needs. Austin can learn from their experiences. All rely heavily on federal monies primarily from the Departments of Housing and Urban Development and Treasury to assist people of low- and moderate-incomes to become self sufficient.
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Innovative partnerships, however, have developed with the private and nonprofit sectors to stretch scarce federal resources. This chapter is designed to give an overview of some of the creative affordable housing practices across the United States. The majority of the programs highlighted in this chapter are from "A Rich Tapestry: States and Localities Take the Lead in Affordable Housing," an unpublished manuscript for the Urban Land Institute, by Professor Michael A. Stegman of the University of North Carolina.
It is important to note that these are model programs -- each tailored to meet the distinct needs of their area. To adopt them in Austin, some features may need to be adapted to local characteristics. To address the broadest categories possible, this chapter summarizes programs that address homeownership, rental housing, services related to housing, and augmenting resources. The first section highlights successful programs in Texas. Typically programs address the basic barriers to affordable housing -- acquisition of land or properties, construction expenses, and funding for rehabilitation/renovation of an existing structure.
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TEXAS PROGRAMS
Several programs in Texas have received national recognition for their ability to fill housing needs locally.
San Antonio Housing Trust Fund,95 established in 1988, is a nonprofit foundation that provides affordable housing opportunities for low- to middle-income residents and assists in the revitalization of downtown. The SAHTF was capitalized with $10 million from the sale of a cable television franchise in 1988 and the Trust is currently worth $10.9 million. Its current leveraging ratio is $11 private dollars to every $1 of Trust monies. All efforts are targeted at residents earning 120 percent of median area income or less. The board is appointed by the San Antonio City Council; the board reviews funding requests and makes recommendations. Proposals are received during open, competitive funding rounds held approximately every 18 months. The Foundation's "Affordable Parade of Homes" is a collaborative initiative between the Trust, builders, lenders, community groups and public officials, whereby city lands were sold to the Trust for $1 and then individual lots were sold to developers for $1. The Trust provided assistance to low-income residents to purchase these homes. This program is the model for the City of Austin's Indian Hills Smart Housing Showcase, off East William Cannon Drive.
The Homeward Bound Programin Austin provides homeownership opportunities through public and private partnerships to promote community and economic development through education, counseling, and financing opportunities. Specific activities include housing counseling and downpayment assistance. Started in 1994 as a program within the Central Texas Mutual Housing Association to help renters become homeowners, Homeward Bound became an independent nonprofit in 1996. Since then, it has assisted over 500 families, including 16 disabled individuals. All residents of Hays, Travis and Williamson Counties are eligible; specific lending programs may carry income and other eligibility restrictions. Homeward Bound is part of a national network of 181 NeighborWorks organizations working to create 25,000 new homeowners, counsel 200,000 families and leverage over $1.8 billion in investments by 2002.96
Austin's award-winning Casa Verde Builders, operated by the American Institute for Learning (AIL), has implemented an innovative housing model that combines production of new affordable housing with community service and job training for at-risk youth. By partnering with public and private-sector organizations, including Home Depot, and others, AIL has built over 40 energy-efficient homes for residents at or below 50 percent of area median income. Homebuyers received down payment and closing cost assistance from the City of Austin, the State of Texas, and, recently, Guaranty Federal Bank. At-risk youth selected to participate in the program are given construction skills, academic education, supportive services, and, in some cases, scholarships. The homes are constructed using "green building" techniques that reduce energy consumption by as much as 50 percent from conventionally built homes.97
HOMEOWNERSHIP
According to the American Planning Association, 56 percent of the nation's wealth is in real estate.98 Thus, homeownership programs are popular because they stabilize neighborhoods and families and provide new taxpayers to local rolls. There is much evidence that with proper counseling, low- and moderate-income people create no more risk to the mortgage lender than homebuyers in higher income brackets. Typically assistance is given to help acquire land or properties, finance new construction or renovation/rehabilitation of existing properties and to meet downpayment and closing costs. A substantial amount of funding for such activities comes from HUD through its Community Development Block Grant, HOME program, and the Federal Housing Administration, which provides mortgage loans and insurance.
HOMEOWNERSHIP PARTNERSHIPS
There is significant risk involved in both the construction/rehabilitation of a single-family home and the placement of a mortgage on that home. To sell those homes, then, at below-market prices requires some form of subsidy. In order to share the risks and rewards of affordable housing programs, partnerships have developed between the private and public sectors to build safe, affordable homes. A major incentive in bringing banks to the table was the Community Reinvestment Act of 1977. CRA is intended to encourage depository institutions to help meet the credit needs of their communities, including low and moderate-income neighborhoods. The law requires that each depository institution's record in doing so be evaluated periodically. That record is taken into account in considering an institution's application for deposit facilities.99
Tampa Bay Community Reinvestment Corporation100 was created in 1991 in response to poor lending practices by area banks in minority communities. This nonprofit mortgage banking corporation allows member financing institutions to combine resources and share the risks of financing affordable housing. Every member -- currently 37 institutions with a total loan pool of $50 million -- has a pro-rata share in every loan; this allows member banks to make community development loans with low administrative overhead and allows smaller institutions to participate without hiring staff. Membership is for two years with a minimum participation amount of $100,000 with loan apportionment pools of up to $24 million. Underwriting standards are set so that loans may be sold in the secondary market, further increasing resources. As loan volume increases, the Corporation expects to fund operations through fees.
New Opportunities for Homeownership in Milwaukee (NOHIM)101 is a partnership of 46 banks, thrifts, credit unions, community-based homebuyer counseling agencies and the City of Milwaukee that seeks to increase homeownership for low and moderate-income families. The partnership, administered by a community-wide information clearinghouse for nonprofits, focuses on the needs of member lenders and homebuyer counseling agencies. The credit institutions gain from having a pool of educated potential buyers, and the counseling agencies benefit from the access to unique loan products and flexible underwriting guidelines of member financial institutions. Each organization pays a one-time initiation fee based on the size of their firm and a nominal annual administrative fee. Members agree to use standardize eligibility requirements, including minimal loan origination fees, prompt servicing, and referral if client is denied. NOHIM also provides training and workshops for lenders and real estate professionals not in the partnership to educate them on neighborhoods and programs available to buyers.
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PROGRAMS FOR TARGET POPULATIONS
Organizations also use public and private monies to achieve policy goals -- assisting certain populations, revitalizing declining neighborhoods, and/or encouraging the development of certain housing.
The City of Memphis' Downpayment Assistance Program102 offers low- and moderate- income homebuyers up to $3,500 in downpayment assistance for a new or existing home located anywhere in the city.
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[This is typical local housing assistance; the City of Austin currently provides up to $7,000 in downpayment assistance to qualified borrowers anywhere in the city.] Caps are raised, however, for homes in targeted neighborhoods (up to $10,000) and for certain populations. Public housing residents purchasing a home anywhere in the city may receive up to $10,000 and police officers who purchase homes in target areas may receive up to $15,000. Over four years, 4,500 residents bought their first homes through the program, and $6 million in public funds leveraged more than $140 million in private mortgages.
HouseHartford103 provides downpayment and closing cost assistance to qualified first-time homebuyers in Hartford, Connecticut. HouseHartford was granted a waiver from HUD to allow federal monies to be used to assist properties of two to four units where one or more are occupied by market-rate tenants. For instance, a purchaser who does not meet federal income eligibility requirements may still use city program to purchase a duplex as long as the other unit is rented at restricted levels to someone who meets federal income standards, and the purchaser lives in the other half of the duplex. If the purchaser is eligible under federal income standards, then there is no income or rent restriction for the other unit.
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Boston Community Capital's sponsors the One-to-Four Family Homeownership Program104 to rehabilitate severely dilapidated properties that are too small to attract developers and too costly for a single investor. A partnership of Cities of Boston and Cambridge, the State of Massachusetts, nonprofits, and the Local Initiatives Support Coalition offer loans for nonprofits and individual homebuyers to rehabilitate homes.
The properties must be sold to low- and moderate-income families who live in one unit and rent the others to income-qualified tenants. A common project is a three-unit home with total development costs of $250,000. The home would be sold for maximum price supported by low-income buyer and renters approximately $140,000. The gap would be filled with city and state soft-second mortgages.
The award-winning Bridge Housing Corporation105 of San Francisco is a nonprofit corporation that uses a variety of innovative and aggressive efforts to produce large volumes of homes for families earning between $12,000 and $25,000 annually. Since inception in 1983, they have participated in the development of more than 7,500 homes valued at more than $700 million. Its working capital fund of more than $15 million is the result of grants, fees, and corporate loans. Bridge has expanded its role to address related issues in poverty, such as job creation and supportive services. Under California law, Bridge purchases surplus public lands at fair market value. They vigorously use density bonuses and other land use concessions to lower rents or sales prices since the reduced cost of infrastructure and per unit land prices are passed on to the consumer. Their construction lending pool is a $340 million revolving loan pool created in partnership with two state pension funds, the Ford Foundation, and the World Bank.
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RENTAL HOUSING
As Chapter 1 shows, roughly 45 percent of Austin residents rent their homes and face significant challenges in finding and keeping them. Recognizing the critical need for rental housing, several cities developed programs tailored to special concerns of renters.
Paca House106 is an innovative public-private partnership in Baltimore, Maryland. This single-room occupancy (SRO) project links two rehabilitated structures, one of which is a former fire station. Consisting of 30 efficiency apartments and 76 SRO units, the residential facility serves a population of elderly and disabled, including a section which serves persons who are disabled as a result of HIV -- all of whom are homeless or at risk of becoming homeless. Appropriate services are provided to all residents, depending on each person's level of need. Although there are shared community facilities and shared grounds, there are separate, more private, community areas for each population subset. The design of the facility makes it easy for persons to interact as part of the whole facility or within their separate niche. Paca House required five sources of financing: Federal Low Income Housing Tax Credits; Federal Home Loan Bank housing funds; State and city housing funds, and a rebate from Baltimore Gas and Electric. Opened in December 1996, the facility has enjoyed a successful history of operations and has been the focus of public attention to due its innovative use of existing structures, its creative and colorful design elements, and its successful ability to serve a diverse population.
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After conducting a statewide assessment study, the Colorado Housing and Finance Agency107 created the Small Affordable Rental Transactions (SMART) Program to encourage the development of rental properties with less than 20 units. These were especially needed for certain markets rural residents, very-low income people, and special needs populations. The SMART program offers permanent long-term, fixed-rate, fully amortizing, non-recourse, first mortgage loans of no more than $1 million to developers. For-profit developers may also apply for loans. General obligation bonds provide much of the capital; tax-exempt 501(c)3 bonds are available for nonprofit and public sponsors while private activity bonds and taxable bonds are available for private sponsors. Trust fund monies may also be tapped; these are generally used for lower-income areas and census tracts. Developers benefit from a consolidated application process, streamlined processing and documentation, and less costly appraisal and environmental requirements. SMART program has approved more than $60 million in loans to fund 1,240 family units, 53 elderly apartments, and 18 units for disabled individuals.
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Workforce Housing Preservation Programs108 in the Pacific Northwest were created to address the competitive rental market where the private sector has not responded to demand. Three organizations are operating programs to spur development of rental properties. The public housing authorities use bond monies of varying terms so that when the shorter term, subordinate bond is paid off the additional funds may be used to reduce rents in the properties. Rents are typically only slightly below market rates; in some complexes, only a certain number of units are reserved for below-market renters. The deals must be carefully structured to assure adequate cash flow to repay bond monies and maintain reserves. In Kitsap County, projects are maintained through a private contractor and are advertised on the web. In one project, tenants may purchase the units as condominiums. The Vancouver Housing Authority began workforce housing because the gap between housing costs and income has widened despite a booming economy. The VHA partners with county government, private developers, builders, realtors, and property management firms to finance the purchase of 766 units since 1992. The complexes require that at least 51 percent of the renters earn 80 percent or less of area median income.
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RELATED PROGRAMS
A critical component of providing affordable housing is working with tenants and potential homebuyers to improve their credit and adopt better money management practices. Many cities and states provide credit counseling and homebuyer education courses.
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Some cities are developing programs that work in conjunction with efforts to build more affordable rental units. The City of Minneapolis Inspection Department offers city code abatement loans to property owners who cannot afford repairs on their properties. The Department conducts "sweeps" of given neighborhoods and issues citations to those who fail code inspection. Loans of up to $8,000 are available to those owners/renters who are cited but cannot qualify for other financing. The Minneapolis Community Development Agency109 offers matching loans of up to $16,000 interest-free to property owners who receive market-rate loans from private lenders to make repairs on rental properties of up to six units for tenants earning under 80 percent of area median income. The amount of loan is subject to the number of units. Funds are from the city's CDBG allocation.
A inner-ring suburb of Minneapolis, the City of Richfield sweeping Neighborhood Revitalization Strategy110addresses its aging population and housing stock. The Richfield plan targets improving neighborhoods by offering incentives that will increase overall property values over time. By helping homeowners remodel and improve aging buildings, the city hopes to keep families. The city uses tax increment financing (see tax section below).
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The Richfield Housing and Redevelopment Authority launched the program with $1.5 million in funds borrowed from long-term capital improvement funds. These monies finance the acquisition and demolition of deteriorated properties. Vacant lots are sold to developers and the loan is repaid with the tax increment on the improved properties. The city requires new construction be for owner occupied housing and sets minimum size and amenities with a recommended market value. The city also provides remodeling advice and deferred no interest second mortgage loan of up to 10 cent of a remodeling contract between $30-50,000 and 15 percent for remodeling over $50,000. The loan is payable upon sale or forgivable after 30 years. City advisers help homeowners with general cost estimates, a remodeling manual, and how remodeling affects future home value. Recently Richfield developed a pilot program of owners of apartment buildings who wish to remodel.
The City of Akron, Ohio manages a comprehensive housing strategy to strengthen neighborhoods. Based on declining physical characteristics, high owner-occupancy levels and adequate resident income levels, neighborhoods are selected for the Neighborhood Improvement Program.111 The city makes available a number of resources for these neighborhoods through grants and loans. A broad assessment of the neighborhood is conducted with all violations noted. Repair estimates and contractor selection are provided free of charge. Public infrastructure streets, sidewalks, parks are improved as needed. Renters may receive matching grants to address their code violations. Buildings in serious disrepair may be demolished free of charge through another city program. Elderly and disabled persons with very low incomes are eligible for grants of up to $2,000.
Homeownership is encouraged through other city programs one where the city contracts with local builders to provide infill housing at below $60,000 for three-bedroom, 1-1/2 bath homes with garages and another to provide downpayment and closing cost assistance to eligible buyers.
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OTHER RESOURCES
Communities have developed additional means to fund affordable housing and related services for their residents.
TRUST FUNDS
About 150 cities, counties, and states augment federal housing resources with additional funds from local and statewide taxes and fees.112 These housing trust funds can be targeted to serve narrow or wide populations and funded in a variety of ways depending on the purpose of the trust fund. The State of Florida operates the largest in the country with annual revenues from a real estate transfer tax of $120 million annually.113 Below are profiles of existing local trust funds, their roles, and source of funding.
The City of Memphis created a housing trust fund in 1994.114 Monies can be used to develop and operate programs that increase housing opportunities for low- and moderate-income residents, to provide information, public education, and technical assistance on Memphis' housing, and to support efforts to revitalize distressed neighborhoods and address poverty issues. The City of Memphis provided one-time funding from several sources of $750,000 in 1994, and since that time has agreed to provide savings from a waste-disposal contract (approximately $250,000 annually) and unclaimed deposits from the utility department (close to $240,000 initially and between $40-50,000 expected annually). The Ford Foundation granted the city $1 million in 1998 to be matched by local corporations. When this funding is in hand, the city will have approximately $750,000 to spend on neighborhood-based organizations annually.
Seattle's Housing Bonus and Transferable Development Rights Program115 enables developers to increase the allowable floor-area ratio and add square footage to the projects in exchange for creating units of affordable housing or paying cash into the city's housing trust fund. These incentives allow commercial developers to maximize the size of their projects in exchange for building affordable housing units. Developers may build the affordable housing on the same site as their commercial project; build it off-site in the downtown area or make a cash payment to the city's housing trust fund or a city-approved nonprofit housing developer. The contribution amounts are set by a formula that encompasses a ratio of commercial space approved for construction and service to target populations for affordable housing. Seattle also allows the transfer of development rights (TDR); a retail-office developer, for instance, may "purchase" development rights from a nonprofit housing developer. The city operates a TDR Bank to manage the transfers.
TAX PROGRAMS.
The federal and state tax codes provide tremendous resources for the development of affordable housing across the country. In fiscal year 1998 alone, the Federal Low Income Housing Tax Credit program operated by the Department of Treasury was responsible for producing an estimated 60,000 units of affordable housing nationwide.116 Tax abatements are also a popular ways at the local level to encourage production of affordable housing.
Low Income Housing Tax Credits (LIHTC). Under the housing tax credit program, investors in affordable housing can receive credits against their payments of federal income tax provided the housing is developed and operated in accordance with the Low Income Housing Tax Credit program. Credits are usable by owners of these affordable housing projects to reduce dollar for dollar their federal income tax obligations.
The Texas Department of Housing and Community Affairs administers the LIHTC program for Texas. The amount of tax credits the Department can award is calculated on a federal formula of $1.25 per capita. The amount of credit awarded to a housing development is based on both the cost of the development and the percentage of low-income units in the development. Competition for these credits is keen with only one in four applications for tax credits actually awarded credits each year. In 1998, the City of Austin received three awards of funding: St. John's Village, a 156-unit multifamily development on Whatley Avenue; Trails at the Park, a 200-unit multifamily development on Slaughter Lane; and The Lodge at Merrilltown, a 204-unit development for seniors.
Tax Abatements/Increment Financing. Localities often forgo tax payments to encourage development of commercial activities in desired areas. These same means are also used to encourage the development of housing and businesses for low and moderate-income residents and revitalize neighborhoods, called tax increment financing.
The City of San Antonio created a tax-increment financing zone to revitalize 28 acres of the Rosedale neighborhood, three miles west of downtown. The redevelopment will include construction of 64 single-family units, 182 multifamily units, and 30 units of elderly housing. In addition, the project will provide for the creation of a park on Apache Creek, a commercial zone, and street improvements. The new housing will serve to help stabilize a declining inner-city neighborhood. Development costs for public infrastructure total $2.5 million and will be repaid through a financing plan that ultimately increases the city's tax base. The developer will borrow funds from local and national housing organizations; these will be repaid through the capture of appraised value, which will be contributed by the school district, city and county governments, and other taxing entities. Once the funds have been repaid -- in approximately 10 years -- the future capture appraised value will provide significant funds for these taxing entities.117
"This Old House" Program118 in Hennepin County, Minnesota allows homeowners to make improvements in their homes without paying property tax on the increased market value for up to ten years, then their tax payments are gradually increased over the next five. This provides an incentive to improve and stabilize older homes, which are primarily located in inner city neighborhoods.
NON-GOVERNMENTAL HOUSING LEADERS.
Though city and state governments often lead efforts to provide affordable housing opportunities, they are by no means the only actors in a community who do so. More and more business communities are recognizing the critical link between housing and attracting and retaining a workforce. Other organizations, such as unions, are also involved in housing their members.
Employer-based programs: Silicon Valley high-tech employers alarmed by the rising cost of housing in their region established a trust fund to help moderate-and low-income and homeless people find housing. The average home sells for $320,000, and rents have increased 30 percent in two years. Companies working with state and local governments expect to raise $20 million over two years and leverage these funds with government monies for a total of $100 million. The Trust Fund will support first-time homebuyer programs, rental housing, and homeless shelters.119
Select Milwaukeeworks with area employers through the "Walk to Work" program.120Employers help their employees pay downpayment and closing costs of buying a home within a designated area around the work location. Amounts range up to $3,000 and may be offered as a loan, grant or salary advance. Select Milwaukee, an information clearinghouse organization, estimates that an additional $22 in neighborhood investment follows each dollar an employer provides for home purchasing. Funds are provided by the Wisconsin Department of Transportation.
Boston Hotel Restaurant Employees Union Local 26121 started a housing trust to assist its members in becoming homeowners. The Trust Fund sponsors a homebuyer savings club matches members' savings for a downpayment and offers to pay part of the mortgage (a "buy down") to help families afford the monthly mortgage payments. Programs are targeted to members below a certain area median income and for homes in neighborhoods often denied credit by conventional banks. Union members pay 8 cents per hour to the fund, which has helped 1,000 families purchase homes.
The North Carolina State Employees' Credit Unionoffers two home-financing packages for homebuyers who have not owned a home within three years.122 As part of its charter to assist members improve their lives, the credit union has set aside $125 million for first-time homebuyers and $15 million for the Homestead Mortgage program for full-cost financing of homes for qualified members. The former program offers adjustable-rate mortgages of no more than $125,000; purchasers must pay closing costs from their savings; be employed for 12 months; and have a good credit record for the past year. The Homestead Mortgage Program was designed to assist members who do not qualify as first time buyers and is less restrictive. For both programs, mortgage payments must be made by payroll deduction or automatic withdrawal from the SECU account.
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