Let’s Build A New Kind of Affordable Housing
In New York City, and all across the country, we are facing an affordable housing crisis. More people are becoming homeless each day. Countless families are rent-burdened, paying much more than 30% of their income on rent.
So what do we do about it? Building more public housing is politically impossible. Affordable housing is not profitable for developers. These two realities are aspects of the markets-first environment we live in.
What if we tried to work within the system? What if there is a way to make permanent affordable housing profitable? Guess what: affordable housing developers in New York have done exactly this.
Nonprofit housing developer Broadway Housing Communities recently completed their first ground-up project, Sugar Hill, named after the neighborhood it resides in. Sugar Hill contains 124 permanently affordable apartments for low-income and formerly homeless households. The first floor of the building is occupied by a preschool and a children’s museum for art and storytelling.
The units will never go on the market.
The preschool serves children in the building and the surrounding neighborhood.
The museum hosts studio labs, music, dance, and storytelling for kids and families.
How is this possible?
Sugar Hill was financed by a mix of private and public funding sources. Broadway Housing Communities harnessed an unprecedented amount of philanthropic money — which is not replicable by most housing developers.
What they hope will be replicated by others, though, is the combination of two federal funding sources which are normally meant to be used for separate projects. These federal programs are the Low Income Housing Tax Credit and the New Markets Tax Credit. Let’s establish what exactly these programs are before navigating the maze of red tape that a developer has to get through to use them both for one building.
What is the Low Income Housing Tax Credit?
How this program works is that tax credits are issued by the federal government, like bonds, to housing developers who apply for them.
The developers sell them to investors, either corporations or individuals. The investors who buy the tax credits can use them to write off the taxes they have to pay. Also, since the tax credit is similar to a bond or any other investment, it can produce dividends, making money for the investor.
The tax credits are a commodity. Like bonds, they are essentially insured by the federal government. Banks and other corporations buy them, thus providing money for developers to build affordable housing.
The LIHTC is a mechanism to make affordable housing profitable. In market-rate housing, developers and investors make their money from rental income or sales. There isn’t much income for developers in affordable housing, so money has to be made another way besides from renting out apartments. What makes money are the tax credits, which are sold and traded around like a loan or any other nebulous financial commodity.
Let’s be clear: the LIHTC is a developer subsidy. This is why it is such a politically popular program — it’s a market-based solution.
What is the New Markets Tax Credit?
The New Markets Tax Credit is another market-based solution to a problem of lack of investment. The purpose of the program is to kickstart investment in low-income, previously disinvested communities.
How it works is the government allocates tax credits to groups called Community Development Entities. These entities are organizations that are attempting to gather money to put into their neighborhoods. Think of them like a mix between a bank and advocacy group for neighborhoods.
These Community Development Entities then sell tax credits to investors, who supply the entities with funds. The CDEs then issue loans to select businesses or organizations who provide important resources for the neighborhood, such as a supermarket.
Other examples of organizations that can get loans through the New Markets Tax Credit are retail stores, small manufacturers, and cultural centers. The preschool and museum at Sugar Hill were funded through the New Markets Tax Credit.
Again, to be clear: The NMTC is a market mechanism that helps investors make a profit.
What’s the issue with combining these two programs?
Broadway Housing Communities acquired LIHTC funding to build the housing in Sugar Hill. They also got NMTC funding to build the preschool and museum. It was actually using these funds that was the ordeal. Not a dollar from the NMTC can be used to build housing, and vice versa.
I spoke with Melissa Benson, the Director of Development and Broadway Housing Communities. She called the isolation between the two programs “siloed.” The word silo is used in this context to describe how different divisions of an organization are disconnected and do not communicate or work together at all. It is usually used as a business term. The government silos the LIHTC and NMTC, making it nearly impossible for both programs to be used for one building.
This was an issue when figuring out where the money for building the foundation would come from. Both the preschool and the apartments use the foundation, so which tax credit dollars would go toward building it? The pieces of the foundation had to be partitioned into different sections — one part was the foundation for the museum, another for the housing. How this worked out is baffling.
The determination of Broadway Housing Communities in solving this logistical problem is extraordinary. They are the first developer to use both of these programs in one building. Their hard work demonstrates to government officials and other developers that it is possible to do so.
It should not be difficult to see how the goals of the New Markets Tax Credit and Low Income Housing Tax Credit are intertwined. Both are the government’s methods of providing for the needs of low-income communities. The LIHTC is for building housing, the NMTC is for economic and social development. Combining these two programs will be a step toward solving the crises of poverty and homelessness.
Sugar Hill is supplying the neighborhood with multiple needs — housing, childcare, and arts education for children. There is also a commercial garage and offices for nonprofits in the building, which contributes rental income. Combining multiple uses in one building is ideal for below-market housing because developers can access both the LIHTC and the NMTC. It will also positively impact communities in the long-term if developers provide people with what they need in their neighborhood— a concert venue, a theater, a museum — along with housing.
What we need is a holistic approach. We must build mixed-use structures and mixed-use policy. There is no other way to effectively deal with the affordable housing crisis.