Why It’s So Hard to Build Affordable Housing
Editor’s note: this article is the second in a series on affordable housing in Columbus. The first one looks at the different terminology used in the industry and how ‘affordable housing’ is defined in practice.
A wide range of local organizations and institutions have been working in recent years to draw attention to the need for more affordable housing in Central Ohio. Numerous plans and studies have been completed on the topic, but they tend to assume a level of familiarity with the affordable housing and development industries that most people simply don’t have, and they don’t answer the most basic question – ‘If there is such a desperate shortage of affordable housing, why aren’t developers just building more of it?’
Carlie Boos, Executive Director of the Affordable Housing Alliance of Central Ohio (AHACO), has a way of breaking down housing affordability that simplifies what can be a complicated and charged issue. There are certain steps that need to be taken in order to build housing at different price points, she explains, and in order to get down to what many would consider truly affordable housing – something a minimum wage worker or a senior on a fixed income could afford – a developer would have to take all of them; “They can’t skip any step on the ladder.”
“I kind of waterfall in my mind the different things you need to do, to go from shallow affordability to deep affordability,” Boos says. “The first layer for me is kind of in the value engineering category.”
That means not including things like swimming pools, balconies or granite countertops in the project, of course, but “Those examples are the easy ones…it’s not always that straight-forward,” Boos says. “Some of the things that have costs are also required by the zoning code or by the housing code, so it’s not just a conversation between you and your architect, now it’s a conversation between you, the city, the area commission, your architect, your engineer, your environmental study…it’s not always easy.”
The city’s zoning code, for instance, requires a minimum number of parking spaces for most new development, and that can add substantial cost to a building (as much as $20,000 per space, according to some studies). The city is currently working on a plan to potentially re-write its zoning code, but it’s far from certain what the end result of that process will be.
Extra costs can add up, particularly for infill projects in existing neighborhoods, where there can be additional challenges and more uncertainty than there is for a greenfield development on the edge of the metro area.
A recent 98-unit proposal on East Town Street that aims to offer apartments priced in the 60% to 100% AMI range, for instance, has a total budget of about $20 million.
Boos estimates that value engineering can bring down the cost of a development, but only enough to get to what she defines as the first level of affordability: housing that is affordable for a family of three earning about $90,000 a year, or roughly between 100% and 120% of the area median income (AMI).
To get to the next level – under 100% AMI – financing from a nonprofit lender, or “friendly debt,” as Boos calls it, will probably be required.
(For much more on what AMI is and how it translates into rent and income limits, see the first article in this series)
“If you’re going to build [your project], you’re going to have to get a mortgage; you gotta borrow money,” she says, and a commercial lender is going to “price that product based on the risk, so you can be looking at an interest rate of 5, 7, 13%, depending on where you’re coming from…that’s a cost that you have to absorb one way or another.”
A market-rate developer simply passes those costs on to the tenant, Boos explains; “It’s a monthly cost I’m paying for my debt service, I just bake it into my monthly rent for everybody and you all eat a slice of it.”
A developer looking to lower the end-cost for tenants can go to a nonprofit organization, like the Affordable Housing Trust for Columbus and Franklin County, for a loan with a better interest rate. Some groups also offer something called ‘quick-strike’ funds, which can help affordable housing developers compete with market-rate developers, who often have the ability to snap up land quickly with cash offers.
“If you want to build an affordable apartment development, you usually need to get between – and this is a ballpark estimate – five to seven different grant makers and lenders to agree, which is moving mountains,” Boos says. “To take five to seven loan approvals and go out looking for sites, you’re gonna lose every time, because there’s some guy who has cash and doesn’t need to balance all of those.”
Another thing that can help projects at the 80% to 100% AMI level is tax abatements. And while the abatement policy that the City of Columbus established in 2018 to encourage more workforce and affordable housing has not exactly led to a flood of new units, most nonprofit leaders in the affordable housing sector support them as one of many different tools that can potentially help tip the balance for projects that otherwise just wouldn’t work financially. (The city is currently in the process of updating its abatement policies, including introducing incentives for units at the 60% AMI level.)
The Role of Federal Programs
The next tier down is the 50% to 80% AMI level, or housing that is affordable to a family of three making between $37,750 and $60,400 a year. In Columbus there are nonprofit developers (like Homeport and Community Development for All People) that build this type of housing, as well as for-profit companies (like Wallick Communities and Woda Cooper Companies), but the thing they have in common is that they all rely heavily on Low Income Housing Tax Credits to make their projects work.
Essentially, investors help pay for the construction of housing in exchange for an equity stake (or partial ownership) in the project, which they can translate into tax savings thanks to the credits. The Low Income Housing Tax Credit (or LIHTC, pronounced ‘lie-tech’ in the industry) was created by the Tax Reform Act of 1986. It’s regulated at the federal level but controlled by the states, and is the main driver of affordable housing construction nationwide (LIHTC was responsible for the creation of more than 100,000 units a year nationally between 1995 and 2018, according to HUD).
Investors in such projects are often banks or other large lending institutions, and they typically rely on a third party, known as a syndicator (locally, one example is the Ohio Capital Corporation for Housing), to help structure the deal.
Other programs that can be used to make the numbers work for this type of project include the HOME Investment Partnerships Program administered by the city, which distributes federal money, or the Franklin County Magnet Fund.
Boos calls the next level ‘deep affordability,’ or projects that provide housing at the 30% to 50% AMI level. These are the hardest types of projects to build, requiring developers to check all the boxes above – value engineering, friendly debt, help with construction costs from tax credits or another program – and to then find one more source of help; an operating subsidy.
“Even if you find a lottery ticket and you hit and you’ve got 10 million dollars so now you have this free building, you still have to shovel the snow, you have to hire somebody to monitor the front desk, you have to have a management company who’s going to screen tenants, you’ve got to clean it, things are going to break, so what it costs just to operate it is already more than most of those [tenants] can afford to pay,” she explains.
The most common way to bridge that gap – between how much money is brought in by rent and what it costs to operate a facility – is through the Housing Choice Voucher Program, a federal program that is administered by local public housing agencies (in Central Ohio, that’s the Columbus Metropolitan Housing Authority). Some vouchers are place-based, meaning they are tied to a specific property, while others are given out to individuals, who can then apply the voucher to the rent they pay at any apartment they choose, as long as it is accepted by their landlord.
Often called Section 8 because the program was enacted in 1974 as Section 8 of the United Housing Act, there is a huge waiting list for Housing Choice Vouchers in Central Ohio – there are currently over 19,000 active applications, according to the Columbus Metropolitan Housing Authority.
Permanent supportive housing also falls into the ‘deep affordability’ category. Locally, the nonprofit organization Community Housing Network is the primary developer of this type of housing, which provides wrap-around services for tenants who are often formerly homeless or at high risk of experiencing homelessness. It also typically relies on Housing Choice vouchers and tax credits.
The Search for Solutions
The federal programs that fund the majority of the affordable housing built in the region are very competitive. Central Ohio projects are often competing with developments elsewhere in the state for a limited number of tax credits, and the complex application scoring process that is used to award the credits can favor cities that are experiencing more poverty and are facing larger economic headwinds than Columbus is.
Along with changes over the years in how the federal government funds affordable housing (going from actually paying for the construction of public housing to funding tax credits and vouchers instead), the overall level of funding for affordable housing has decreased significantly.
A history of affordable housing programs produced by the National Low Income Housing Coalition concluded that, “The federal investment in housing has not increased at pace with the overall increase in the federal budget, and expenditures on housing go overwhelmingly to homeownership, not to rental housing for people with the greatest need.”
With all of the constraints faced by developers of affordable housing – particularly those that are trying to build housing for the lowest income groups – local planners and nonprofit leaders tend to advocate for an ‘all of the above’ approach to the problem.
AHACO estimates that 54,000 low- and moderate-income households in Franklin County pay more than half of their income towards housing costs. And, with about 40 new people moving into the county every day, there is not enough new housing being built to meet the overall demand, which means that renters and buyers of every income are competing for a smaller and smaller slice of available product.
Last year’s Regional Housing Strategy, produced by the Mid-Ohio Regional Planning Commission, emphasized this supply gap and outlined a variety of recommendations and policies geared toward local cities and suburbs.
A group of Black leaders also recently called on the city to create a “comprehensive action plan” that would go beyond the studies and quickly begin allocating money and resources toward the issue.
Boos points out that there are resources out there – the city has only spent a portion of the money it has received from the American Rescue Plan of 2021, for instance – and the organizations that make up AHACO are pushing for more of it to be directed toward affordable housing.
The Build Back Better Bill, which has passed the U.S. House of Representatives but has yet to make it through the Senate, would provide a once-in-a-generation injection of federal money into existing affordable housing programs while also creating new ones that could make a real impact.
The local consensus seems to be that next two years will be critical, as the housing market continues to heat up and the impact of the pandemic continues to be felt.
“We know that affordable housing just got rocked by Covid, everything from construction, to demand for it, to the inability to buy materials,” Boos says, although she also argues that there is reason to be optimistic. “We’ve got the resources to undo that and to put us on the right course.”