Financing Affordable Housing in the Era of Post Redevelopment Agencies

Financing Affordable Housing in the Era of Post Redevelopment Agencies
By Russ Watson – December 6, 2013

Since the elimination of California’s redevelopment agencies in January 2012, and the subsequent loss of tax increment revenues dedicated for the purpose of creating and preserving affordable housing units, affordable housing developers have been challenged to obtain financing necessary to build new affordable projects.

Redevelopment agencies provided an essential local source of funding for affordable housing projects; funding that was used most effectively in the early stages of project development (i.e. site acquisition, pre-development expenses, etc.) and again at the end of the project funding process, often providing the funds necessary to “fill-the-financing-gap.” This local source of funding had been just one of many layers in the financing process required funding projects, yet its importance in assisting the project as it relates to award of 9% tax credits can not be understated.  Often it is the amount of public dollars committed to a project that are critical in assessing breaker points necessary to win award of the tax credit investment.

Many affordable projects presently being developed, or recently completed were already far along in the development planning or entitlement phase before RDAs were eliminated.  Many had their financing commitments in place as well.  The question in funding future affordable housing projects is how will local governments be able to assist, in meaningful ways the developer of affordable housing projects?

With the end of redevelopment agencies, and successor agencies assuming control over former redevelopment ‘housing assets’, the long-term management of these assets will provide new opportunities for revenue.  “Assets” include encumbered cash reserves (earmarked for projects) and real property held for future development, and future income generated from the repayment of outstanding loans.

Over time revenues coming from housing assets may represent a substantial dollar resource available to be allocated for other affordable projects. However, the reality is, revenue from housing asset resources will not replace the previous annual deposits made into the “mandated” Low and Moderate Housing Fund L/M Fund.  Unfortunately the revenue generated from the assets will not see the growth each year in the amount of funds available to dedicate for housing as was with the former redevelopment tax increment revenues.  Additionally, in many cases the demand for expenditures of these funds includes staffing expenses to administer remaining housing projects and programs.  This means even less fund available to fund projects.

What are the alternatives available to support the production and preservation of affordable housing?  As noted, there may be opportunities for cities to manage or leverage their housing assets in ways that create a steady stream of income.  Some communities have housing fund resources generated by the payment from developers in-lieu of actually constructing affordable housing, or they have adopted requirements that developers of retail and industrial projects pay an impact fee, based on the impact of housing new jobs created by that project.  In-lieu and impact funds are typically deposited into a local housing trust fund that has been established.  Many cities are now reassessing the amount of the fee required to be paid and some increases to the fee amount have been imposed, recommended or currently under consideration.

Local governments may also need to seriously look at ways to reduce costs (fees/permits/design standards, etc.) to accomplish savings to the project.  This is somewhat a double-edged sword in that reductions of fees typically impact the communities’ general fund and the possibility of further raising neighborhood opposition if design standards are compromised such as reduced parking standards equating to more demand for on-street parking spaces or the lessening of architectural esthetes, etc.  If neighborhood opposition is expressed for the project itself, local governments consessions to help reduce development costs and increase affordability will simply add fuel to the fire.

Some communities have seen an increased use of density bonus law authority to assists developers in making affordable housing projects pencil.  The ability to use density bonuses is well grounded in legislative authority, but again often creates more public opposition to specific projects, citing the project as creating negative impacts in the community.  State housing policy is still somewhat unclear on this matter as the Governor recently vetoed legislation (AB 1229) that would have provided more authority in the use of density bonus.  Finally, SB 391 (introduced during 2012 ) will be revisited in the 2014 legislative session, and if approved would provide the State a permanent funding source for affordable housing by adding a fee to the recordation of certain document.

Established funding sources such as tax credits application and awards require a larger amount of local funding match to win tie-breaking scoring techniques.  Designing affordable projects by score-card will likely produce housing projects that serve lower income and special needs populations, but may not produce sufficient affordable housing units to meet the needs of moderate income or workforce segments of the population.

California has not met housing production needs for several decades.  These problems are also exacerbated by cuts in federal and state programs that assist affordable housing. Many affordable projects may be lost as their conversion period nears and end and there are no funds to ensure that the affordability is continued.

It is likely a combination of change and funding resources that will be needed to support the production of new affordable housing projects. Some changes in product design, approval process and development regulations may be required, coupled with a more streamline funding procedure for use of tax credits and other state and federal funding programs.  Finally, with the loss of redevelopment agencies, over time local governments may see an increase in property tax revenue that could be set aside in an effort to assist future affordable housing projects if the local agencies wish to prioritize this money for housing purposes.

The challenges to produce affordable housing remain significant.  Construction costs are not necessarily “affordable” and the social service programs offered to residents further increase the true cost of affordable housing.  The question remains…what can local government do to promote the development of more affordable housing?

There is little question that most communities need additional workforce-available housing to meet current and future local employment needs. Vision Economics is available to assist local jurisdications in implementing the alternative funding approaches related to workforce available housing.  Please give us a call at 805-987-7322, or Russ Watson directly at 916-217-5997.

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