By Lisa Sturtevant, PhD
Local funds are critical to the financing of affordable housing. The combination of bank financing and tax credits will always leave a gap in high-cost markets like the Washington, D.C. region. As a result, very- and extremely- low income housing communities are most in need of a wide variety of gap funding. Federal resources, including CDBG and HOME funds, are frequently used to partially close that gap, but in recent years many jurisdictions have seen cuts to these financing tools. Locally-generated funds have become increasingly important to help bridge the financing gap, and are becoming a growing component to affordable housing funding, overall. In fact, several jurisdictions within the region—including the city of Alexandria and Arlington and Prince William counties—generate more than half of the current public funding for affordable housing from local sources.
There are hundreds of local housing trust funds and other mechanisms that direct local resources to affordable housing projects in communities all across the country. But in this time of limited resources and growing need, where is the innovation in local funding of affordable housing? What are new local sources? How have communities forged fresh partnerships to develop local funding sources? And what are the best practices for efficiently allocating limited local resources?
New resources. Common sources of funding for local trust funds include dedicated portions of deed, recordation and/or property taxes, developer contributions and loan repayments as well as general revenue. These are used to leverage other resources—particularly low income housing tax credits (LIHTCs)—to create affordable units for lower income households.
All of the major jurisdictions in the greater Washington D.C. region have local resources for affordable housing. However, no jurisdiction reaches the level of local funding that is sufficient—even when combined with other federal and state resources—to meet the development needs of households in need.
Yet, there are innovations on the horizon.
One of the newest local sources of funding for affordable housing in high-cost markets is a tax on short-term rentals, sometimes known as the Airbnb tax. The rise of Airbnb—the online resource that connects people with short-term rentals—has led to discussions about whether this new approach to lodging could actually be making housing affordability worse in some high-cost cities. In response, communities have begun taxing owners of Airbnb properties and directing that revenue to affordable housing. In December, the city council in Portland, Oregon decided to dedicate the estimated $1.2 million dollars that the city will collect from taxing short-term rentals to affordable housing. Remarkably, this revenue will actually be the sole source of dedicated funding to Portland’s local housing trust fund. Other communities that have instituted this kind of tax on short-term rentals include Anaheim, Long Beach and San Francisco in California; and Columbus, Ohio. Oakland is debating instituting an Airbnb tax, as well.
Regionally, the District of Columbia began collecting taxes on Airbnb properties in early 2015. The short-term rental tax could result in millions of dollars of revenue for the city over time. However, that revenue is currently not dedicated to the city’s local affordable housing trust fund. There are no well-publicized efforts in either northern Virginia or suburban Maryland to explore a similar tax.
Pioneering partnerships. The possibility of generating more funding for affordable housing through increased taxes is often limited. As a result, a new paradigm for creating financing is needed. Philanthropic organizations have long played a part in funding programs and services that help create opportunities for better housing and neighborhoods. In New York City, foundations play an outsized role in providing bridge financing to developers of affordable housing projects. Foundations are also active in our area. In 2012, 29 private foundations awarded $33.4 million to housing organizations in the Washington DC region, with the funding largely serving homelessness prevention programs and supportive housing services. In this space, national foundations have been more likely than local organizations to partner with large housing and community development organizations on targeted, large-scale projects.
Philanthropic organizations, private companies and the public sector have also recently begun working in partnership to use social impact bonds for housing-related investments. A social impact bond, also referred to as a “pay for success” bond, involves a process where local governments work with an intermediary to raise capital from investors—banks, foundations and others—to support a particular social program that has well-defined goals. Investors are repaid only if -and when – those goals are achieved. Theoretically, the local government will also gain a net public savings as a result of the program.
The use of social impact bonds for affordable housing has been fairly limited; and where they have been used, they have focused primarily on homeless services programs. For example, in Denver a social impact bond program helped provide services to chronically homeless individuals, and in Cuyahoga County, Ohio one was developed to fund a program geared towards keeping children of homeless families out of the foster care system. At present, there do not appear to be any large-scale social impact bonds being used to help finance the development or preservation of affordable homes, even though the model suggests there is potential for this application.
In our region, the Washington Regional Association of Grantmakers has teamed up with Enterprise Community Partners to develop a new approach to generating resources to invest in local affordable housing. Individuals and organizations can invest in the Enterprise Community Impact Note and those investments will be used to help finance the creation of affordable housing. Investors will receive a fixed-rate of return and will also receive regular statements about the social impact of their investments. The goal of the new fund is to raise at least $5 million to help build affordable housing throughout the region, and will reflect a truly innovative way of raising capital.
Efficient allocation. Due to the limitation of affordable housing resources, local governments are exploring options to distribute funds from their housing trusts that will create the greatest opportunities for new construction and preservation. And, they are also looking for ways to support the overarching housing goals of their jurisdictions. While not necessarily novel, designing a notice of funding availability (NOFA) process can help local jurisdictions evaluate and improve the way in which they use locally-generated affordable housing funds. A formal NOFA process can encourage competition for funds that can lead to better leveraging of local resources, help ensure the local jurisdiction is meeting strategic goals and increase transparency in the funding process.
The city of Los Angeles has a well-developed NOFA process for its local affordable housing trust fund. It includes a master calendar for distributing local resources and a detailed description of the goals that are important to the city when funding affordable housing projects – such as location and size of the project, the population to be served and the experience for the developer. The city of Portland, Oregon has also developed a NOFA process for allocating not only local resources, but also public land to be used for affordable housing. Their NOFA is designed to be clearly aligned with the city’s strategic goals of equity, stewardship, transparency and innovation.
Locally, the District of Columbia recently overhauled its process for awarding funds from the city’s Housing Production Trust Fund. Among other criteria, the city’s NOFA includes requests for proposals of affordable housing projects that are affordable to very- and extremely- low income households, including units that will be reserved as permanent supportive housing.
Arlington County is in the process of developing a formal NOFA process for its locally-generated Arlington Housing Investment Fund. While the County has always had funding guidelines, a formal NOFA will streamline the funding process, better publicize the funding criteria and the total amount that will be distributed, and create a specific application deadline (as opposed to having rolling funding decisions). As part of this process, the County is updating its criteria for funding and developing a general scorecard to evaluate projects that align best with the goals and objectives of Arlington’s recently-approved housing plan.
Locally-generated resources are becoming increasingly important for supporting the development and preservation of affordable housing, particularly in high-cost areas like the greater Washington DC area. Looking for ways to find new sources of local resources – and how to more efficiently use existing resources – is the direction many progressive local jurisdictions are headed. This innovation on the funding side is, of course, only part of the equation and local jurisdictions should continue to look for ways to reduce the overall cost of affordable housing development and build the capacity of local affordable housing developers.