Why it’s hard to build affordable housing

“It’s as hard as doing a triple twist off a high dive.” That’s how one Washington region developer described building affordable housing. I recently attended a forum on how, exactly, affordable housing gets built and what the hurdles are, and what I learned is below.

The DC region is in the midst of an affordable housing crisis. In DC, from 2005 to 2015, rental units doubled but most of these cost more than $1,500 a month, which does not alleviate the burden for individuals and families making less than 50% area median income (AMI), the standard by which cities determine how much an individual or family of four can afford to spend on housing based on income.

Even though DC increased its supply of affordable housing in 2016, it isn’t out of the woods: The District has committed $100 million to affordable housing projects but estimates that at any given time, 5,000 families are at risk of losing their homes due to rising housing costs. Meanwhile, parts of Northern Virginia, such as Arlington, may lose all affordable market-rate housing by 2020, coinciding with a decrease in the amount of homes set aside for lower income residents.

There are numerous challenges to building affordable housing, including tight competition to purchase land, the region’s high cost of living, the friction between scarcity and high demand, applying for tax incentives, finding partners, and government regulations.

Three affordable housing professionals discussed these issues in November, as the Urban Land Institute continued its educational series, Real Estate 101, with a panel in Logan Circle on Housing Affordability. The panel was comprised of Nina Janopaul, the President and CEO of the Arlington Partnership for Affordable Housing (APAH), a nonprofit focused on building affordable housing; Matt Birenbaum, the Chief Investment Officer of AvalonBay Communities, a real estate developer; and Winell Belfonte, a partner at CohnReznick, an accounting firm that advises nonprofits and developers on financial matters.

Land is expensive and it’s hard to get federal funding for projects that include market-rate units

APAH focuses on building housing for residents who make between 30% and 60% AMI. To do this, Nina Janopaul said, APAH buys land, develops it with private partners, and looks out for existing properties it can renovate to improve living conditions for the residents already there.

There are a number of challenges to making this happen. One is the cost of buying land. Janopaul said that APAH is always looking for opportunities to purchase land that can be used for housing development, but that it faces tough competition from private developers and many land owners want to close the deal quickly, which requires APAH to maintain more liquidity up front.

Another reason affordable housing is so tricky is that the federal programs are not set up for mixed-income housing, Birenbaum said. Mixed-income housing is a development with a variety of units priced at different affordability levels. Some may be market-rate (no subsidies), others may be workforce housing (those who can’t afford market-rate, but aren’t considered low-income), and some may be low-income affordable housing.

Middle-income housing (also called workforce housing) does not currently qualify for tax credits. This makes it more difficult to get financial support for projects in expensive areas like the DC region because developers need to pay more for construction.

Belfonte said that many developers only break even when they build affordable housing, which makes every dollar coming in from rent even more important for sustaining the quality of services and amenities, as well as the building infrastructure.

In September 2016, Senator Wyden (D-OR), one of the heads of the Senate Finance Committee, introduced legislation to provide tax credits to building middle-income housing. The legislation’s fate will likely be decided in the next administration. Additionally, it can be difficult to obtain the right combination of affordability to ensure apartment buildings can sustain themselves financially.

Maintenance costs never go away

After construction is complete and residents move in, there is still the challenge of maintaining the building. Construction costs and maintenance costs are connected. Janopaul said that APAH uses higher quality materials so the cost of repair and replacement go down, and Virginia state regulations are designed to ensure affordable housing is not built or refurbished poorly and with low quality materials, which can contribute to higher construction costs.

If a building can’t maintain occupancy or costs rise, maintenance may suffer because there is not enough revenue coming in to cover those costs.

Developers lean heavily on tax credits to build affordable housing

Affordable housing is as much a juggling act as it is a delicate process of shifting money and resources to achieve better quality of life and housing for DC area residents.

Nonprofit organizations, such as APAH, need to have strong financial infrastructure in order to accomplish their goals and developers rely on a healthy real estate market in order to build mixed-income neighborhoods. During the recession housing development in DC dropped significantly (only 700 units were built from 2008 to 2010) even though there was high demand. It is riskier to build new developments during times of economic uncertainty and it may be more difficult for developers to secure financing.

CohnReznick, Belfonte’s firm, also works with developers and nonprofits such as APAH to find and apply for tax credits that can reduce the cost of construction.

Nina Janopaul said that tax credits, which are available at the federal and state level, are typically determined through self-scoring the qualities of a particular neighborhood or plan, such as using environmentally-friendly materials, to collect points; the points add up to a certain level of tax credits that can be granted.

Points are assessed using the Qualified Allocation Plan, which is a document provided by state government to outline how much funding will go to low income and affordable housing projects.

Belfonte, who specializes in the financial side of affordable housing development, said that projects always include partnership agreements that lay out the terms for developers and other partners. These documents outline the amount of money that will be contributed by each party and deadlines for work. Partnership agreements are vital for not only clarifying the roles and responsibilities of each party involved in bringing a project to fruition, they help organizations gauge their own risk and help determine how revenue is divided at the end of the partnership.

What’s in store for affordable housing in our region?

Affordable housing is in Arlington. In 2015, Arlington County committed to building 15,800 affordable housing apartments over the next 24 years, with a plan of having 22,800 total affordable housing apartments by 2040.

It’s also a priority in DC. In September 2016, DC committed $7 million to preserve affordable housing in Wards 7 and 8 and will preserve units in Ward 4, and is on pace to build 8,000 affordable housing units in the future.