Since the first New Deal housing policies emerged in the 1930s, governments from the municipal level all the way up to the federal government have sought ways to help alleviate the lack of affordable in this country. While there have been many successes, there have also been notable missteps. Infamous projects like Queensbridge in New York City and Cabrini Green in Chicago tarnished the credibility of projects subsidized by the government for decades and continue to tarnish that credibility today.
Low Income Housing Tax Credit
Low Income Housing Tax Credits (LIHTC, or Section 42 credits as they are sometimes called) support the development of much of the low-income housing product developed today in the United States. This tax credit provides a dollar-for-dollar subsidy to investors deploying capital into affordable housing projects. When investors choose to work with this program, in return for the tax credits they receive, they must abide by rent restrictions to maintain the affordability of these projects for low-income Americans. Rent restrictions can be required to continue for up to twenty years and can wreak havoc on the investor’s ability to project a financial return on a LIHTC project.
Real estate is by definition a depreciating asset, aside from the value of the land. Any structures built will require maintenance, repairs, and capital investment over the life of the building. If you are unable to rely on appreciation in value because the property is located in a depressed economic area, then you’ll find that you have a substantial restriction on how much income that property can generate. As a result, LIHTC projects are relegated to a small niche of developers who have figured out to how to generate returns despite these issues.
For many years those working to solve low-income housing issues focused primarily on the quality of housing- there was at least some lower-tier housing in most urban areas that even the very poorest could access through market means or government assistance. With increased urbanization and the concentration of economic opportunities in cities, these affordable housing opportunities have all but disappeared. Existing residents are forced to move further and further away from job opportunities, exacerbating poverty and environmental issues caused by commuting- and all the while, slowly by surely the fabric of inner-city communities across the country is being destroyed.
Opportunity Zones may help fill the gap
One of the definitions of madness is trying the same thing over and over and expecting a different result. Developers, investors, government and community groups would do well to adopt new, market-based approaches. Channeling capital from traditional markets to these underserved communities in a responsible way may help to reduce the affordability crisis in ways that government initiatives have failed.
A much talked about solution that has been underway since 2017’s Tax Cuts and Jobs Act is the use of Opportunity Zones. These zones (8,000 of them) offer investors tax benefits for investing in designated Opportunity Zones, which are economically depressed regions that have suffered from a lack of capital flow. While LIHTC projects have rent restrictions, Opportunity Zone investments have no such limitations. Investors can invest in market-rate projects that are not hamstrung by onerous rules and regulations that so often come with government-led housing development.
Despite the not-insignificant issues that may arise as a result of public-private partnerships, there is incredible value to be created by working hand in hand with government to solve housing issues. Previous efforts that failed to take market forces into account unfortunately had predictable results. With Opportunity Zones and other such market-driven approaches, we can hope to see a greater reduction in housing insecurity in the years to come.
Image Cabrini Green Demolition, by Joe M500, CC BY-2.0