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In light of all the challenges I've described in Part I, here are some thoughts about what we might do to address them and enhance the development of more affordable housing in California.
1. Create California State Bank
The state of California and every other state is presently being ripped off by major money center banks. Our state has approximately $600 billion in deposits in those banks earning next to zero interest. Yet, if we go to Wall Street to sell debt to fund public projects or government operations, we’re charged usurious interest rates and underwriting fees. As a result California is hurting but Goldman Sachs is doing just fine.
California is now tied with France as the world’s 5th largest economy. It’s time to start acting like it. North Dakota, one of the least populated states in the country, has a public bank. And guess what? It’s highly profitable from making loans to businesses, farms municipal projects, home mortgages and student loans in North Dakota.
Unsurprisingly, Wall Street hates the idea of a California public bank, which is probably all the more reason we should be pursuing it. For an in-depth discussion on this subject, please see the Los Angeles Times article by Jonathan Tasini.
2. Create Separate California State Low Income Housing Tax Credits
The Low Income Housing Tax Credit (“LIHTC”) program has been the most successful and biggest financial inducement to creating affordable housing since it was first introduced in 1986. It is estimated that LIHTC’s are involved with almost 90% of all low income housing built.
Tax credit allocations for the LIHTC comes from the federal government but are granted and administered by a state agency in each state. States like California also have their own LIHTC in addition to the federally funded credits.
I misstated the title of my presentation comments on Low Income Housing Tax Credits and created some confusion. Whereas my notes read, “Create Separate State Low Income Housing Tax Credits, I believe I omitted the term “separate” in my remarks, for which I apologize.
Let me explain why that is significant.
As it stands, qualifying low income housing projects can apply to receive an allocation of tax credits from our state agency, the California Tax Credit Allocation Committee. About half of those funds are from the federal sources and the other half from the state. Qualifying developers can then sell those tax credits to corporations or other investment entities to help fund their project costs.
The problem, however, is that in order to be eligible to receive state tax credits one has to qualify for federal tax credits, first. This creates federal bias on allocations. Whereas all government funding is subject to political influence and lobbying, in Washington DC, they have elevated this to an art form. Federal allocations, therefore, favor larger projects, bigger developers (with high paid lobbyists), and those that align with HUD’s wish list. The other difficulty in relying on federal tax credit approval is that very few smaller developers have the legal or financial wherewithal to play in that game.
I think we should separate state approvals from federal approvals.
In addition to needing a federal allocation first, the operational requirements and length of the state and federal credit grants also do not match. California credits are for 4 years, while federal credits are for 10 years. The federally required compliance period (how long it has to remain affordable) is 30 years. The state requirement is 55 years. Both of these create extra processing costs and financing obstacles that should be eliminated by aligning California’s requirements with federal requirements.
If we separate the granting of state tax credit grants from federal grants, the only difference would be that we would have to do more due diligence, since we could no longer always rely on the federal application process to vet projects. However, if we also move the application and granting approval process from Sacramento to local agencies, and provided local funding to do so, those are transferred from the state level to the local level, where I believe the process will be more efficient and less costly.
My proposal then would be to (1) change the terms requirements for California LIHTC to align with the federal terms of 10 years of credits and a 30 year compliance period to make project financing easier for developers to obtain; (2) separate the review and the allocation of California low income housing tax credits from the federal process (as required when the local agencies want to grant credits to a project that doesn't have federal credits), so that qualifying for both would be optional and, (3) transfer the California LIHTC application, review and granting process to local cities and counties, which would have credit allocation capacity proportionate to their percentage of state population.
I believe this would result in more small projects being developed, more projects that are targeted to serve local needs and more projects that better reflect the character of local communities. These changes would also finally give local government an incentive “carrot” to entice developers to build the kind of affordable housing they want, where they want it
3. California State Co-Insurance for lenders on Affordable Housing
Current affordable housing financing methods rely heavily on direct federal and state lending. We also presently have state agencies, such as the California Housing Finance Agency, housing trusts and other state and local agencies making lower interest rate loans for affordable projects, and community development finance banking requirements obligate private banks to make loans to development that benefits communities, but their funds are limited.
We also fund affordable housing through direct subsidies and grants with “un-leveraged” taxpayer funds. Having nonprofit status is often a prerequisite to obtaining that funding, which limits eligible developers and their projects, particularly small, local ones. Instead of this mostly un-leveraged approach, where local grants are dependent upon dollar for dollar participation by donors, foundations and agencies, we could enhance funding options for owners of small, infill properties to help them more easily qualify for financing.
Co-insurance would be a layer of construction loan and mortgage loan insurance that would be offered to private lenders, by a state fund or shared pool of municipal funds if those lenders agree to finance low income and affordable projects. The lender's downside losses would be limited.
With co-insurance in place, private lenders could also be allowed to reduce loan to value requirements for qualifying low income and affordable housing development that has been approved for tax credits.
4. Adjust the Tax Free 1031 Exchange Rules
The Section 1031 tax free exchange rule in real estate is heavily used by investors. It allows owners to exchange appreciated investment property for “like kind” property in order to avoid capital gains taxes on increases in value. This applies to both federal and state income taxes. Its purpose is to add liquidity to the real estate markets and encourage re-investment.
It would be beneficial if investors were able to apply that provision to exchanges of “non” like kind properties (i.e., personal property, securities, etc.) if the property one was exchanging for was affordable housing (new or existing).
This adjustment in the tax code could also include extending the time period allowed to identify the property being exchanging for, which is currently only 45 days. Since affordable housing development typically takes longer to gain approvals than market rate development, it would help to have that extended. Or, add other kinds of special provisions to deferred "non-like" kind exchanges using intermediaries, which make trading into affordable housing development more attractive.
I realize this one is a lot easier said than done, and although it could be done immediately regarding California tax law, it would likely require some kind agreement or waiver from the IRS in order for it to work well for investors (since their major tax burden would be federal). However, this really should be explored and it might even find support in Washington because this is such a nationwide issue and it is essentially revenue neutral, because the trade will likely happen anyway just not into affordability.
Tweaks such as this, could bring significant capital into affordable housing development, at essentially no hit to government revenues.
5. Enhance State Charitable Deductions for Affordable Housing
California has the distinction of having the highest income tax rates in the country. Our top rate is 13.3%. Oregon is a distant second at 9.9%. This negative can be turned into a positive with regard to affordable housing. The state could increase or otherwise enhance the allowable tax deductions for charitable gifts made for affordable housing equity grants, land trust creation or other such donations.
Again, every piece helps close the gaps that make a project “pencil” for developers and lenders.
6. Consider State Supplemental Section 8 Vouchers
With costs savings achieved from agency downsizing, California could consider funding its own Section 8 vouchers to help close the rental cost gap between federal fair market rents and actual market rents people must pay in the San Francisco Bay Area and in other high priced regions.
The voucher administration agencies are already in place. All that is needed is a formula to spread the benefits equitably throughout the state.
7. Let affordable housing types be set locally
As it stands now, most of what defines what is or is not “counted” as affordable housing is set by federal, state and regional agencies. The problem is that in many cases the rationale for what is statistically supposed to be needed doesn’t correspond well with what is actually needed.
For example, West Marin has a particular need for agricultural worker, low income co-housing. East Marin has more need for “active elderly, move down” housing and affordable housing tailored to young singles and young couples coming here from more urban environments. Their preferences may be for lofts or other alternative housing types, not just traditional one or two bedroom units. However, if state mandates keep score by how many one bedrooms and how many two bedrooms get built, it doesn’t really address the needs.
We would be better served by finding more ways to empower locally elected governments and give them tangible, financial incentive tools to let them determine where and what kind of affordable housing is needed.
I believe economically, socially and environmentally sustainable solutions have to be locally driven and locally enabled to succeed. The changes I’ve presented could help pull significant private capital into affordable housing development, which would otherwise go elsewhere. That could create tens of thousands of housing units across the state.
Yes, the cost benefits of all of these ideas need to be carefully analyzed and weighed. But, I doubt they compare with the present costs of running our ever-expanding state and regional agencies, and their growing staffs and pensions and benefits liabilities.
Development based on private investment creates jobs and increases state and local tax revenues. Adding staff and building agency facilities are just expenses, which are often of dubious value (as is the case with MTC’s new headquarters).
Finally, we need to face the fact that our representation and voice in regional and state planning is diminishing by the day. Almost weekly, someone in Sacramento proposes yet another way to add punitive development fees and wrest local zoning and planning control away from cities and counties. It has only been the protections of the sovereignty of locally elected governments in the State Constitution that have stood in their way.
However, local control appears to be a losing battle. ABAG, which is presently our only representative voice in regional matters, will soon be a hallow shell and all its planning staff and whatever decision making input it had will be swallowed up into the Metropolitan Transportation Commission, an unelected, black box, state agency.
With the demise of ABAG and absorption into MTC our opinions on regional planning matters will silenced.
My suggestion is that we take action now. I would suggest that our locally elected leaders use the Marin County Council of Mayors and Councilmembers as a platform to create a new North Bay Council of Governments: our own version of ABAG but better suited to represent the concerns of our three North Bay counties, Marin, Napa and Sonoma, which have a decidedly different character and different challenges than our more urban southern neighboring counties.
I think that planning grounded in local control and enabled by the kinds of new state policies I’ve proposed, have the potential to address affordable housing needs more quickly and more effectively than present methods.