Economists are people who are too smart for their own good and not smart enough for anyone else's. ~ Anonymous
On Monday, June 18th, I received an email announcing the “results” of a major forum held by the Marin Economic Council in May of this year. It purported to be a gathering of Marin’s best and brightest to yet again attempt to tackle the Marin “housing crisis.” So, what was the result?
In a word, nothing.
The “news” letter spent most of its ink telling us what we’ve been told and read at least 10,000 times over the past five years in every other newspaper, blog, government report, and “study.”We have a housing shortage. Housing prices are very high. We have a lot of traffic. We care about housing and social justice and the environment. We have to do something about it!
Wow, it really took all those people all that time and energy to realize that?
They lamented that 65% of our jobs are filled by workers who have to commute into Marin. But, they failed to mention that close to 70% of Marin residents have to commute out of Marin to get to work (mostly to San Francisco and the Peninsula) -- a fact that Dick Spotswood has written about at length. In fact, as Dick has pointed out, Marin actually has the best in migration to out migration balance of any of the nine counties in the San Francisco Bay Area.
They urged us to be concerned because…
“These commuters fill important jobs we all rely on at local hospitals, schools, banks, hotels, salons, restaurants, parks, fire stations, theaters, car repair, and every other service and management job you can name.”
But, they only tell us one side, as if somehow all the commuters who go to work in San Francisco and elsewhere to jobs running large corporations, banks, retail chains, transportation and manufacturing companies, underwriting municipal bond financing, running hospitality companies or major funders of arts and education are unimportant.
The Marin Economic Council alerts us that “workforce housing” is drastically needed because…
…”costs in Marin are so high that a working couple making a respectable combined living up to $150,000, which is 66.8 percent of Marin’s population, struggle to purchase or afford market-rate housing and do not qualify for affordable housing based on the area’s median income (AMI) level.”
Meanwhile, they are forgetting that homeownership rates in the U.S. has been relatively stable in the low 60 to 63 percent range since the 1960s and that the SF Bay Area and Marin have recently adjusted to a slightly lower ownership rate of about 59 percent, which has been true of more upscale areas of major cities on the East Coast for half a century.
They claim that…
“our housing shortage is largely responsible for the high inequity we have between whites and under-represented groups.”
But, this disregards the fact that equal opportunity to jobs and a living wage, equal access to education and healthcare and healthful food choices and parks and open space, and freedom from fear of crime and so many other social factors create disadvantages for those groups so that they cannot earn enough to even consider owning a home. The Marin Economic Council’s myopia doesn’t consider that these other factors so far outweigh the problem of housing shortages that it’s almost insultingly elitist for them to even claim it is the main problem.
We need to ask ourselves, is lack of housing “responsible” for inequality or a symptom and result of it?
More of the same
Why was astrology invented? So economics would seem like an accurate science. ~ Anonymous
So, after all their expressions of grief and high-minded hopes for a bright future, in their report, what did the Marin Economic Council come up with as a solution?
“We recommended the county and cities consider the benefits of a new economic development tool, an enhanced infrastructure financing district (EIFD), that is currently being touted by the California Economic Development Association. An EIFD uses a tax increment financing model to generate needed investment and is a work-around to achieve what was accomplished under the former redevelopment agency programs that Governor Brown abolished in 2012.”
Remarkable. All that effort and all they can think of is “tax and spend, tax and spend” -- yet another layer of government bureaucracy, more planning regulations, more fees to pay, more regressive burdens on those most in need.
Don’t these people ever get tired of hitting their head against the same old wall?
For all of their hand-wringing about dire consequences and lecturing about our need for robust growth and equity, they seem to entirely miss the biggest truth staring them in the face. We don’t have a “housing” affordability problem of its own. We have an “affordability” problem, in all things in all ways.
Face some facts: Americans, on average, are getting poorer for the last 30 years, except for those who own assets and receive revenues from those assets and those who by luck and circumstance find themselves in industries or with skills that are benefiting from technology and the greatest economic disruption since the Industrial Revolution. Add to that, an overload of entrepreneur discouraging regulations and a U.S. tax code that currently heavily favors financial capital over human capital and you have a perfect storm.
Does it ever occur to all these experts that these facts greatly overwhelm the theoretical benefits of yet another tax wasting legislative scheme, all of which work against private capital formation – the fundamental backbone of our economy.
This is not a solution.
What we are refusing to acknowledge
The methods and systems that were put in place during the 1930s are not going to address the challenges of the 21st century. That fact is true for ideologies on both the far right and the far left. With regard to the need for affordable housing and many other tragedies of the commons, the answers do not lie in the tax and spend model.
The current lack of housing production is not an economic problem. It is essentially a financing problem, a liquidity problem, an investment return problem. Things just don’t “pencil.” If we accept that as a more realistic premise, it’s easier to look for solutions.
The world is awash in money. So how can we find ways to attract more of that private capital for public good? I’ve written about this extensively in the past year, but to summarize some of the more obvious things we could be doing:
Create a California Bank
California is now the world’s 5th largest economy. It’s time to start acting like it. North Dakota, which has a population of less than the city of San Francisco, has a state bank. It’s highly profitable from making loans to businesses, farms municipal projects, home mortgages and student loans.
Unsurprisingly, Wall Street hates the idea of a California public bank (because they have about $700 billion of our assets there), which is probably all the more reason we should be pursuing it. For more discussion on this subject, please see the Los Angeles Times article by Jonathan Tasini.
Change the 1031 exchange rules to allow “non-like kind” transfers
Turn lemons (California’s high tax rates) into lemonade (deferred taxes). The Section 1031 tax free exchange rule in real estate is heavily used by investors, who can 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 exchange “non” like kind properties (i.e., personal property, securities, etc.) if the property one was exchanging for created affordable housing (new or existing renovation).
This adjustment in the tax code could also include extending the time period allowed to identify the property being exchanged for, which is currently only 45 days, since affordable housing development typically takes longer to gain approvals.
Done correctly, this could free up billions of dollars for affordable housing development (i.e., young, YIMBY, tech stock billionaires could put their money where their mouth is and exchange stepped up basis stock for housing investments and defer all taxes on the transaction).
Separate the California State Low Income Housing Tax Credits from the federal LIHTC and make the allocation process locally based
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 administered by a state agency in each state. States like California also have their own matching LIHTC in addition to the federally funded credits.
As it stands, qualifying low income housing projects apply to the California Tax Credit Allocation Committee. However, 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 tend to overshadow local criteria and needs. 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. This leaves Marin’s small cities at a disadvantage.
With some minor adjustments, separating state approvals from federal approvals has significant advantages. Then, by transferring the determination of who gets tax credits to local agencies on a population basis, we can finally give local government the “carrot” they need to direct development to maximize public benefits.
Stop giving grants to individual housing projects: insure debt
Leverage is the lifeblood of real estate development. Leverage, in a sense, is a form of subsidy. Un-leveraged “one-off” investments are a waste of public assets and limit positive impacts. We have to stop thinking that companies like Resources for Community Development in Fairfax -- which is purported to hold assets worth a half a billion dollars and which just received over one million dollars in Marin County grants funding -- actually need taxpayer’s money to cover their equity shortfalls, when they could pledge other assets to accomplish this.
It’s time for governments to stop directly giving developer’s money, altogether. Instead, we need them to invest for reasonable returns and insure debt to enable developers to qualify for private capital investment and loans. It’s time to get smart and stop working under the 1950s model of low income housing.
Publicly funded debt insurance by a state fund or shared pool of municipal funds could be offered to lenders if they agreed to finance low income and affordable projects. The lender's downside losses would be limited and after all, if they are funding a project that is approved for Section 8 subsidy, their tenant waiting list is all but guaranteed. So, how big is the downside for the insurer compared to a grantor? This type of insurance would reduce loan-to-value requirements for qualifying low income and affordable housing development.
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.
Stop trying to tax major corporations to fund housing: incentivize investment
The idea of penalizing major employers to fund city agencies who are ill-equipped to become competitive housing developers is one of the dumbest ideas to come along in a while. It’s clearly a sign of the desperation of small minds. Wouldn’t it be better to find ways to attract all that private capital?
In addition to and in concert with the suggestions above, existing Program Related Investment provisions of the IRS Code allow nonprofit entities to invest equity in affordable housing development and reap returns on those investments tax free. These regulations have been on the books for more than 50 years and have enormous potential to attract capital, particularly in places like the SF Bay Area, where taxes are so high.
Once again, stock with appreciated value can be donated to nonprofit entities (avoiding taxation and resulting in a donation tax deduction), which can then invest, lend or otherwise leverage its funds into affordable housing development projects and reap returns. Those returns and equity holdings in completed projects can then continue to be leveraged and reinvested in future development. These tools remain greatly under-utilized.
Just do it
An economist is a man who, when he finds something that works in practice, wonders if it works in theory.” – Walter Heller
In the 25 years I’ve been following the California housing challenges, I’ve yet to hear anyone talk about any of the important financing tools I've described.
Why is that?
Endless studies and conferences and workshops and lectures and for what? The lack of creative thinking is mind-numbing. The Marin Economic Council can hold events till the cows come home and they will not change anything. Tax and spend. Sticks instead of carrots. Where is it getting us?
Time to try new things. Time for bold thinking. Time to risk failure, which is the only way to succeed.
Yes, the overwhelming national and increasingly international backdrop of inequity and bad decision making will not be solved on the local and regional level, and social injustice will remain a challenge no matter what we do.
But, in the meantime, shouldn’t we start doing something that works?
 U.S. Census
 For more on this, please see Desperately Seeking Solutions in a Soundbite World.
 Watch for more on program related investments in a future article.
Bob Silvestri is the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded only by individuals in Marin and the San Francisco Bay Area. Please donate the CVP to help us continue to work on the public's behalf. We want to thank all our donors for making our efforts possible.