In 2016, Oregon planners hoped to take advantage of a new light-rail line between Portland and Gresham, a suburban city towards the east, by developing a mixed-use community around Gresham’s rail station. The project would be a walkable transit-hub in a city otherwise dominated by single-family homes and automobiles. But Metro – Portland’s regional government that purchased the land – faced a problem. Nearly all developers rely on loans to pay the costs of construction, and very rarely have enough cash on hand to finance projects themselves. And lenders in Portland were unwilling to finance a transit-oriented development that would be the first of its kind in the region.
This issue is part of a larger pattern that prioritizes existing models of car-based development.Just as some zoning codes can make developments less pedestrian-friendly by demanding minimum parking requirements, banks often have their own set of parking criteria that can sometimes supersede that of local zoning rules. As a Street Blogs article put it: “In many parts of America, efforts to build transit-oriented, walkable communities are foiled because financing can’t be secured for projects that differ from the templates lenders have become used to since World War II.”
The Crossings at Gresham. Photo credit: Myhre Group Architects
To get buy-in from financial groups, the community had to first prove the value of the project. It was only after a coordinated education campaign by regional leaders showing the viability of transit-oriented developments without large amounts of parking that lenders eventually financed the project. The development ended up being a success with 100% occupancy and long wait lists, and has provided a valuable template for financing other projects in the region that have less stringent parking requirements or none at all.
As planners, we often interact with zoning codes, ordinances, and other public tools to (ideally) create healthier, safer, and more sustainable communities. While these tools are essential, we sometimes overlook how economic or financial systems create barriers to achieving those goals. By studying how financial markets work and understanding how banks, lenders, or other parties think, planners can have a better understanding of the barriers for good policy.
This summer, I’m working as a graduate fellow with the Development Finance Initiative in UNC’s School of Government. The group supports local governments across the state with economic and real estate development decisions. One of our current projects is to facilitate the development of affordable housing eastern North Carolina communities ravaged by hurricanes over the past few years.
Today, nearly all affordable housing developments are financed using a federal program called the Low-Income Housing Tax Credit (LIHTC), a program that has been around since 1987 and has helped produce an estimated 2.3 million affordable units. Developers rarely use these credits themselves, and instead sell them to investors or companies who wish to reduce their tax bills while using the proceeds to finance the project. But credits are rarely sold at a 1-to-1 value, and the price often fluctuates in response to investor demand. For example, after President Trump passed his tax reform bill in 2017, the corporate tax rate was cut from 35 to 21 percent. Suddenly corporations weren’t in need of tax credits, and the price of LIHTC dropped. For developers, that means less investment to cover the costs of construction. Some industry experts predict passage of Trump’s tax reform will reduce the supply of affordable units by nearly 235,000 over the next 10 years.
While subtle shifts in financial markets can have large consequences at the local level, economically distressed communities have increasingly turned to these same credit systems to spur economic development. Federal and state governments are turning towards tax credits as a way to preserve historic structures or to incentivize investment in high-poverty neighborhoods.
Luckily, a number of towns are using these tools to their advantage. James and Deborah Fallows, in their series on American Small Towns, documented the role that tax credit policies played in the revitalization of downtown Danville, Va. Like North Carolina, Virginia’s small towns have an abundance of vacant or underutilized textile mills and tobacco warehouses. Similar to the LIHTC program, Virginia and the federal government provide tax credits for the rehabilitation costs of redeveloping old structures that retain their historic aesthetic. In this case, Danville’s historic character was what made revitalization possible.
Main Street Plaza. Photo credit: City of Danville
For better or for worse, every community in the nation is increasingly affected by capital markets and the faraway investors who operate in them. Just this month, the New York Times reported that an estimated 1 in 5 starter homes are bought up by investors, leaving local families facing stiff competition in buying their first homes. As local leadership grapples with these new realities, planners should learn how to take advantage of financial and tax policies to create economic opportunity, and develop policies to protect local residents from the worst effects of global capital. Understanding how the assortment of carrots and sticks that developers and bankers used to finance projects, gives planners a better understanding of the forces that drive their communities.
Featured Image: A rendering of a redevelopment plan relying on public-private partnerships for the City of Kannapolis, NC, as developed in partnership with the Development Finance Initiative.
About the Author: Frank Muraca is a rising second-year master’s student in the UNC Department of City and Regional Planning. His interests include neighborhood change, displacement, and disaster housing. Prior to graduate school, he lived and worked in Jiangsu Province, China, writing about migrants and how changing city borders affect outlying farm communities. He’s originally from Charlottesville, Virginia, and earned his bachelor’s degree in economics at George Mason University.
Edited by Nora Louise Schwaller