By Frank Muraca
Since its creation in 1986, the Low-Income Housing Tax Credit (LIHTC) has become the largest source of new affordable housing in the nation, supporting the development of nearly three million affordable units nationwide and over 100,000 units in North Carolina.
Each year, the North Carolina Housing Finance Agency (NCHFA) ranks applications submitted by affordable housing developers to determine which projects will be awarded tax credits. Successful projects use these credits to finance construction in exchange for keeping rents below a certain threshold for at least 15 years. Projects are scored by NCHFA using a Qualified Allocation Plan (QAP), which regulates where and how affordable units should be built. While each state’s QAP is different, North Carolina requires proposed LIHTC projects to be within a mile of a grocery store, in Census tracts with relatively low poverty rates, and project costs below $78,000 per unit, along with other criteria. These requirements have a tremendous impact on how developers choose sites for affordable housing, and subsequently on where low-income renters will live.
Between 2009 and 2019, nearly half of all new LIHTC units in North Carolina have been built in suburban neighborhoods, a 12-percentage point increase from the previous ten years, suggesting the nation’s largest tool for subsidizing affordable housing is increasingly being shifted to suburban communities.[1] One possible explanation for why subsidized housing is moving away from cities like Charlotte or Raleigh is that urban LIHTC applications are less competitive when scored against suburban applications in the QAP.
For example, if two projects tie under the 2019 QAP, the project in the census tract with the lower poverty rate will be awarded the credits. Because tract poverty rates are likely to be higher in urban neighborhoods than in suburban neighborhoods, developers may be more likely to choose sites in suburban tracts to submit for credits.
Building affordable housing in suburban communities is not a problem on its own. In fact, suburban neighborhoods, which generally have lower poverty rates and higher median incomes, often struggle to generate adequate affordable housing options for their most at-risk residents. The median income of urban neighborhoods with LIHTC projects built in the past ten years is $38,800 compared to $47,500 in suburban tracts. However, most LIHTC neighborhoods across all tract types have median incomes below the state median of $55,000.
Advocates argue that it is equally important for high-poverty, urban neighborhoods to have access to the country’s largest source of funding for new affordable units. Increasingly, affordable housing is being built or preserved through public-private partnerships that are financed in part by LIHTC. For example, the federal Rental Assistance Demonstration program (RAD), allows local housing authorities to make long-needed renovations to their public housing stock using tax credits.
There are also uncaptured costs placed on residents of suburban housing. While rents are required to be kept under a certain threshold, North Carolina’s program does not consider residents’ future transportation costs. Tenants in suburban communities are more likely to be dependent on a car to commute to work. In Wake County, nearly half of LIHTC units built in the past 10 years are over 10 miles from downtown Raleigh.
LIHTC is also an important tool for combating gentrification. Unregulated housing stock on the private market is more at-risk of speculation from those trying to take advantage of rising demand by displacing low-rent tenants in favor of new, high-rent tenants. Because projects funded by tax credits must maintain their affordability for 15 years, these units provide stronger guarantees for current residents that wish to remain in the neighborhood.
How might the QAP better encourage urban development? One way would be to alter QAP requirements depending on where projects were located. For example, nearly all LIHTC applicants lose points if project costs exceed $78,000 per unit, regardless if they’re built in downtown Charlotte or more rural counties.
Construction costs are difficult to compare project to project because of differing building heights, accessibility standards, or other factors. One way to measure differences in development costs is through the price of land. The median cost of urban land for all new LIHTC project applications over the past 10 years was $112,500 per buildable acre compared to $100,300 for suburban projects. And while suburban and non-metro applicants had relatively similar land costs regardless if they were awarded credits or not, successful urban applicants had sites with median land costs $22,000 cheaper than unsuccessful applicants.
Because the cost of land in urban neighborhoods is often higher than suburban or rural neighborhoods, the QAP could create separate categories to have projects compete on a city to city basis rather than county to county. The current QAP reserves 37% of credits for “metro” counties, which may be too large of a geographical area for inner city affordable housing projects to compete.
Through the QAP, each states’ housing finance agency is given wide authority to set the terms for allocating these credits, and is an often-underappreciated policy document in conversations on how to address the affordable housing crisis. Changes in how the QAP treats dense, high-poverty communities could allow LIHTC to be a more useful tool to create affordable housing in gentrifying neighborhoods and provide low-income renters with access to transit.
[1] Urban census tracts are defined here as tracts within the primary city of an MSA. Suburban tracts are outside the primary city but still within an MSA. Non-Metro tracts are outside the MSA.
Feature Image: The Signal Ridge development in Hendersonville, NC is part of a growing trend of 9% LIHTC deals in suburban areas. Hendersonville is in the Asheville MSA. Photo Source: Hendersonville Times-News
About the Author: Frank Muraca is a 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.