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How to fund affordable housing development? 

NOW THAT the new Savannah City Council and Mayor have identified the expansion of affordable housing as a primary priority, it is time to explore ways to fund this goal. 

The good news is that there is a wide variety of mechanisms used elsewhere.

The bad news is the uncertainty of their adoption here because of two factors: limits state laws place on the ability of local administrations to raise new funds and the unwillingness of our local officials to try new approaches.

Last year, the city of Washington, DC announced they would build 86 new affordable housing units using $19.5 million in Tax Exempt Private Activity Bonds and $12 million from Low Income Housing Tax Credits (LIHTC). If raised here, the same amount of money could build more than twice the number of units. 

Other cities have created Housing Trust Funds which collect money from new market based and luxury housing developments. Linkage fees, often applied on a square foot basis, are charged to each project. Impact fees, also collected from new multi-unit projects, are justified by the expected new demand for labor and city services.

Between 2016 and 2018, Savannah approved applications for projects which created over 3,000 new market based rental housing units. Sadly, no funds were collected from these developments to help fund new affordable housing, a major lost opportunity.

States and cities elsewhere use dedicated revenue sources to provide below market capital for affordable housing development. These are usually applied to funds related to real estate transaction costs such as real estate transfer taxes and document recording fees. Vermont has used these sources for decades.

Another funds source comes from demolition taxes and condo conversion fees. When existing housing is demolished, the developer pays a tax in order to provide funding for the units lost. 

Similarly, when a landlord converts rental units to condos for sale, local jurisdictions apply a fee between 1 and 12% of the condo sale price.

A simple source of funds is general obligation bonds. The municipality sells the bonds and provides the proceeds to developers, usually non-profits, to build the new housing units. 

This is available only to cities with high bond ratings. According to Moody’s Investor Services, Savannah’s Aa1 bonds have the second highest rating possible.  Some cities must have such a bond issue approved by a referendum. 

Tax Increment Financing is another funding option. The city creates a TIF district in which the applicable projects could be built. 

The anticipated revenues from the new project(s) are used to pay back the bond issue. Here the affordable housing project has its infrastructure costs covered. 

Other cities use Transferable Development Rights (TDR), a method where developers can purchase the development rights of certain parcels within a designated “sending district” and transfer the rights to another “receiving district” to increase the density of their new development.

The underlying legal concept of a transfer of development rights program is the notion that all land has a bundle of property rights.  It is used for controlling land use to achieve more effective urban growth management and land conservation. 

Two cities provide excellent examples of how government and local organizations can fund housing development. 

In Columbus, Ohio, the Affordable Housing Alliance of Central Ohio developed a funding plan where the city contributed funds from 3-year Affordable Housing Bonds, Franklin County transferred money from a property conveyance fee, and local foundations and banks provided substantial grants. 

In Atlanta, the city raised $50 million to build 550 new housing units with much of the funding from their United Way and the Ameris Bank.  

Other actions the city can take beyond raising funds include removing density barriers, reducing parking requirements for new projects, expediting permitting, waiving or reducing fees for affordable projects, reducing or abating taxes for such projects, and implementing inclusionary zoning policies. 

The latter requires that new rental housing projects include a percent of total units be offered as affordable.

Here in Savannah previous attempts to alleviate our affordable housing shortage have been stymied by officials who claim that state laws will not allow government to raise new revenue sources. Others stubbornly hold the belief that somehow subsidizing housing encourages people to ignore their personal responsibility.  

It seems time for our new City Council and Mayor to direct their administrators to stop telling them why something cannot be done and instead help them find ways to solve the problem.  

Traditional ways of looking at housing development has not kept up with the need. The problem needs creative thinking and new cooperation among government, business, and non-profit organizations. 

cs

Kenneth Zapp, PhD, is Professor Emeritus, Metropolitan State University, and Mentor, SCORE Savannah.

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Kenneth Zapp

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