Tag: AMI

The role of tax credits in affordable housing

By Gary Bennett and Hugh Gordon

This articxe appears in the Opinion section of The Frederick News-Post on Saturday, August 3, 2024.

How do moderately priced dwelling units actually get built in Frederick? The short answer: It’s not easy.

It takes a lot of players coming together to make these units happen. The prices of land, material, labor costs and building fees force developers to concentrate on market rate developments to turn a profit.

All you have to do is drive around Frederick County and see all the “From the $500,000s” signs and $2,500 monthly rent ads to see this is so. Even though city and county ordinances encourage developers to build moderately priced units, many are not built because of fiscal realities.

For the last three decades, when these affordable units do get built, the federally funded low-income housing tax credit (LIHTC, pronounced “Li-tech”) has been the driving force. It is a rare congressional bipartisan success story. It finances about 90% of all affordable developments nationwide.

But these tax credits are limited, and getting one is an uncertain and highly competitive process for developers.

And, the kicker is that counties and municipalities like Frederick have little say in them. Our local governments can sweeten the pot with things like impact fee exemptions, negotiated taxes and deferred loans, but they only hear about these affordable projects when the developer approaches them for a letter of support during the competitive process.

Here’s how LIHTC works:

Federal tax credits are allocated to state housing agencies by a formula based on population. Each state agency, including Maryland’s Department of Housing and Community Development, establishes its affordable housing priorities.

Developers then compete for an award of tax credits based on how well their project satisfies the state’s housing needs.

Developers receiving an award use the tax credits to raise capital from investors. The tax credits are claimed over a 10-year period, but the property must be maintained as affordable housing for a minimum of 15 years.

Units funded by LIHTC must be affordable for people earning no more than 60% of the Area Median Income (AMI). Rent may not exceed 30% of their income.

What about those making less than 60% of AMI?

That’s a big problem if you believe safe, decent, affordable housing is a basic necessity for everyone like the Affordable Housing Council does. The sad truth is most LIHTC buildings are unaffordable to families with incomes below 60% AMI.

Here’s why:

There are two types of low-income housing tax credits: 4% and 9%. The 9% rate provides more tax credit to the developer, of course, but is ultra-competitive.

Therefore, most affordable units are developed using the 4% credit, which is a “matter of right,” meaning these credits are usually automatically available.

Unfortunately, not as much tax credit for the developers means most low-income developments are not affordable to those with the lowest incomes.

There is a clear need to reconsider how affordable housing is financed in America. Relying on LIHTC is not producing nearly enough units to address the huge deficit of affordable housing.

HUD should adjust rates to ensure that all low-income families can qualify to live in LIHTC buildings.

One way to expand access for very low-income households would be to better coordinate housing vouchers and tax credit projects to help families make up the difference in rent payments.

Frederick’s low-income developments

In recent years, due to efforts by the county’s Division of Housing and the city’s Department of Housing and Human Services, Frederick County and the city of Frederick have attracted a sizable number of affordable rental developments that utilize these tax credits. See the attached chart.

Among a few of the successful older developments not on the chart include Sinclair Way at 350 W. Patrick St., Orchard Park at Ballenger Run at 5234 Black Locust Drive and The Fred on Waverley Drive.

The new Prospect Center campus at the Old State Farm building on Himes Avenue is slated to be mostly affordable units. The plan is for 200 in four years.

The Junction at 511 W. South St. will add roughly 175 units. The Madison at 1724 N. Market St. will add another 60 affordable units.

Frederick County is quite active, but still has a long way to go in providing affordable homes for its residents.

The chart shows a total of about 1,350 affordable units in service now or soon to be. A 2016 housing needs assessment study (scheduled to be updated in 2025) shows a gap of 5,700 units.

To find an affordable home of your own, your best bet is to go to the development’s website and apply or get on a waiting list.

Editor’s note: Gary Bennett is a retired marketing executive. Hugh Gordon is the association executive for the Frederick County Association of Realtors and has decades of experience in the real estate world, including 24 years as a mortgage banker. They are longtime Frederick County residents and members of the Frederick County Affordable Housing Council.

Primer on the basics of affordable housing

By Gary Bennett and Hugh Gordon

Affordable housing project in Frederick, MD

This article appears in the Opinion section of the Saturday, June 22, 2024 edition of the Frederick News-Post.

A lot of written and spoken words have been devoted to the lack of affordable housing in Frederick County. This periodic column has discussed at length how we got into this mess and the possible long-term fixes for getting out of it.

But what exactly is meant by the terms “affordable housing,” “moderately priced dwelling units” and “payment-in-lieu fees,” among others? We will explain these terms and how the affordable housing market works in Frederick County.

What is affordable housing?

A house that costs $400,000, $500,000 or even up to $1 million can be considered affordable to those with adequate resources. But for local governments and the housing industry, the term “affordable housing” generally means housing (not just owned homes, but also rental homes) that is affordable to those with low to moderate incomes.

How do we judge low to moderate income?

The housing industry and their regulators use “area median income” (AMI) as the statistic for which the concept of affordability is based. The 2022 area median income for Frederick County is around $116,000 per household or about $51,000 for an individual. AMI is based on the most recent U.S. Census Bureau information available.

Many in the affordable housing industry consider those in lower-income households to make 40% to 60% of the AMI. In other words, Frederick County households with incomes of $46,000 (low end) to $70,000 (moderate end) can usually qualify for a government-subsidized home, also known as a moderately priced dwelling unit.

How much of your monthly income should you spend on a home?

It is generally accepted that an individual or family shouldn’t spend more than a third of their disposable income on housing. If you do, you are considered cost-burdened or, in more colloquial terms, “house poor.”

Therefore, if you make around $46,000 per year (low end), you shouldn’t spend more than $14,000 on your home. That works out to a monthly mortgage or rental payment of $1,150. When is the last time you saw a monthly rent payment such as that, much less a monthly mortgage payment, advertised in Frederick County?

Hence, the problem: For folks in this income category and below, there is simply not enough affordable housing to go around in Frederick County. According to United Way’s ALICE report, more than one-third of Frederick County residents cannot afford market-rate housing.

Where do the government’s “moderately priced dwelling unit” (MPDU) programs come in?

For many reasons, it is very difficult for market rate developers to build new homes or rental communities that are affordable to those with moderate to low incomes.

It is often left to nonprofit builders such as Habitat for Humanity or Interfaith Housing Alliance to build moderately priced homes, but their capacity is not adequate to meet the need.

Both the city and county have MPDU ordinances that try to get market-rate builders to do their share. They require market rate builders to build 12.5% of new homes in a development as moderately priced.

If they can’t or won’t, they must pay a fee to the jurisdiction in lieu of building the moderately priced units. In most instances, builders pay this fee instead of building the units.

These substantial MPDU fees go into a housing initiative fund, which helps fund such laudable programs as housing rehabilitation, homebuyer assistance, rental assistance and deferred loans for future affordable housing projects that will come to market several years down the road.

In effect, while the MPDUs are not built when the builder pays the fees, those funds are repurposed into other effective affordable housing programs.

But one thing remains clear: There is no replacement for actually building the affordable units. We’ve heard that loudly and clearly from the Board of Aldermen and County Council.

Payment-in-lieu fee

Both the city and county charge $2 per square foot as a “payment-in-lieu” fee to the developer for the entire size of the development, rather than a flat fee, in the hope that more affordable units will be built rather than the builder simply paying the fee.

Because of the length of the development process, it’s still too early to know if the change to the fee is working as a strategy.

The dwelling units that are constructed, sold or rented under the MPDU ordinance are rent-controlled in order to be affordable to those with low to moderate incomes.

Income eligibility for an MPDU is set at 70% of the area’s median household income and adjusted for family size.

Sales and rental prices are set by the appropriate governmental housing director or their designee. In general, the sales or rental prices are set as to not exceed 30% of the applicant’s monthly household income.

Editor’s note: Gary Bennett is a retired marketing executive. Hugh Gordon is the association executive for the Frederick County Association of Realtors and has decades of experience in the real estate world, including 24 years as a mortgage banker. They are longtime Frederick County residents and members of the Frederick County Affordable Housing Council.