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Partnerships for Downtown Affordability

February 7, 2013

Developers, nonprofits and government work together to provide urban living opportunities for lower to moderate income workers.

 

Cities from coast to coast have invested millions of dollars to make their downtowns a more attractive place to live. Now they’re scrambling to make them less expensive places to live — especially for people seeking affordable rental housing.

“The need for [affordable] rental housing is as great as its ever been,” says John McIlwain, senior resident fellow and J. Ronald Terwilliger chair for housing at the Urban Land Institute (ULI).

While many cities are “doing what they can” to meet the need, McIlwain suggests they’re fighting an uphill battle. “I don’t think there’s a way that most cities are going to be able to keep up,” he says. “I think there’s going to be a continuing tightness in the urban rental market.”

Data from the 2010 U.S. Census underscores the attraction of downtown living. Numbers show downtown populations grew significantly in many major cities during the last 10 years — even in some cities where the overall population shrank.

The problem is that most of the housing growth is occurring at the upper end — because there’s a market for it and because of the high cost of downtown construction. That slams the door on people with low and moderate incomes — the very folks who stand to benefit most from the proximity to jobs and public transportation found in many downtowns.

The housing crash isn’t helping. Fewer buyers means more renters. More renters means higher rents. While many foreclosed homes and condos are being converted to rentals, most of that is occurring in the suburbs or in less desirable parts of the city, not downtown, says McIlwain.

In many ways, the downtown residential boom is a positive smart growth story because it focuses compact development around existing infrastructure in walkable environments. Yet there’s a missing chapter. “Diversity of housing — both size and price — is a basic piece of smart growth,” says Ilana Preuss, chief of staff at Smart Growth America. “A lot of work needs to be done to add units of all types to downtowns.”

Economics dictate it won’t happen without some form of public involvement. The cost of building housing downtown is simply too high — and getting higher — to make a project pencil out if rents are too low.

Austin, Texas, illustrates the challenge of providing affordable housing in a resurgent downtown. “It’s a supply and demand thing,” says Michael Knox, downtown officer with the city’s Economic Growth and Redevelopment Services. “The more things develop, the higher land costs get, so it’s a self-perpetuating cycle.”

Austin has been working on a new downtown plan for several years. One of the goals of the plan, which was submitted to the city council this fall, includes providing more housing options for families with low and moderate incomes. Only 7 percent of Austin’s residents can afford to live downtown, according to a 2009 study prepared as part of the downtown planning process.

“Virtually nothing new has been constructed downtown [in that price range] for the last 10 years,” Knox says.

“Making it affordable is a real challenge.”

Affordable is a relative term. Although often applied generically, it also describes a specific range of housing aimed at people who make less than 80 percent of the area median income. Workforce housing describes dwellings affordable to people making 80-120 percent of area median income.

Downtown Austin rents average $2,000 a month, creating a gap in workforce-friendly rents that can reach is addressing that gap,” Knox says. “The people working downtown live 15 miles out and are driving in every day, which is not helping our traffic problems at all.”

The new downtown plan contains a potential cure — a new density bonus program. The program would allow developers to exceed established floor area ratios — typically to build taller buildings — by including a certain amount of housing that would be affordable to a family of four making 80 percent of area median income (just under $60,000) if they’re renters or 120 percent if they’re buyers (just under $90,000). They could also pay a fee the city would use to subsidize construction of affordable housing within two miles of downtown.

Austin is trying to achieve what San Diego, Calif., has already done — encourage a steady increase in downtown housing for people with different incomes. One out of every five housing units built in downtown San Diego since 1975 — mostly rentals — is affordable to households making 120 percent of area median income ($89,900 for a family of four). And 60 percent of those 3,500 units are affordable for households making 50 percent or less of area median income ($40,950 for a family of four).

The Centre City Development Corporation (CCDC) is spearheading that growth. The CCDC works on behalf of the Redevelopment Agency of the city of San Diego. the public nonprofit organization promotes public-private partnerships within the city’s downtown redevelopment area under California’s Community Redevelopment Law (CRL).

The CRL empowers cities to establish redevelopment areas and use tax increment financing to fund public improvements — streets, parks, etc. — plus provide incentives to private developers. With tax increment financing, cities get to capture increases in property taxes that occur as property values rise within a redevelopment area.

One of the CRL’s top goals is to generate additional affordable housing. the law requires cities to spend 20 percent of their tax increment money on affordable housing. The threshold for rental units is 110 percent of area median income. That’s not all. At least 15 percent of all residential units built in a redevelopment area must be affordable. And 40 percent of those must be reserved for households earning below 50 percent of area median income.

The CRL isn’t the only way California encourages communities to boost their affordable housing stock. State law requires cities and counties to establish density bonus programs. At least 10 percent of the units in every new residential development — not just those in redevelopment areas — must be affordable to renters making 110 percent of area median income. In return, cities and counties must give developers certain concessions — most notably the right to increased density. Developers can opt out by paying a fee, but lose the right to concessions.

With market rate rents starting at $2,000 a month, the need for both workforce and affordable housing in downtown San Diego is great. Because San Diego is a tourist destination, many people work in the hospitality industry, where the pay is typically modest. “San Diego is a very expensive place to live, but wages aren’t what you’d find in other high-cost cities such as Washington, D.C., San Francisco, New York or Boston,” says Jeff Graham, vice president of redevelopment with the CCDC.

Proof of the demand occurs every time a new project is announced. The waiting list for one of the most recent developments, Ten Fifty B, topped 8,000, says Graham. The 23-story tower, which was completed last year, contains 226 units that are affordable to people earning between 30-60 percent of area median income.

Ten Fifty B is a good example of the cocktail of incentives needed to finance construction of affordable housing downtown. The developer, Affirmed Housing Group, bought the property from another developer that abandoned plans to build condos there. The redevelopment agency awarded Affirmed Housing Group a $34 million subsidy — the agency’s largest ever. The San Diego Housing Commission issued $48.5 million in tax exempt bonds. And the project qualified for a $38 million low-income housing federal tax credit.

The big question right now is whether those sorts of financing packages will remain available in the future. Legislators in California recently voted to make redevelopment agencies surrender their tax increment revenues to help the state meet a budget shortfall. Agency proponents responded by filing a lawsuit to block that move. “Our major funding source will be gone” if the state prevails, Graham says.

Joe Alexander, president of the Alexander Co., wonders if federal tax credits for low-income housing and historic preservation — two key funding sources for many of the projects his company builds — might also be in jeopardy. “It will be interesting to see what happens in today’s political environment,” Alexander says. “My impression is that they will continue to enjoy support. they’ve been going for years and the benefits are obvious to folks on the ground in those communities.”

Based in Madison, Wis., the Alexander Co. specializes in downtown revitalization projects that often involve repurposing historic buildings. The company recently transformed a 1930s federal courthouse in downtown Kansas City, Mo., into 176 units of workforce rental housing. Financing included a $9.5 million tax credit, which included a low-income tax credit and historic preservation tax credit. Plus the city expedited the permit review process.

“You can’t make these projects pencil out without that kind of public/private partnership,” Alexander says.

In New York, the city’s Housing Development Corp. makes low-interest loans to developers to construct mixed-income apartment buildings that offer 50 percent of their units at market rates. However, 30 percent must be affordable to tenants making 175-200 percent of area median income and 20 percent must be affordable to tenants making 40-50 percent.

The Jonathan Rose Companies and Lettire Construction used New York’s 50/30/20 program and low-income housing tax credits to build Tapestry, a 186-unit building in Harlem. Tapestry was a 2011 winner of a Jack Kemp Models of Excellence Award from the Urban Land Institute. The award recognizes outstanding examples of workforce housing.