Distant aerial view of Hollywood sign, a famous landmark in the Santa Monica Mountains, in Los Angeles, California. On both sides of the ridge, the ground is thickly settled with buildings.

Opinion Moving Community Development Forward

Why Don’t California’s Nonprofit Housers Embrace Social Housing?

Attachment to tax credits, which can’t provide as much housing as we need, is keeping the much-needed expertise of nonprofit developers out of conversations about alternatives.

Photo by Flickr user Ken Lund, CC BY-SA 2.0 Deed

https://www.flickr.com/photos/kenlund/21595908251/

This article is part of the Under the Lens series

Moving Community Development Forward

In this series, we examine the state of the community development field, the challenges and tensions it faces, and some promising approaches to this work.

California needs 1.2 million additional units of affordable housing over the next 10 years to meet the current demand. That would require building 120,000 units per year (and not losing any we already have). And yet, annually, the Low-Income Housing Tax Credit finances less than 15 percent of this amount. Even if the Biden administration’s proposed 46 percent increase in LIHTC credits were to pass, the state’s LIHTC allocation is not—and cannot be—sufficient to build affordable housing at the scale we need.

And yet, the nonprofit affordable housing industry’s policy advocacy is almost entirely focused on growing LIHTC or getting access to it, and the industry shies away from engaging with models that could truly address the problem at scale. What’s going on?

Can’t Quit LIHTC

The mission-driven, nonprofit affordable housing development industry as we know it was built by LIHTC. For several decades, LIHTC has been the largest and most consistent source of funding for new construction of affordable housing in the United States. In California, the program created 435,281 low-income housing units from 1990 through 2023. It has essentially financed the creation of an entire affordable housing industry with at least 100 nonprofit affordable housing developers statewide. LIHTC has been the “only tool in the toolbox,” and a mighty effective one, for decades now. Critically, it also finances deeply affordable housing developments that serve extremely low-income households, supportive housing projects, and other projects that require deep subsidies.But it’s just not enough to meet the need.

When I joined the affordable housing industry in 2018, I remember being surprised at how much competition there was among the nonprofit developers. The 9 percent LIHTC credit, which provides funding for nearly 70 percent of the cost of construction, is awarded competitively and has long been difficult to get statewide. I was working in the Sacramento region, and of the roughly five projects receiving a 9 percent LIHTC award there each year, several tended to be projects from a single large organization, leaving many good projects unfunded and nonprofit capacity to develop unused. That this was the annual limit of affordable housing production in a region with more than 2 million people shocked me.

A place like the Bay Area, which had a wealth of local funding sources to supplement its projects, could make projects work with the less competitive 4 percent LIHTC awards. The difference in the development environment was palpable. However, even places like the Bay Area began to struggle in 2020 as a shortage of the tax-exempt bonds that are required to get 4 percent LIHTC awards developed.

Months into the COVID-19 pandemic, the state was announcing a $90 billion surplus, but the Bay Area affordable housing developers were feeling constrained for the first time ever. That might seem surprising, as the region’s affordable housing advocates had fought for and won many local ballot measures for affordable housing development funding, such as Measure A in Santa Clara, Measure KK in Oakland, and, recently, Proposition A in San Francisco. In other parts of the state there was Measure U in Sacramento and Prop HHH in Los Angeles, plus statewide Proposition 1 (which created the Multifamily Housing Program) and Proposition 2 in 2018.

However, all the billions the advocacy community had fought for and won went to adding gap financing to unlock more tax-exempt bonds with 4 percent LIHTC for the whole state. This had the inevitable effect of inspiring way more project applications than ever before.

So now nonprofits were competing with one another and the for-profit developers for a limited number of tax-exempt bond awards, leaving many shovel-ready affordable housing projects to sit idle. While the California affordable housing industry was building itself up to produce as much housing as possible, the primary financier of affordable housing—the federal government—was providing a static amount of funding.

California’s nonprofit developers—and the state itself—had outgrown LIHTC. And yet in my five years in the California affordable housing sector, as a member first of real estate development teams and then as a policy staffer, I witnessed a baffling ideological and emotional attachment to LIHTC.

In early 2022, I had a few tepid conversations with nonprofit developers in the Bay Area after the hope of Build Back Better and a federal LIHTC fix had been crushed. I would gently say, “You’ve outgrown LIHTC” and they would look sad, look down, and nod gently. They reacted as if I had said they had personally failed.

Meanwhile nonprofit housing policy organizations remained fixated on ways to keep the LIHTC model at the center of the process: They hung on to a hope of a federal fix in the form of the Affordable Housing Credit Improvement Act, which would double national LIHTC production. They engaged in protracted ideological battle with the state to encourage the prioritization of limited tax credits to high-public benefit projects that served extremely and very low-income households. And they advocated for local housing bonds to add funds to LIHTC projects or finance similar projects. This focus continues in 2024, when the ever constant hope of AHCIA passage is dangled by Congress every few months (most recently in the tax bill and the administration’s housing plan), and several affordable-housing bond campaigns are ramping up for the 2024 election.

The sector did experiment a little with the California Housing Accelerator, which was one of the state’s first major forays into non-LIHTC affordable housing models. There was genuine excitement around the creation of the accelerator. During the process, the leadership of the California Housing Partnership Corporation, a statewide organization formed by the legislature in 1988 to coordinate and support affordable housing finance and development, asked the field “If we had $5 billion from the state budget surplus, how could we fund the stalled LIHTC pipeline?” This exercise gave the organizations’ affordable housing experts an opportunity and permission to think outside of the box—to imagine a non-federal affordable housing program that would create new units without needing LIHTC. There seem to be so few moments like that in the current affordable housing landscape.

What was created, however, while successful in moving some stalled projects along, did not deviate enough from the LIHTC model to hold a promise of making a meaningful dent in the state’s affordable housing needs. Under the accelerator, an affordable housing project that would’ve received a tax exempt bond and LIHTC award was instead given the same amount from the state’s budget surplus. This was supposed to contain costs because of the reduction of bureaucracy and less pressure to add expensive items just to compete for tax credits. To date, the program has been awarded $1.9 billion and created 5,070 low-income units. As of 2023, the program had expended all funds and was no longer in effect. And the looming state budget deficit in 2024, after years of unprecedented surplus, makes it difficult to imagine a future for programs like the accelerator.

Social Housing Who?

There is another way—social housing. The nonprofit advocacy organization Public Advocates defines social housing this way: “Social housing is affordable to households with a mix of income levels, high-quality, socially-owned, resident-managed, and permanently off the speculative market.” Mixed-income tenure is a signature of all social housing models. They use the rent paid by middle-income households to help subsidize low-income households, thereby dramatically reducing one of the hardest types of funding to find—operating subsidy. Instead of seeing this as diverting scarce resources to middle-class households, as affordable housing advocates often fear, social housing advocates reframe this as a way for middle-class rents to be redistributed to lower-income households.

[RELATED ARTICLE: Social Housing: How a New Generation of Activists Is Reinventing Housing]

The burgeoning social housing sector is the primary place where truly innovative conversations about affordable housing models are happening. Led by Montgomery County, Maryland, social housing advocates and practitioners are looking to international models to see how to build large scale housing that is affordable and available to low-income and middle-income households. It would still require significant upfront investment and be very expensive, as large real estate projects are, but mixed-income tenure should both increase political will for that funding and reduce the ongoing need for subsidies, making for deals that are easier to finance.

There is growing support for and discussion of social housing across California among tenant groups, YIMBY advocates, a surprisingly large portion of California state legislators, and local elected officials and city housing staff. In 2023, for the first time, social housing bills made it through the California state legislature and to the governor’s desk. While Gov. Newsom vetoed the bill that would have created a pilot program to build three social housing projects on state land, he did sign a bill that mandates the California Department of Housing and Community Development (HCD) complete a social housing study by 2026.

But some of the most critical stakeholders in this process—nonprofit, mission-driven affordable housing developers—have been absent from the conversation. These organizations were created specifically to build homes that are affordable to low-income Californians, and have an immense amount of real estate development expertise and human and financial capital. Nonprofit housers have the tools, knowledge, and means to bring what is currently only a concept to fruition. Still I never saw a single one of the California affordable housing developers or the industry’s advocacy groups weigh in on either social housing bill. It is very rare to see an affordable housing leader even discussing the merits or challenges of social housing publicly.

Rejection of Mixed-Income Solutions

As far as I can tell, this is in large part because the affordable housing industry is attached to its identity as developers of 100 percent low-income housing, where they provide the housing needed for residents who need the most help. This is a noble and just cause. But clinging to it is not solving the housing crisis.

There is a somewhat irrational, but understandable, fear of social housing among affordable housing leaders.It requires an acknowledgment that the tool that built their industry cannot finance its next stages. Social housing could solve their funding problems and advance their missions, but it would also require the development of new skill sets and, more importantly, a shift in identity.

It’s Happening Anyway

While the affordable housing development community is opting out of social housing discussions, California’s cities are quietly exploring social housing models. Major cities like Los Angeles, Oakland, and San Francisco are having conversations about what social housing could look like in their communities and how it could be financed. Southern California’s housing development community has embraced social housing concepts more than any other area of California. Measure ULA sets aside up to 25 percent of its funding for social housing developments.

To succeed in providing a home for everyone, the affordable housing development community needs to experiment and innovate in its real estate development models. Think about how fun and exciting and joyful it would be to collectively envision new housing models and financing tools from a place of abundance rather than scarcity.

There are too many nonprofit developers, too many vacant lots, too many development opportunities, and too much need to limit production to just LIHTC. Solving California’s affordable housing shortage will require massive production of both LIHTC and social housing to get us the affordable homes we need.

It’s time for California to say “Thank you. Next!” to LIHTC’s dominance—and for California’s nonprofit housing sector to take its rightful place among the thought leaders working on how to make that happen.

Other Articles in this Series

Moving Community Development Forward

  • Three women and a man standing in a row in front of a photo-op background of a repeating IFF logo.

    Want Leaders in Community Development? Develop a New Hiring Strategy

    May 30, 2024

    It's easy to stick to the tried-and-true pipeline when hiring for community development roles. But forming connections with people from different industries and generations can make our teams stronger.

  • Seven people in red T-shirts bearing a logo for CDAD are smiling as they stand in a row on the grass at an outdoor event. They're either dancing or listening to music. Behind them are lots of other people talking, playing, making music. In the background is a large white pavilion tent and off to the left, trees in leaf.

    Lessons from Detroit: Joining Forces with Resident-Led Groups

    May 22, 2024

    It's been 14 years since the Community Development Advocates of Detroit opened its membership to resident-led groups. Here's a look at what they've learned about working together and navigating the transition.

  • A Black woman in blue flowered dress and dusty pink hijab speaks into several microphones. In foreground, blurry, are news cameras. The woman is part of a large group at a rally, carrying signs promoting rent stabilization and saying "Home to Stay MPLS"

    Affordable Housing Sector Split on Rent Control

    May 21, 2024

    In the Twin Cities, where voters have recently supported rent control, most nonprofit housing developers have stayed silent, and some have openly lined up with the developers and landlords who oppose it.