This article is part of the Under the Lens series
Moving Community Development Forward
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.
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7 thoughts on “Why Don’t California’s Nonprofit Housers Embrace Social Housing?”
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Thank you! We need to build the next system of affordable housing financing. State banking, or permanent affordable housing zero I terest, or extremely low interest loan and grant funds are the only way to begin to meet the needs our savage inequalities have wrought.
The reason that the tax credit works, and is necessary, in California, is because it provides a vast amount of equity toward the very high cost of construction in this state. Social housing, particularly if new construction and net new units, which are preferable, will need just as much equity. Nonprofit housing developers do not have $20 million/per project to invest. Where will this equity or quasi equity come from? In Europe, it comes from the government. Nonprofit developers would sign up for that kind of program immediately.
We learned from HomeKey that lower cost units, as purchases, required less up front capital. The State’s funding provided 25-40% equity to allow this housing to be created.
Affordable housing operators can’t charge high rents to cover the cost of development. Equity or quasi equity, whether it is tax credit equity or soft patient loans from government are needed.
Wow, this hit the nail on the head. Great piece. In our campaign to get social housing passed via initiative in Seattle in 2024, I was caught off guard by the resistance from the non-profit housing development world – naively assuming they’d be supportive. This piece helped me better understand why they weren’t. Thank you!
Sylvia Martinez is right, no matter what in California high subsidies are needed to make social housing affordable. However, limited equity co-ops which need only a one time subsidy are not eligible for tax credits. Social housing a la Vienna with many co-ops appears to have better results with now30% of all housing. The LIHTC model is heading for massive repeated subsidies which will end the model downstream. We need other social housing models such as co-ops to increase the scale of not for sale housing to dampen the market.
The reason that nonprofits don’t embrace social housing is because they don’t want competition from the government. Nonprofits can still be quite lucrative. Not to say they don’t do a lot of good work, but having local governments get into the development arena would be a huge threat to their business model, especially when we start to show how much better developments we can create as opposed to LIHTC.
The public sector can simply doing housing better and cheaper than the private sector, this has always been the case. The problem is we need to get the country to understand that housing is human and community right first, and as asset, a commodity, and business venture second. Not the other way around.
Low-income tax credits are given to millionaires who should instead be paying higher taxes that can be used to build appropriate housing in appropriate locations. The current housing tax-credit system is Wall St. driven all the way: mostly big money people and corporations buying up long-term real estate deals and getting lucrative tax credits, with complex layers of bond-holders, managers, and other “meddlers” looking after someone’s housing unit. Most tenants often don’t need or want any “overseeing.” The current system is really awful with its high costs, high operating expenses, and oppressive management, rules and qualifications.
Permanently affordable limited-equity housing models such as those used by Habitat for Humanity are superior in every way to the LIHTC program. Limited-equity deed restrictions preserve affordability for future households while also allowing residents to build some equity over time. LIHTC projects have a fair amount of eviction cases that aren’t nearly as prevalent in limited-equity housing models. Limited equity housing doesn’t rely on management overseers or tax credits given to billionaires. There is no perpetual management company getting into a tenant’s business, which are only a few of the terrible aspects of the LIHTC program. LIHTC isn’t a progressive housing policy by any stretch and its supporters often have a financial reason for supporting a terrible housing program.
The US and state governments hand out BILLIONS of dollars in tax subsidies to real estate speculators *every year* that serve no purpose other than to make housing much more expensive for everybody, and to enrich the already wealthy. Real estate speculators (non-homeowners) don’t need phony depreciation deductions for assets they didn’t build. They don’t need interest write-offs on assets the didn’t build either. They don’t need tax-free refinancing (when cash is pulled out of a property for a new loan), and they don’t need 1031 tax-free exchanges when they “sell” the property. These tax write-offs – mostly given to millionaires – don’t help tenants, homeowners, or small businesses. Repeal these tax subsidies and use the money to build new buildings, and then we’ll finally start to see some “housing justice” in the US. No one will miss the Low-income housing tax credit program after adoption of these far superior housing and tax policies.
Maybe the challenge is math.
Middle income housing typically requires subsidy to work in coastal markets, which is why most market rate housing isn’t for the median income, it is primarily for a luxury market. In order to make a mixed-income project work in our construction cost, interest rate and land cost environment, we need some combination of subsidy and/or luxury housing to subsidize the folks whose rent cannot support the cost of new construction.
If an agency is willing to make this leap, they also need to look at themselves and realize that they aren’t used to building luxury housing and really confirm that what they are building will bring the high rents necessary for the deal to work.