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The Property Pendulum
by Jim Emerson
New policies from the Obama Administration will benefit multifamily housing owners from San Francisco to San Juan. After years of languishing, federal government support for rental housing is being reinvigorated. More emphasis is being put on rental housing than promoting individual home ownership. The housing policy team that President Barack Obama assembled and policy changes in process portend a new era of full funding and stability for programs that affect apartment owners. More new initiatives are anticipated as well.
Critics of the Bush years note that Housing and Urban Development budgets, particularly cutbacks in funding for Section 8 rental housing vouchers, put some multifamily owners and developers at a disadvantage, compared to what can be anticipated under Obama. Shaun Donovan’s appointment as HUD secretary and Carol Galante’s appointment as assistant HUD secretary for multifamily housing were just the first indications that the pendulum is swinging in favor of affordable rental housing, analysts say.
The American Recovery and Investment Act of 2009 will pump more economic stimulus money into federally subsidized apartment units, while HUD’s budget proposal for next year seeks another $1.8 billion for construction of rental housing. “The Obama Administration has a more sophisticated understanding of what drives apartment owners,” says Matt Schwartz, president and CEO of California Housing Partnership Corp., a financial consulting firm with offices in San Francisco. “We now have a captain in charge of the ship who understands where it needs to go.”
There isn’t going to be a huge influx of additional dollars in HUD because the Obama Administration is also dealing with the recession, climate change and war, but there will be enough money to stabilize existing programs and for some new initiatives that benefit multifamily owners, according to Schwartz. We can look forward to HUD budgets that keep up with inflation, plus the department will roll out one or two new initiatives—not a huge expansion, but a significant change for the better, in his opinion.
Some changes will come faster than others, but it all starts with proactive policy. If you think of HUD as a large tanker that’s been adrift for eight years, important changes are taking place now, but it takes awhile to feel the impact, says Schwartz. He points out there’s no doubt in his mind that the new HUD leadership and increased HUD funding will have a positive impact on the multifamily sector. Foremost, he says, is that the administration for the first time in many years understands the economics of owning and operating rental properties.
The administration is requesting a total of $46.3 billion to fund HUD in fiscal year 2010, which reflects a 10.8% increase over fiscal year 2009. This includes $17.8 billion in funding for Section 8 tenant rental vouchers, roughly $1.7 billion more than fiscal 2009.
Property owners can expect funding for Section 8 renewal contracts to be more reliable. Analysts say it’s critically important for owners to know that Section 8 will be stable, because it wasn’t previously. Owners were opting out of the program because the formula for funding kept changing, but this administration won’t do that, says Schwartz.
“HUD believes strongly that annual renewal funding should be predictable, timely and sufficient to fund rental contracts for a full 12 months, a sharp contrast to the short funding of contracts that occurred in recent years,” states HUD’s budget request for 2010.
“Funding for Section 8 is being increased because there are more poor people. Housing affordability pressures are increasing because of the recession. People who used to own are moving to rentals, which drives rents up,” notes Dianne Spaulding, executive director of the Non-Profit Housing Association of Northern California. The most significant change for Section 8 involves the formula used for allocating and increasing funds given to the states.
Nonprofit organizations are landlords too, and they have been the most prolific developers of apartments in San Francisco, she points out, although nonprofits had to rely more on state money in recent years. The role of the federal government in multifamily housing diminished greatly of late, but that’s all changing now. Spaulding says that’s why a lot of people are very excited about the Obama Administration.
The supply of rental units can be expected to increase, as new federal initiatives mirror the kind of financing already available for multifamily development through state Proposition 1-C. More than $71.4 million were allocated for affordable housing by the state during the summer, conditional on the state’s ability to sell bonds. New federal initiatives modeled after the state’s efforts will support development of more infill units and transit-oriented development, predicts Lynn L. Jacobs, director of the state Department of Housing and Community Development. “I am very encouraged that there will be more (federal) money available for affordable housing. I’m especially happy with the emphasis on affordability and green initiatives, such as energy efficiency,” stresses Jacobs.
HUD and the U.S. Department of Energy are working together to offer more financial incentives for owners to retrofit properties for energy efficiency. The sweeping economic stimulus plan enacted earlier this year provided funds for green retrofits. Larger owners benefited from the initial round of green retrofit money, but Schwartz says he anticipates smaller landlords will benefit as such initiatives are expanded.
The first round of money for multifamily properties (already in process) was limited to about 300 properties receiving HUD project-based assistance for funding green building improvements. Eligible owners could receive up to $15,000 per apartment unit. “I think we’ll see more of this,” Schwartz adds.
For 2010, HUD is seeking $100 million for an Energy Innovation Fund to retrofit existing buildings and new construction. A separate climate change bill in Congress has implications for multifamily owners too, because it requires states to adopt building codes for substantial rehabilitation and new construction that incorporates better energy efficiency.
The budget proposal for HUD next year also includes $1 billion to fund the new National Housing Trust Fund, the first new federal housing program in many years. It was signed into law back in July 2008 but never provided with any budget. This program is primarily designed to provide funds for rehabilitating and building rental housing units. “The impact for San Francisco will be huge because it’s a per capital formula,” asserts Spaulding. The new NHTF program will require that at least 75% of the funding benefit households with 30% or less than the median income for the area. All funds must benefit very low income households with income 50% or less of a given area’s median income.
More changes are afoot for the Low Income Housing Tax Credit Program for apartments, which is expected to come under close scrutiny in next year’s budget. The economic recovery and stimulus act enacted earlier this year included provisions to bolster this tax credit program, which saw demand from investors nosedive with the economy. Tax credit syndication investment declined from about $9 billion in 2007 to about $5.5 billion in 2008. LIHTC investment this year is projected to drop even further.
The Housing Advisory Group, a coalition of organizations concerned with low income housing tax credits, submitted a letter with proposals to Congress over the summer to rejuvenate the LIHTC program. It calls for continuation of changes already implemented as part of the economic recovery and stimulus plan and for further expansion of the program.
Simply put, multifamily projects that qualified for tax credits but could not attract investors are being allowed to exchange the credits for cash from the government on a temporary basis, but LIHTC program advocates are seeking to have these exchanges extended another year. To stimulate investor demand for the tax credits, tax law changes are being advocated to allow investors to carry back credits on their tax returns for up to five years. To broaden the base of potential investors, changes are being sought to allow some S Corporations, Limited Liability Corporations and closely-held C Corporations to offset otherwise taxable revenues with housing tax credits, provided these entities have at least $10 million in gross receipts.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. im Emerson is a freelance writer based in Berkeley. He has written extensively about real-estate and marketing topics. He can be reached at jim.emerson@comcast.net. Copyright © 2009 by Black Point Press. All rights reserved.