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Affordable housing units in L.A. are often not so affordable — even by the standards of the government funding subsidies.
(Photo illustration by Arantza Peña Popo
For Tenants In ‘Affordable Housing,’ Extra Help Is There for Just Half Who Need It
Is it fair to shower the bulk of subsidies for decent affordable housing on one group while the majority of those in need are left with none?
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Los Angeles is home to more than 350,000 households who spend more than 50% of their incomes on housing and 41,000 people who don’t have housing at all.

As the city grapples with a rising number of people living outdoors and a reputation as the most rent-burdened city in America, an LAist review of one of the largest housing assistance programs found it provides a relatively small number of lucky L.A. residents with multiple housing subsidies while hundreds of thousands seeking help go without.

How does the program work and why is this happening? Keep reading, we’ll explain.

A program that needs a lot of costly help

Known as the Low-Income Housing Tax Credit program, the federal government describes it as “the most important resource for creating affordable housing in the United States today.” The program is designed to get private, mainly corporate investors to help fund affordable housing for low-income households. To do this, Congress forgives billions of dollars per year in income taxes that the corporations owe and, in return, requires them to invest much, but not all, of their tax savings.

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About this series

But the tax credit funds do not generate enough money to pay for all development costs. Additional government subsidies are needed to cover the gap, and still more to make the housing’s discounted rents affordable to many of the low-income households who live there. To make rents affordable, projects subsidized with tax credit financing depend heavily on additional federal rental subsidies, such as Section 8 vouchers.

These subsidies cap tenants’ rent payments at an affordable level and help the building owners bring in more cash, because the government supplements tenants’ contributions and the owners wind up collecting market-rate rents.

Adding up total costs

It can take years for families or individual renters to obtain Section 8 vouchers. But tenants in tax credit buildings benefit from a heavy concentration of them, most of which come with their apartments.

At LAist’s request, the federal Department of Housing and Urban Development calculated that about 45% of tenants in tax credit-financed properties in the city of Los Angeles receive Section 8 or other similar rental subsidies.

Los Angeles’ experience closely mirrors that of all of California, HUD’s published statistics show. About 40% of tenants in tax credit-financed housing throughout the state get the extra aid.

Nationally, about 25% get it.

Without the extra aid, as many as eight of 10 tenants in these properties in Los Angeles and in the rest of California would face rent costs that would be unaffordable by government standards.

With the subsidies, that number is cut in half.

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  • Most government housing aid programs are offered through the Department of Housing and Urban Development, which has a simple rent formula. Tenants are required to pay rent equal to the government’s affordability standard, which is 30% of their household income.

  • But the Low-Income Housing Tax Credit program is different. It operates under the jurisdiction of the Internal Revenue Service which has more complicated rules. These requirements don’t link rents to a tenant’s income — at least not directly. Each apartment has a rent level intended to be affordable to a tenant earning a specific percentage of median income in the area. Under IRS rules, developers of buildings that offer these apartments can qualify for tax credits if:

    • They promise to make at least 20% of all units affordable to tenants earning 50% or less of the area median income
    • Or if they promise to make at least 40% of all units affordable to tenants earning 60% or less of the area median income
    • Or if they promise to make their average apartment available to tenants earning 60% or less.
  • Because winning tax credits is highly competitive, developers almost always choose to make 100% of their units available to tenants earning 60% of median income or less. Tenants are then charged rent equal to 30% of their apartment’s assigned median income level. If tenants’ incomes fluctuate, or don’t keep pace with increases in area medians, they can wind up paying more than 30% of their incomes in rent.

  • UC Riverside housing economist Bree Lang explains:

  • “In reality, a household living in a LIHTC [Low-Income Housing Tax Credit program] unit may earn much less than [the percent of area median income assigned to the apartment] but the rent level will not be adjusted to their income.”

A question of fairness

The value of all of the subsidies required to build and sustain tax-credit supported housing nationally will roughly triple the program’s acknowledged $11 billion cost this year, according to Edgar Olsen, a University of Virginia housing economist and professor emeritus.

This raises a fairness question: Is it wise to shower a relatively small segment of those in need of decent affordable housing with benefits from multiple subsidies while leaving the majority of those in need with none?

Unlike other forms of aid to low-income households such as food stamps, which the government makes available to all who qualify, housing aid is strictly rationed. Congress authorizes only enough money to help about one in four of those whose low incomes make them eligible for rental subsidies.

The role of lotteries

In the case of housing subsidies, need is so great and subsidies are so scarce that they are handed out through lotteries.

The city of L.A.’s housing authority distributes Section 8 rental subsidies locally, but doesn’t have nearly enough to meet demand. When it recently opened its Section 8 housing choice voucher waiting list for the first time in five years, it was promptly swamped with more than 220,000 requests.

Given limited congressional funding, there was no way the housing authority could offer help to everyone seeking it. Instead, the housing authority selected 30,000 winners via a lottery, then informed them that they could face a 10-year wait before receiving a call to determine if their incomes really made them eligible.

Lotteries are also frequently held to decide who gets coveted apartments in tax credit-financed buildings.

One Harvard housing researcher observed that beneficiaries of both forms of aid are like people who have won the lottery twice.

Resources for renters

The extra aid helps owners too

Federal rent subsidies such as Section 8 housing vouchers not only help tenants in tax credit housing — nearly half of whom in California had annual incomes of less than $20,000 as recently as 2019, according to HUD — they also help building owners, since the federal government pays them the difference between what tenants pay and market-rate rents.

The extra income this generates is sometimes key to making sure there is sufficient cash to keep a building operating. To win tax credits, developers in California have to promise to keep their buildings going for 55 years.

The program can also enhance their profits.

Developers typically line up most of their extra subsidies before they seek tax credits. Local housing authorities are a primary source. They are permitted to distribute up to 30% of their federal allocations of the coveted Section 8 housing vouchers to developers rather than to tenants.

In doing so, housing authorities make one change in the way the vouchers typically work. The vouchers become tied to an apartment in the developer’s building, rather than to a tenant. That way, if a tenant moves, the subsidy remains. Section 8 vouchers normally move with the tenants who hold them.

The extra subsidies help fuel a brisk trade

The guaranteed extra rent streams these subsidies provide enhance the long-term value of tax credit buildings and have helped fuel a brisk second- and third-hand market for them.

In 2021, new sets of investors paid a record $23 billion to acquire tax credit properties, according to Fannie Mae, a leading source of mortgage financing. Fannie Mae researchers cited data from CoStar, a real estate intelligence firm.

The largest deal that year illustrated how lucrative these properties can be. The deal involved American International Group, best known as the insurance company AIG. It had assembled a portfolio of 80,000 tax credit-supported apartments in California and other states and was readying to unload them.

AIG told its stockholders that tax credits for the projects had expired, but the company had nonetheless:

  • Made a net profit of nearly $300 million by operating these apartments in the year before the sale.
  • Saved $750 million in income taxes while it held the apartments by deducting losses for depreciation as the properties’ presumed values declined. 
  • Was poised to make another $3 billion in profits from a pending sale to a third-hand buyer, the giant Blackstone Real Estate Income Trust.

Blackstone, meanwhile, assured its investors that paying AIG nearly $5 billion for these properties in California and other states was a good deal, because rents from the apartments would continue to produce “strong, stable cash flows.”

  • Numbers reported in this series about the share of tenants who pay unaffordable rents and the share of tenants who receive supplemental rental subsidies such as Section 8 vouchers should be regarded as estimates.

  • These figures were compiled by economists at the federal Department of Housing and Urban Development, which maintains the Low-Income Housing Tax Credit industry’s largest data set. HUD collects its data from the housing finance agencies in every state, which are tasked with awarding tax credits to developers, and are then responsible for collecting data annually on rents and rental subsidies from operators of each tax credit-financed project. The data is inexact.

  • As Freddie Mac, which buys mortgages from issuing lenders, describes it on its website: “The format and contents of the data sent back by each state varies… While HUD tries to ensure high data quality, there are inevitably shortcomings.”

  • Data imprecision extends to the seemingly simple matter of how many tax credit projects currently operate in each state and locality. In California, for instance, the state agency that issues the credits, a part of the State Treasurer’s Office called the Tax Credit Allocation Committee, has cited numbers that are larger than HUD’s. Numbers of households whose incomes would qualify them for the program are also estimates, drawn from Census data and other government reports.

What questions do you have about housing in Southern California?

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