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Row of green plastic houses with one larger red one in the middle, from the famous property trading board game Monopoly. The houses are isolated on a white background.
Affordable housing units in L.A. are often not so affordable — even by the standards of the government funding subsidies.
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Even 'Affordable Housing' In LA Isn't Affordable. Why A Key Program Is Falling Short
A 37-year-old tax credit program intended to get private developers to build affordable units has failed in a fundamental way: It's a bargain people still can't afford.

The federal government’s largest effort to build affordable housing for low-income households has been a godsend and a bane of Neise Knowles.

The 63-year-old disabled woman from South Los Angeles snagged a one-bedroom apartment built with federal subsidies that, by Los Angeles standards, is a bargain.

But it is a bargain she can scarcely afford.

Rent at the Richard N. Hogan Manor apartment complex on South Figueroa Street consumes more than 60% of her income, which consists of a monthly $1,133 Social Security disability check. Although she also gets food stamps, she says “[p]aying rent is a struggle. Trust me.”

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Paying rent is a struggle. Trust me.
— Neise Knowles, Los Angeles renter

Knowles’ situation is not uncommon among tenants whose apartments are financed through a program known as the Low-Income Housing Tax Credit.

A photo taken from across the street of a four story apartment complex with a color scheme of beige, and pale salmon pink. It is enclosed by a black metal fence. The sidewalk is lined with trees. There's a sign at the base of the building that reads "5506 Richard N. Hogan Manor." You can see the street sign name at the street corner that reads "Figueroa St."
More than 40 million households in the U.S. have incomes low enough to qualify them for tax-credit-financed apartments, but there aren't enough to go around.
(Samanta Helou Hernandez

Named for its chief funding mechanism, the tax credit program is the federal government’s largest effort to fund construction of affordable housing for low-income households.

About this series

The program dates from the Reagan era and was intended to privatize production of affordable housing by encouraging private corporations to invest in it. It was enacted after Congress stopped funding construction of new public housing, which long faced issues like segregation and other problems.

More than three decades later, the program has produced or rehabilitated more than 3 million apartments — more than 350,000 in California, and nearly 50,000 in the city of L.A.

But 37 years into the tax credit program’s existence, the best that can be said is that it has made a significant dent in the nation’s affordable housing shortage. Across the U.S., about 40 million households have low enough incomes to qualify for tax credit-financed apartments — if there were enough to go around. In L.A. alone, more than 450,000 households have incomes low enough to qualify.

The program has also failed in a fundamental way. Because of its complicated structure, many tenants who are lucky enough to get its “affordable” apartments wind up paying rents that aren’t affordable by the government’s own standard. (See the box below for a technical explanation of how this happens.)

  • 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.”

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Nationally, nearly four out of 10 tenants — well more than 1 million of the households in these apartments — pay rents in excess of what the government defines as affordable, which is rent that consumes no more than 30% of income, according to the federal Department of Housing and Urban Development (HUD). Of that group, nearly 300,000 are, like Knowles, “severely rent-burdened” because their rents consume more than 50% of their incomes, making it a challenge to pay for other necessities like transportation and clothing, according to HUD.

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This same story repeats on a smaller scale in California, where HUD statistics show that about 140,000 households — again, four out of every 10 in tax credit-financed apartments — pay unaffordable rents. Of that group, about 42,000 qualify as severely rent-burdened.

In the city of Los Angeles, the situation is slightly better. About 17,000 households in the program — or more than three in 10 — pay unaffordable rents, according to HUD. Of those households, about 6,500 families, and people living alone or with roommates, are severely rent-burdened. They live in apartment complexes scattered throughout L.A, from Van Nuys to San Pedro, that typically have 60 to 80 units. Most are in relatively low-income neighborhoods.

The tax credit program’s essence is simple: The federal government forgives billions in corporate income taxes in return for corporations that owe the money investing much, but not all, of their tax savings in affordable housing projects.

These tax credit investors include corporate names you may recognize: Wells Fargo, J.P. Morgan Chase, Union Bank and Google, to name a few.

Although the scope of their profits is seldom disclosed, a 2014 report by the federal Office of the Controller of the Currency said they have enjoyed earnings that have ranged from 5% to 14% a year, depending on fluctuations in the broader economy. Another indication of corporate profitability is that demand to buy tax credits far exceeds supply every year.

Who benefits most — investors or tenants?

Determining who benefits most — investors or tenants — is difficult. Given that nearly half of all tenants have extremely low incomes and some, like Knowles, moved in from homeless shelters, tenants clearly benefit a lot.

But on balance, many housing economists have long said investors and developers benefit more.

In 1992, in the program’s early days, economists for the Congressional Budget Office expressed concern to Congress that the program was designed to be “more suited to the needs of investors than poor renters.”

This sentiment was repeated In 2014, when Harvard economist Edward Glaeser and the University of Pennsylvania’s Joseph Gyourko called for a better designed program in their book, Rethinking Federal Housing Policy. They observed that the tax credit program does “remarkably little to make housing more affordable” and does not appear to be “very effective along any important dimension — other than to benefit developers and their investors.”

In 2018 the conservative Heritage Foundation weighed in, dismissing the tax credit program altogether as "a costly and inefficient corporate welfare system." Last year, Heritage called for its repeal.

Tax credit apartments remain in high demand

Despite the program’s frequent failure to provide affordable housing, the apartments it produces in California remain highly sought after in the midst of a housing crisis that seems to keep growing in intensity. Even relatively unaffordable tax credit apartments frequently offer higher quality lodgings at lower rents than what most low-income households can find from private landlords on sites like Craigslist.

Carolina Reid, a UC Berkeley professor who specializes in affordable housing, disagrees with housing economists who argue that investors benefit most, saying tax credit housing is “incredibly important for tenants, offering them quality housing and housing stability.”

She points to her 2018 study for the school’s Terner Center for Housing Innovation, for which she is faculty research adviser, that was based on interviews with 250 tax credit tenants throughout California. It found that most were relieved to have gotten their apartments and had stayed in them for years even though 40% of them were paying rents that were considered unaffordable by government standards. Many said they considered these rents to be affordable and, in any event, worth paying to secure better housing.

We consistently heard that private market rents have so outstripped incomes that families are increasingly struggling to find any kind of shelter, let alone stable and safe units.
— 2018 UC Berkeley report

Many renters also said they had previously been living in undesirable conditions. One construction worker said he had been living with his wife and three children, along with other families, in curtained-off sections of a two-car garage, without cooking facilities or running water.

“This story was not an anomaly,” the study’s authors reported. “We consistently heard that private market rents have so outstripped incomes that families are increasingly struggling to find any kind of shelter, let alone stable and safe units.”

Openings of new buildings financed through the tax credit program are often occasions for a crush of applicants. In early 2022, when his firm was readying to rent out a new complex for low-income seniors in Glendale called Vista Grande Court, developer Steve PonTell recalled a rush of 7,500 applicants for just 65 apartments. He held a lottery.

“This work is important,” PonTell said of developing tax credit-financed apartments. But, he added: “Everybody knows that what we’re doing now is not going to solve the [affordable housing] problem.”

Everybody knows that what we’re doing now is not going to solve the [affordable housing] problem.
— Steve PonTell, developer

A quick, back-of-the-envelope calculation shows why. Los Angeles County housing officials say the county needs 500,000 more affordable units to solve its shortage and that an average tax credit-financed unit in the county last year cost $600,000 to build. That means relying on new buildings to solve the problem just for Los Angeles County would cost $300 billion — nearly eight times the county’s entire yearly budget.

Congress has allocated only $11 billion in tax credits this year for the program nationally.

Resources for renters

Some say the program should be abandoned

Some economists argue that given the high cost of producing tax credit apartments, construction in the program should be refocused to accommodate people with special needs, such as those who chronically experience homelessness, who could be most efficiently served with intensive social services delivered in one place. California is already taking steps in this direction.

Others echo the Heritage Foundation's call to abolish the program. University of Virginia housing economist Edgar Olsen would like to see the tax credit program phased out. “If I were a dictator, I’d get rid of it altogether,” said Olsen, who is a professor emeritus at the school.

Olsen calculates that many more low-income households could be helped for the same cost by increasing the number of Section 8 housing vouchers, which are less expensive for the federal government to offer than subsidizing the building of new housing. These federally-funded vouchers guarantee that a tenant will pay no more than 30% of income on rent — the government makes up the difference between that amount and a market rent.

He also suggests that the government give grants directly to severely rent-burdened tenants to help them pay their rents, avoid evictions and possible homelessness.

Olsen said he recently calculated that the tax credit program is so inefficient that only one in four tax credit dollars goes to lower rents — or about $2.75 billion of the $11 billion spent each year nationally. The rest? Much of it goes to compensate developers and investors and other professionals who provide a large array of services to support them.

A sizable chunk goes to developers

Developers take home a sizable chunk of tax credit funding in return for assuming sizable risks. In California, they have to promise to keep their projects going for 55 years.

They earn fees for steering a project to completion that are capped at 15% of construction costs or $2.5 million, although exceptions for very large projects could drive fees to more than $6 million, state officials said.

The fees are not all gravy for developers. They have expenses from competing for projects and often have to postpone collecting some of their fees until sufficient rents are collected.

But they also also have opportunities to earn more from their projects later on. Once tax credits are used up, tax credit investors typically depart, leaving developers as the projects’ owners. That leaves them in position to claim valuable income tax deductions for depreciation as the assumed values of their buildings decline. They can also apply for a new round of tax credits and fees to rehabilitate their buildings. In a minority of cases, they sell their buildings to big companies assembling large portfolios.

The largest known tax credit property transaction took place in 2021 between two of these big companies. The insurance giant American International Group sold a portfolio of 80,000 tax credit-financed apartments it had assembled in California and other states to Blackstone Real Estate Income Trust for nearly $5 billion.

Another sizable chunk goes to a large supporting cast

An entire industry of well-paid professionals has sprung up to serve developers and investors in the tax credit program.

Developers make use of specialized brokers called syndicators who pair them with tax credit investors, then assume an oversight role on behalf of the investors to make sure they don’t lose their tax credits. This can happen when developers fail to adhere to government regulations during a project’s early years. The top seven syndication firms are huge, each handling more than 100,000 tax credit apartments, according to the online industry magazine Multifamily Executive.

There are also specialized accounting firms that help developers and investors navigate complicated tax codes.

If you flood a place like Los Angeles with vouchers when it doesn’t have [sufficient housing] supply, all that will do is raise rents.
— Peter Lawrence, Novogradac director of public policy and government relations

Peter Lawrence, director of public policy and government relations for the specialized accounting firm Novogradac, says it would be foolish to abandon the tax credit program in favor of housing vouchers because both are necessary. Housing vouchers alone won’t work in tight rental markets like we have in Los Angeles, he said. Here, many voucher holders say they have difficulty finding landlords willing to accept them.

“If you flood a place like Los Angeles with vouchers when it doesn’t have [sufficient housing] supply, all that will do is raise rents,” he said.

There are also property management firms and lawyers — lots of lawyers. One L.A. developer, who asked not to be named because he is concerned about alienating potential investors, said he has been in meetings to close deals with as many as 50 others — half of them lawyers. “Everybody’s got a lawyer,” he said.

Finally, there are the professional organizations and lobbyists whose job it is to maintain the strong bipartisan congressional support the tax credit program has always enjoyed.

Lawmakers in Congress who support the program dismiss concerns about developers and investors making too much money as ignoring a fundamental reality of public-private partnerships: Private entities will only participate if they can make money. As the late Sen. Johnny Isakson (R-GA) put it at a committee hearing to extend the program, “If you don’t do what you need to do [to attract private capital] the money will go somewhere else.”

Neise Knowles now has a choice

A photo taken from across the street of a four story apartment complex with a color scheme of beige, and pale salmon pink. It is enclosed by a black metal fence. The sidewalk is lined with trees.
Rent at the Richard N. Hogan Manor apartment complex consumes more than 60% of Neise Knowles' income.
(Samanta Helou Hernandez

As for Neise Knowles, the South L.A. woman who has been struggling to pay rent, she got good news last month.

After being on a waiting list for a Section 8 housing voucher for six years, she was notified that her turn had come.

Knowles said she was extremely relieved to now have a choice.

She can use the voucher to stay at her current apartment, which, as a tax credit property, is obliged to accept it, or she can shop around for a private landlord who will accept it.

Knowles said she was surprised to learn that shopping around can be difficult

Regardless of whether she finds a new place, the voucher will be life-changing. Knowles' rental payment will be cut in half.

  • 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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