Why LA County could lose $3 billion worth of affordable housing

L.A. County is at risk of losing roughly $3 billion worth of affordable housing in the next five years, according to a draft report presented to county officials Thursday.

On top of that, efforts to build new units for homeless and low-income people in the county are also hitting snags. 

Why? A combination of gentrification, federal tax reform, and the circuitous way affordable housing is funded in this country are mostly to blame.

How affordable housing disappears

The U.S. has largely stepped away from building things like public housing projects. Instead, we have affordable housing developments that are public-private hybrids—meaning private developers use public funds to construct affordable housing developments, which they then agree to operate at reduced rents for a period.

Eventually, those periods expire, and the developer can then choose to raise the rents. The same is true of Section 8-funded apartment buildings. Once the federal contract for rental subsidies expires, the owner is free to do as they wish with rents.

In areas that are gentrifying or close to quality transit, the risk is even higher that landlords will opt to get out of the affordable housing business, especially as properties age and become expensive to maintain.

The California Housing Partnership Corporation, in their draft report presented Thursday, counted 11,000 units countywide that are in this category. With an L.A. apartment, on average, worth $250,000 on the market, that's almost $3 billion worth of affordable housing.

"And it's even more, it's probably double that if you had to replace them," said Paul Beesemyer, Southern California director for CHPC. Factoring in the construction and associated fees, it could cost more like $400,000 per unit to build them from scratch, he said.

Aren't we investing more in affordable housing than ever?

Yes and no.

It's true that there has been some major local investments in L.A. County. In November 2016, voters in the City of L.A. approved Proposition HHH, a $1.2 billion bond expected to construct 10,000 new apartments for homeless and low-income people over the next ten years (24 projects, consisting of 1,800 units have been approved so far).

The L.A. City Council also recently approved a linkage fee—a charge developers pay, based on square footage, for building market rate residential and commercial buildings. That money then goes into the city's affordable housing fund. The fee's expected to raise another $100 million a year for affordable housing. And tens of millions of dollars a year are going into affordable housing through Measure H, a countywide 1/4-cent sales tax voters passed last year.

But at the same time, federal resources are going away. Specifically, low-income housing tax credits. Those are federal tax credits that are awarded to affordable housing construction projects, which they then sell to corporations to fund construction.

The reality is that no affordable housing development bigger than a handful of units is built without those tax credits. And since corporate tax reform, they've plummeted in market value.

CHPC President Matt Schwartz said L.A. County alone saw a 21 percent decline in tax credit funding for new affordable housing developments in 2017.

"That will play out over the next couple years," said Schwartz.

Nationally, the financial firm Novogradac & Company LLP estimated tax reform will cost the country 232,300 new rentals for low-income people in ten years. 

Construction costs have also gone up, accounting for some of the decline, Schwartz said. 

Tax credits, incidentally, are also used frequently to preserve existing affordable housing, providing landlords with renovation money in exchange for keeping rents low for a period. Those tax credits have also taken a hit.

What can be done?

CHPC is expected to present recommendations to L.A. County's Board of Supervisors in the coming weeks. They also lobby the California legislature and governor's office for more investments in affordable housing. (There are rumblings about using some of the state's budget surplus for construction projects.)

Schwartz said there are ways the county can identify affordable housing that's going away and provide incentives for landlords to keep the units low-rent.

The federal omnibus spending bill passed last month also did provide some additional funding for low-income housing tax credits. But didn't restore the program to near where it was before tax reform.

The implications for California -- where high housing costs already are considered a crisis in many areas -- are big.

"Over a ten-year period, if there's not further changes," Schwartz said, "we could be short about 70,000 affordable homes."