Q&A: The Future Of DC Affordable Housing
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Vibrant neighborhood redevelopment, looming tax reform and potential cuts to federal programs all affect what is going on with affordable housing in Washington, DC, and nationally. Bisnow chatted with Nixon Peabody DC office managing partner Jeff Lesk to discuss the past, p0resent and future of affordable housing and community development.
Bisnow: What are the most critical programs to support and expand the supply of affordable housing nationally? How will the change of the national legislature and administration affect these programs?
Lesk: Ironically, the most important federal program to develop and rehabilitate affordable multifamily rental housing isn’t a HUD program. It’s the Low-Income Housing Tax Credit program run through the IRS. Its effectiveness stems from its “public-private partnership” approach, under which private developers and investors undertake, finance and manage projects under governmental oversight and regulation. The result has been strong private sector underwriting, project delivery and asset management, delivering around 90,000 units of affordable housing annually at income levels ranging from workforce housing to units for the formerly homeless.
On the whole, the housing is high-quality, well-appointed and located in a variety of neighborhoods. And while the LIHTC program provides a good amount of the project financing needed to compensate for the lower levels rent that qualifying tenants can afford to pay, many projects — especially those providing housing to the lowest-income tenants — still have a gap that needs to be filled by other housing programs. While the LIHTC program enjoys broad bipartisan legislative support, proposed cuts in these other gap-filling programs threaten the viability of these important projects, particularly in light of rising interest rates and high land costs in certain markets.
Furthermore, since most tax credit investing comes from large corporations and financial institutions, likely reductions in the federal corporate income tax rate will reduce after-tax investor yields and result in reduced private investment into these projects, widening the gap even further and [putting] more stress on project feasibility. We’ve already seen investors pricing in the prospect of this happening, and some are sitting out until there’s more clarity on precisely how tax reform and budget cuts will play out.
Bisnow: How are developers, policymakers and creative lawyers responding to this state of the market? And how is this specifically playing out in the District?
Lesk: The focus nationally is on filling the gap. Short term, cities are committing resources to supplement available debt and equity. Many continue to make secondary loans on attractive terms from block grants received by HUD — particularly under the Community Development Block Grant and HOME Investment Partnership program — but they’re nervous about the future of these programs under some of the legislative and administrative proposals.
DC spent over $100M from its Housing Production Trust Fund in 2016 to help address this and other affordable housing issues. Developers are deferring fees and seeking gap financing from any other sources they can find — including looking to foundation funding. And at Nixon Peabody, we’re working with both our developer and investor clients to structure and implement transactions to both maneuver through the increasingly complicated layered financing and create new approaches to doing more with less.
Bisnow: What major community development trends are you seeing on the ground in the District? And are these trends positive or negative?
Lesk: Clearly DC is experiencing one of the most explosive neighborhood revitalization booms in the nation. The U Street Corridor, Shaw, Logan Circle, NoMa, Mount Vernon Triangle, Columbia Heights, Navy Yard and H Street already have become sought-after neighborhoods. Petworth, Bloomingdale, Brookland and others don’t appear to be far behind. This has been largely fueled by the massive influx of young professionals to the District embracing neighborhoods that are walkable, bikeable, diverse, sustainable and characterized by a sense of place.
As these neighborhoods deliver more options for housing, services and entertainment, we’re beginning to see more Baby Boomers moving closer to downtown, and developers are including larger units for them and for young families. From a pure urbanism standpoint, this all seems great on its face. But we have to be careful. These neighborhoods are rich in cultural, ethnic and architectural tradition. Existing tenants and small-business owners are part of the urban fabric of these neighborhoods. Market forces threaten to price them out, and strong policies and incentives are needed to create balance.
One of the best ways to do this is by developing mixed-use, mixed-income housing through public-private partnerships. But we also need to balance new development and preservation of existing building stock – and we can’t develop in a way that reduces the overall number of affordable housing units.
Bisnow: You often talk about the need to develop affordable housing in a way that is “not just housing.” What do you mean by that? How can we provide the programming and services that are “above and beyond” affordable housing?
Lesk: Developing well-designed, well-appointed affordable housing can be a foundation for strong communities. But the truth is that residents who qualify for this housing – especially housing targeting lower-income bands — often have additional needs. And that’s where the need for a holistic approach involving other community institutions comes into play.
Affordable housing projects that are developed in consort with child care, technology and job training programs, medical and educational institutions and job-creating programs are much more likely to achieve our desired outcomes.
Nixon Peabody continues to be a leader in working with clients to develop and finance projects utilizing various community development tools; new markets, historic and renewable energy tax credits being among the most powerful. The same public-private partnership approach that has proven successful in producing affordable housing has facilitated the development of community centers, medical clinics, charter schools, theaters, grocery stores and other job-creating projects.
Bisnow: Let us bring all of this back to your particular legal practice. What is the most interesting new development in affordable housing finance and community development in DC that you and your firm have personally been involved with?
Lesk: Nixon Peabody has just launched the first “Community Solar” project in Washington, DC. We formed a nonprofit organization, committed pro bono time and undertook the development and operation of solar arrays on three downtown commercial DC rooftops. The project not only produces clean, renewable energy, but we distribute the financial benefits of all of the energy produced to low-income District residents to reduce their monthly energy costs at no charge. The law has been on the books since 2013, but it took lawyers with experience in both affordable housing and renewable energy finance who were willing to commit the legal resources to address the structural, legal and practical implementation hurdles.
Why did we do it? We believe strongly in giving back to our community and to the stakeholders in the affordable housing and community development industries we work in and with.
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