By Scott Littlehale
In the first half of 2020, investors in Idaho based housing developer Pacific Builders were awarded $200 million in California tax subsidies in exchange for an estimated $179 million in private financing to create new housing units. The company will also get an estimated $46 million in developer fees from these projects.
Nearly half of California’s current annual affordable housing production comes from similar arrangements — a complex Reagan-era financing tool, called Low Income Housing Tax Credits, or LIHTC. LIHTCs are public subsidies — credits against future tax liabilities — that are paid to wealthy private investors who put up the money to create affordable units.
Since 1986, LIHTCs have been credited with funding the acquisition, production and rehabilitation of over 400,000 housing units in California. The California Tax Credit Allocation Committee awarded $3.5 billion in state and federal LIHTC credits in 2019 alone. It awarded more than $2.4 billion in the first half of 2020, after the state authorized an additional $500 million in credits to try and stimulate more housing construction.
But a recent study shows that California is actually providing substantially more in subsidies to investors than we actually get back in project financing — adding as much as $26,000 to the cost of each LIHTC financed affordable unit. It also shows that real estate developers, contractors, bankers and investors capture 35% of every dollar in an LIHTC financed project, on average. By contrast, local government and permitting fees capture just 6% and construction labor just 14%.
Unlike other forms of publicly subsidized construction, LIHTC builders like Pacific Companies are not required to pay their workers the local market prevailing wage. In fact, the company’s own 2020 LIHTC applications confirm that most of its workers will not be paid prevailing wage. For more than half of California construction worker families who are considered “low income” or “very low income” according to Department of Housing and Urban Development standards, this dynamic actually makes the housing problem worse — especially in high cost coastal communities where the affordability crisis is most acute.
This current formula seems like a great deal for wealthy builders and investors. But it’s simply not working as well as it should for millions of working Californians struggling with housing costs.
This year, a newly elected crop of state lawmakers will once again be tasked with addressing a persistent housing supply shortage and affordability crisis that have only worsened with the onset of COVID 19.
While most everyone agrees on the urgent need for action, the politics of housing have proven especially fraught. A statewide rent control measure on the 2020 ballot was rejected. Over the last few years, proposals aimed at expanding development by streamlining local regulations have failed to win broad support. And just within the past month, California’s Auditor said “the state lacks an effective approach to planning and financing development of affordable housing.”
California lawmakers, builders, workers and other community stakeholders will no doubt continue to engage in a spirited debate about new housing policy. Yet this time, they will do so against the added backdrop of public budgets and working families strained to the breaking point by COVID 19.
To build enough of the housing that California needs now, we should start by examining and reforming the multi-billion dollar financing tools we currently have in place. We must ensure taxpayers are getting more of the housing investments they’ve paid for through tax subsidies to wealthy investors, and reduce the number of housing construction workers that require housing assistance themselves.
California’s current Low Income Housing Tax Credit system is an ideal candidate for this kind of scrutiny.
Scott Littlehale is a research contributor to Smart Cities Prevail, a California-based, non-partisan construction industry research and education organization. Click Here to read his latest report on the LIHTC program and California’s Housing Affordability Crisis.