Regional Report

D.C. harnesses the boom

By Bendix Anderson

(Affordable Housing Finance, June 2005) Washington, D.C. – This city has captured the energy of its own real estate boom to create one of the nation’s most powerful new affordable housing programs.

While building cranes rise across downtown and high-rise condominiums sell for more than $600 a square foot, many neighborhoods here still suffer from blight and crime. A grisly murder at a public housing project recently set off an explosion of protest as community leaders demanded help to make their neighborhoods safe.

Meanwhile, the housing stock in other neighborhoods is highly desirable, and the cost of living is rising fast. Even in the Ivy City and Trinidad neighborhood, which was once one of the city’s toughest places, property values rose an average of 31% in 2004 and affordable housing is in increasingly short supply.

But district officials have a plan to harness the real estate boom to build affordable housing and create integrated neighborhoods.

Trust fund gets dedicated money stream

Washington, D.C.’s Housing Production Trust Fund (HPTF) has been on the books for years, but 2005 is only the third year that it has actually received any money. Now the HPTF has a dedicated stream of funding from the District’s 15% real estate transfer tax. With all the condominiums being bought and sold here, cash is pouring into the trust fund.

In 2005, for example, about $50 million will flow into the HPTF. By the end of the year, the agency expects the trust fund to have $100 million in its accounts, waiting to be spent.

That makes it one of the most powerful housing programs in the country. Just to provide some perspective, New York state’s low-income housing tax credit program will have only $34.5 million in tax credits to distribute in 2005. Tax-exempt bond programs can provide hundreds of million of dollars, but all that money must eventually be paid back. The money in the HPTF is unleveraged cash.

Housing officials are now identifying what they call “hot spots”: blighted neighborhoods in need of redevelopment.

At the same time, the District is planning a bond issue to raise $170 million to $185 million. This huge loan will be paid for over 20 years with $15 million a year from the HPTF. When the money from this loan is combined with the money already in the trust fund, it will provide the equity to kick-start three to five large-scale neighborhood redevelopments.

This money will be leveraged with public and private capital much like the grants provided by the Department of Housing and Urban Development’s HOPE VI program. The Department of Housing and Community Develop-ment’s (DHCD) tax credit and tax-exempt bond volume cap will certainly contribute. But unlike the HOPE VI program, which usually builds fewer affordable units than it tears down, D.C.’s housing officials promise to replace every distressed affordable apartment they demolish. In fact, their goal is to add many new units to the affordable housing stock.

Each redevelopment will cover a much larger area than a HOPE VI project, addressing blighted properties and opportunities to build new housing in an entire neighborhood. Housing officials also plan to involve the residents deeply in every stage of the process.

Officials rush to build

This city is in a hurry to build affordable housing. Officials believe that the District’s real estate boom and the isolated, blighted neighborhoods left behind by that boom combine to offer an opportunity to create integrated, healthy communities.

“We’ve gotten to a point in history where all the stars are lined up for what we do,” said Deputy Mayor Stanley Jackson. However, as property values rise in some transitional neighborhoods, Jackson recognizes that the opportunity to build new affordable housing won’t last forever.

“Columbia Heights is a great example of that. It’s an impossible market,” Jackson said. In recent years, Columbia Heights has turned from a blighted place into a charmingly restored, fully gentrified neighborhood that is financially out of reach for affordable housing developers that don’t already own land there.

The District never had as large a portfolio of abandoned properties to work with as some run-down cities. There are currently 2,900 abandoned sites, down from 9,800 15 years ago. As the cost of land rises, the DHCD has created a site-acquisition program that lends affordable housing developers up to half of the cost of acquiring a site.

Market forces harnessed for affordable housing

But in the neighborhoods where land is still relatively inexpensive, officials have harnessed private-sector investors to help build new mixed-income and affordable housing projects.

“Banks are now calling me up and asking me where we want them to invest,” Jackson said.

He takes bankers on tours of the neighborhoods where the city is working. As the private-sector money becomes willing to invest in inner-city neighborhoods, the District no longer needs to pay the whole cost of redevelopment. Instead, it often provides only the extra gap financing needed to make a project feasible.

“I can be that gap man, which is where I’m supposed to be,” Jackson said.

Many private developers these days often mix affordable housing with market-rate units at their housing projects, in exchange for relatively small amounts of subsidy. “We’re creating mixed-income communities, but we’re not driving it,” Jackson said. Today, in many projects, the District can leverage its investment of subsidy with other private and public money at a ratio of $1 to $8.

DHCD is also trying to help tenants take advantage of the boom with a variety of homeownership programs.

For example, the District has an unusual law that gives renters in a building a chance to purchase their apartments at a fair market price when their building is sold. Through its First Right Purchase Assistance Program, DHCD offers loans with low interest rates, or even with no interest, to help these tenants.

“We’re trying to partner with the residents and protect them from the market wave that’s coming at them,” said Jalal “Jay” Greene, the new director of DHCD, who took over the post from Jackson this January.

Fixing city government

These financial strategies are possible in part because the city government fixed itself. In the late 1980s and early 1990s, the District of Columbia was out of money and had lost the trust of the financial community. But officials fought to regain that trust, and the borrowing power that comes with it. “We’ve gone from a junk bond rating to a AAA-rating,” Jackson said.

As a result, the city has access to the financial markets, and it can securitize the housing trust fund. If the city hadn’t solved its budget problems, HPTF couldn’t have been created and the income from the transfer tax would still be needed to fill gaping holes in the general budget.

DHCD has also changed. “I not only had to change the paradigm of the marketplace, I had to change the culture of the agency,” Jackson said. “We set certain standards on performance. … I invest for outcomes.”

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