With the number of households spending more than half of their incomes on housing at an all-time high, there is both a practical and political necessity to stretch scarce funding for affordable housing as far as possible.

Michael Spotts
Michael Spotts

From the extensive coverage of this issue in Affordable Housing Finance to the research Enterprise conducted with the Urban Land Institute (ULI) Terwilliger Center for Housing on Bending the Cost Curve, our field has been working hard to find more efficient development and preservation practices. Those allow us to provide homes to more people and address concerns about development costs.

However, it is important to resist the tendency to reduce the focus of this conversation to upfront costs alone. At Enterprise, our recent research on state qualified allocation plans (QAPs) for low-income housing tax credits has focused on the importance of emphasizing cost-effectiveness and the value that affordable housing can bring to residents and communities.

Stable homes provide much more than shelter. A growing body of research shows that well-located, quality housing promotes resident health, educational achievement, and economic mobility, and can yield reductions in other public expenditures. Furthermore, the recent Supreme Court ruling on disparate impact and the Department of Housing and Urban Development’s Affirmatively Furthering Fair Housing rule have reinforced the ever-present need to focus on social equity and resident opportunity when investing in affordable housing. Failure to recognize this value can lead to under-investment in these priorities to the long-term detriment of all.

In June, Enterprise released Giving Due Credit: Balancing Priorities in State Low-Income Housing Tax Credit Allocation Policies, the latest piece of our continuing effort to disseminate leading practices in cost-effectiveness in affordable housing. Enterprise reviewed the QAPs for every housing credit allocating agency nationwide to identify leading methods of balancing cost control with building quality and resident opportunity.

The report documents overall approaches to managing a housing credit program, as well as specific provisions, incentives and tools. It also discusses the numerous options and trade-offs that policy makers and housing developers face and offers examples where specific incentives and provisions can have unintended effects on ostensibly unrelated priorities.

The research showed that, as required by federal law, each allocating agency’s QAP includes provisions related to cost control, but there is wide variation in emphasis, detail, and approach. This is in keeping with the spirit of the program’s decentralized design, which allows each state agency to respond to its own affordable housing needs. Many of these provisions—such as cost caps and point-based incentives for services— are fairly straightforward.

Many agencies are taking their efforts a step further with policies, procedures, and incentives that improve efficiency, enhance value, and develop potential new models for affordable housing. Examples include:

Improving efficiency of the current system: Minnesota is one of several states that combine a cost-threshold requirement with a point-based incentive that encourages competition among developers to achieve greater cost savings. This point-based incentive is balanced with points for achieving other agency priorities, which provides an incentive for developers to focus any necessary cuts on project elements that do not add value.

Supporting value-enhancing development characteristics: Washington coordinated with the Puget Sound Regional Council (Seattle’s transportation planning agency) to develop context-sensitive incentives for transit-oriented development and to offer points for locating in “high-opportunity areas.”

Creating space to test new models: Pennsylvania conducts a parallel “Innovation in Design” competition as part of its allocation process to encourage excellence in design, implementation of energy-efficient technologies and materials, and leveraging of community and capital resources. If successful, such innovations can reduce environmental impacts, yield operating cost savings, and provide other benefits.

There is no single issue or innovation that will fundamentally change the cost profile of housing credit development, nor overcome the barriers to opportunity facing lower-income households. While the complexity of this situation may seem discouraging, an alternative perspective is that it represents an opportunity for experimentation and innovation, with a crucial role for the collection and sharing of leading practices.

Based on the current state of practice, Giving Due Credit offers several broad recommendations for shifting to a value-oriented analysis of affordable housing costs, including:

· Funding sources and regulatory compliance should be coordinated and streamlined to reduce inefficiencies and “dead weight losses.” Massachusetts’ MassDocs system does this by reducing the closing costs associated with multiple financing layers;

· Cost, design, and construction standards should account for and encourage long-term savings to ensure short-term cost reductions do not lead to higher operating, maintenance and recapitalization costs over time. For example, whole-building—rather than piecemeal—approaches to energy efficiency can yield both upfront and long-term savings;

· Agencies should proactively consider the inevitable trade-offs that come with provisions to support a range of policy goals, as well as the cumulative impact of QAP provisions on costs and quality;

· Agencies should encourage innovation through the use of pilot initiatives, which can test new concepts and models before they are applied to the entire allocation; and

· Progress toward agency goals—related to both costs and outcomes—should be measured and the results disseminated so that successful practices can be replicated in other states and brought to scale.

Allocating agencies have the dual mandate of being effective stewards of public resources and expanding resident opportunity through the construction or preservation of high-quality affordable housing. These are crucial obligations, and failing at either can erode public and political support for affordable housing. The core challenge moving forward is building upon and identifying innovative and efficient practices that allow us to use resources more effectively to improve more lives and communities. Those successes will help us better communicate the value of affordable housing.

Michael Spotts is a senior analyst and project manager at Enterprise Community Partners, a national affordable housing and community development organization. He is the author of Giving Due Credit: Balancing Priorities in State Low-Income Housing Tax Credit Allocation Policies.