Households in rural rental properties are among the most vulnerable in the nation. With lower median incomes and higher poverty rates than homeowners, many renters are simply unable to find decent housing that is also affordable. As a result, rural renters are more than twice as likely to live in substandard housing compared with people who own their own homes.
Though the demand for rental housing in rural areas remains high, the supply has decreased. Most federally supported multifamily properties are 35-plus years old and need modernization. These properties have suffered from federal funding shortages and statutory and regulatory barriers that make recapitalization difficult or impossible.
Since neither the private nor the public sector can produce affordable rural housing independently of the other, a public-private partnership is needed to be successful. The following are several existing programs that are proof of the success of such partnerships. However, more can and must be done so that the housing needs of rural America can successfully be met.
An overview
The U.S. Department of Agriculture’s (USDA’s) Sec. 515 rural multifamily housing and Sec. 514 farm labor multifamily properties are the lynchpin for affordable rural housing. Poverty rates in rural areas are substantially higher than in urban areas. Therefore, rental assistance under the Sec. 521 Rental Assistance program is essential for many family and elderly households residing in rural America.
Female-headed households currently occupy 71% of these affordable housing units, with over 62% occupied by senior (62 or older) or disabled households. The average annual income of residents in rural housing properties is approximately $13,600—approximately 75% less than the average U.S. household income—and it’s even less for senior and disabled households.
The housing credit program
Rural housing depends on several sources of funding for construction and preservation of the existing housing stock. The low-income housing tax credit program is a vital source for this housing by bridging the gap between what the market provides and what the market demands.
The housing credit program allows nonprofit and for-profit companies to work together with local and state governments to raise private equity and to help bridge the financial gap. Savings are passed on to the residents in the form of lower rents and affordable rental housing. Approximately 43% of Sec. 515 properties are financed with housing credits.
Since its inception in 1986, the housing credit program has created homes for approximately 2.4 million families. For each 100 apartment units, 116 jobs are created, generating more than $3.3 million in federal, state, and local revenue. This creates a positive, broad-based economic benefit that includes jobs, income, and taxes in industries such as manufacturing, trade, and services, in addition to construction.
The housing credit is the most successful affordable rental housing production program, and its place in the tax credit code is an essential part of its long-term success. In fact, it has become the model for subsequent programs.
USDA’s Rural Development Sec. 521 Rental Assistance program
Rural Development Rental Assistance provides deep subsidy to very low-income residents by paying the difference between the resident contribution (30% of their adjusted income) and the basic rent required to operate the property; almost two-thirds of Sec. 515 units are subsidized with rental assistance.
Under current regulation, Sec. 521 Rental Assistance is only provided to properties with an outstanding Sec. 515 or 514 mortgage. When the USDA mortgage is prepaid or matures, the rental assistance subsidy is no longer available for that property or those residents.
Instead, sufficient funds must be provided for both current levels of Rental Assistance and additional Rental Assistance to support increasing program costs and preservation efforts. Unfortunately, Rental Assistance budgets have been constrained for many years, even before sequestration issues impacted the program at the end of fiscal year 2013.
Historically, Rental Assistance budgets on a per unit basis are about half the cost of other rental subsidy programs. Much of that has been achieved by delaying needed repairs and restricting operating funds.
Valuable affordable housing is disappearing
The existing rural multifamily programs were never intended as a one-time capitalization for low-income housing. The original intent was to allow properties to refinance out of the program and provide a market-centric nucleus of decent housing in rural areas. However, the federal government changed the laws, rules, and basic operations when it changed the federal tax code, withdrew prepayment rights, and reduced Sec. 515 funding without any replacement mechanism.
Even so, the Sec. 514 and 515 programs operate through a successful public-private partnership. The portfolios consist of 13,829 apartment complexes containing 416,396 rental homes, a staggering decrease of 14,171 properties and almost 117,000 apartment homes since the programs’ inception in 1963.
The Sec. 514 and 515 portfolios are by and large more than 30 years old and at risk of becoming obsolete. According to Rural Development, they have not financed any new affordable rental units since 2011.
In 2002, Rural Development estimated that 4,250 Sec. 515 properties with 85,000 units “will physically deteriorate to the point of being unsafe or unsanitary within the next five years.” At that time, Rural Development estimated it would need $850 million to maintain just this portion of the portfolio, and as much as $3.2 billion will be required for portfolio-wide rehabilitation.
Since little progress has been made, the 2002 $3.2 billion estimate is now approximately $5.6 billion, and growing each year as aging assets are not rehabilitated. Clearly, current efforts with existing resources are not enough to achieve portfolio-wide preservation in any reasonable time period.
With affordable housing properties exiting the program at this rate, it is imperative to prioritize the preservation of existing properties ahead of new construction. It is much more cost effective to complete a substantial rehabilitation compared to the cost of building new.
Traditional programs work
Traditional rural rental housing and rent subsidy programs work and often attract other forms of public and private assistance.
For starters, Congress needs to clearly instruct Rural Development to use all financing on hand, specifically Sec. 521 Rental Assistance for preservation. While a greater appropriation of Rental Assistance is welcomed, it is equally important Congress gives a specific direction to spend all funds on hand each fiscal year.
Previously, when Congress provided funding specifically for preservation, Rural Development allocated that amount. Without that clarity, the last two administrations have allowed other priorities, including holding onto reserves of Rental Assistance, to take priority over preservation transactions.
In addition, Congress should continue to modernize the housing credit program, a vital source for rural housing production and preservation projects. Changes to the tax code can strengthen and expand both the housing credit and housing bond programs so rural housing preservation and new construction can continue or be expanded.
Most significantly, a fixed 4% tax credit would be a game-changer for struggling small rural markets, as it yields an approximate subsidy of 30% of the eligible low-income unit costs for the acquisition of existing properties and new development or rehabilitation in conjunction with tax-exempt private-activity bonds.
The current floating 4% credit rate limits the equity available, whereas a fixed 4% would facilitate more preservation and production, resulting in multifaceted benefits: more equity (and less debt), which significantly lower rents for low-income and vulnerable households.
Moreover, conflict between the current tax code and market forces creates unintended barriers to affordable housing preservation. Almost all Sec. 515 properties were originally constructed through limited partnership arrangements that make it exceedingly difficult to introduce new capital into these aging properties. Any new capital contributions generate additional passive losses that current investors cannot utilize.
Furthermore, very few investors are willing to subject themselves to steep recapture taxes that result from selling a property. They instead choose to pass on the property to their heirs at a stepped-up basis. While that is certainly a right, it does not facilitate sound housing policy.
A modest tax code change could waive the depreciation recapture tax liability for investors who sell their property to new owners committing to invest new capital and preserve the property as affordable housing for a minimum of another 30 years. The benefit to the federal government of extending the affordability restrictions will be far-reaching, greatly outweighing the modest cost of this proposal.
Conclusion
America’s elderly, working families, civil servants, and working poor seek to live in communities that are near their jobs and families. In much of rural America, this cannot happen due to the lack of affordable housing options. Homeownership is often out of reach or not financially viable. Furthermore, the cost of providing any new housing or rehabilitating existing housing to current standards without public-private assistance results in rents that are simply too expensive for most low-income Americans.
But with a few relatively minor changes, Congress can provide the tools needed to continue the successful public/private partnership for affordable rural housing.
Tanya Eastwood is CEO of Greystone Affordable Development and chair of the Council for Affordable and Rural Housing (CARH). She can be reached at [email protected]or (919) 573-7515.
