If you paid any attention to Durham's recent municipal elections, you probably heard the phrase "affordable housing" dozens of times—and for good reason. According to real estate website Zillow, median rent for a two-bedroom apartment in Durham has gone from just over $1,100 per month in 2012 to nearly $1,400 per month as of this fall.
Last month, the city council voted to use a prime city-owned lot at the intersection of Jackson and Pettigrew streets, next to Durham Station, for eighty units of affordable housing, along with office and retail space to bring in rent and help subsidize building costs. Now the council is deciding how to use a similarly desirable property downtown—the current headquarters for the Durham Police Department—to address the city's affordable housing needs.
Both discussions have centered on a sort of balancing act, leveraging low-income housing tax credits, city money, and revenue from uses other than housing to support the most affordable units. At the Jackson Street site, it turned out that market-rate apartments—typically seen as a way to subsidize affordable units—only widened the funding gap because those units would not be able to command as much rent as higher-end apartments nearby. The math was made more complicated still by a small, odd-shaped lot and design considerations necessitated by the nearby bus terminal.
The DPD site has more space to work with—about four acres as opposed to two—but throws in the wrinkle of whether to restore or demolish the existing building, a midcentury relic designed by acclaimed modernist architect Milton Small.
In short, creating affordable housing is easier said than done, as the new city council, which will be sworn in next month, will soon discover. Here are some (but surely not all) of the hurdles the city faces:
Securing low-income housing tax credits
"The Low-Income Housing Tax Credit (LIHTC) is the most important resource for creating affordable housing in the United States today," says the U.S. Department of Housing and Urban Development.
Under LIHTC, the IRS distributes a certain amount of tax credits to state and local agencies, which pass them on to developers. Developers then typically sell them to banks and investors to create equity. There are two types of tax credits: 9 percent, which will subsidize much of a project but are harder to come by; and 4 percent, which are much easier to secure but cover fewer costs.
Because the coveted 9 percent tax credits are competitive (the city estimates it can only get one such project awarded each year), Durham needs to spread out its applications to avoid competing with other developments initiated by the city or the Durham Housing Authority, which is seeking to redevelop its properties in coming years. A 9 percent LIHTC application is already planned for the Jackson Street project.
The scale of affordable housing projects is effectively capped by the program, says Karen Lado, assistant director of strategy for the city's community development department, because there is a limit to the amount of tax credits that can be awarded per project and per unit. Usually, this works out to a maximum of about eighty affordable units, as was the case with Jackson Street.
"Once you get to about eighty, you're basically not getting any additional tax credit," Lado says. "It just adds costs to your project, for which there is no offset subsidy."
Four percent credits are also not well-suited for urban projects, particularly new construction. Because the subsidy is smaller, they work better for large, low-density rehabilitation projects, Lado says.
As prevalent as it is, the LIHTC program isn't perfect. Earlier this year, an investigation by NPR and PBS's Frontline found the program lacked oversight and was building fewer units at a higher cost to taxpayers.
Balancing costs and revenue
Beyond tax credits, the city can help fund affordable housing developments. The city dedicates two pennies of the property taxes —which adds up to about $5.4 million per year—to housing, but additional sources are likely needed.
One way to offset those costs is to add rent-generating office and commercial space to a development.
That's the plan for Jackson Street, partly to create revenue but also to address the city's need for downtown office space and fully utilize a prime site that would not have been filled by the maximum eighty affordable housing units. Office and retail are also being considered for the DPD site.
But placing too many conditions on how a city-owned site must be used can cut into a developer's profit margins and in turn decrease the sale price of the land. The amount of affordable housing and the income levels served by those units also affect how much revenue a property will generate—and thus, again, the land price.
"There is a point at which you essentially use up all the value," Lado says.
The city owns both the Jackson Street and DPD sites. In the case of Jackson Street, the city will sell the property for $1 to a nonprofit development team. The city plans to sell the DPD property, with proceeds from the sale going toward construction of the new headquarters opening on Main Street next fall.
Municipalities in North Carolina cannot require developers to include a certain amount of affordable housing, a practice known as inclusionary zoning.
The city can, however, place conditions on the sale of city-owned property requiring affordable housing and other uses to be built. Durham can also offer what are called density bonuses. Right now, that means allowing developers to build one market-rate unit over density limits for every affordable unit they build. But no one is taking the bait. The council is considering upping its incentives—for example, allowing developers to build higher.
Further complicating things, the U.S. House's tax-reform proposal would eliminate tax-exempt private-activity bonds and "gut" 4 percent tax credits, Lado says.
There's also a concern that if the Trump administration lowers the corporate tax rate, there would be a corresponding dip in how much companies—which buy up low-income housing tax credits to offset their corporate tax obligation—will pay for equity for the credits.
Lastly, the city can't be sure how developers will respond to projects requiring affordable housing.
"The biggest challenge we have is that there is a sort of unknown stigma toward affordable housing," Lado says. "There could be none. We don't know how the need to provide affordable housing or the sense that there will be affordable housing on the site could impact developers."