Ron Terwilliger is concerned. In his eye, the United States is in the midst of an affordable housing crisis, and the country has yet to show a strong inclination to do much about it. In fact, he's not very optimistic that the federal government will be ready to do so at any point in the near future.

There are 105 million households in the United States, and 14 million of them are in crisis, meaning they spend more than half of their income on housing and/or live in a severely distressed residence, said Terwilliger, the national managing partner of Atlanta-based Trammell Crow Residential, an apartment development company that produces approximately 1,000 affordable apartments a year. He also recently completed a two-year term as chairman of the Urban Land Institute.

“President [George W.] Bush should say that attacking the affordable housing industry is a national goal. I think there should be a national policy that says every household is entitled to a safe, clean and affordable place to live,” Terwilliger said.

“Every state should be required to come up with an acceptable plan to address the problem, and I think the Feds should stop revenue-sharing highway funds if the states are out of compliance,” he added. “The states should then undertake the same process with the localities, which make zoning decisions.”

However, Terwilliger admits such a national effort may not be in the offing anytime soon. “I'm not optimistic that we will tackle this on a national basis,” he said. “The problem is that no U.S. president to my knowledge has made affordable housing a priority. I've never seen it in my lifetime. We're left trying to convince state and local officials.”

Terwilliger is not alone in the multifamily industry in his conviction that more needs to be done to combat the nation's affordable housing problems. In fact, many of the industry's highest-profile members are exploring and proposing new ways to provide more affordable housing.

How bad is the problem?

For those seeking to quantify the affordable housing situation, there are plenty of statistics. The National Low Income Housing Coalition's annual “Out of Reach” survey said there is nowhere in the United States that a full-time worker earning minimum wage can afford the fair-market rent as calculated by HUD for a two-bedroom apartment. At the same time, HUD reports that the supply of affordable housing is shrinking. The number of rental units affordable to families with incomes less than 30% of their area's median income dipped 5% between 1991 and 1997 (the most recent data available).

Furthermore, poor people are shelling out a bigger chunk of their incomes for housing and more of them are living in dilapidated dwellings, according to HUD. The number of households receiving no government housing assistance and either paying more than half of their income for housing or living in severely distressed housing — which HUD defines as “worst-case housing needs” — reached 5.4 million as of 1997. That figure represents a 4% increase from 1995 and a 12% increase from 1991.

According to a Center for Housing Policy report released in June 2000, 14 million U.S. households either spend more than half of their income on housing and/or live in severely distressed housing. (Part of the reason for the difference in the center's statistics and HUD's is that HUD only examines very low-income renters when looking for its “worst-case housing needs,” while the Center for Housing Policy looks at all renters, explained Clarine Nardi Riddle, senior vice president and general counsel of the Washington, D.C.-based National Multi Housing Council.)

However, not everyone who studies the affordable housing issue is ready to label the situation as a crisis. Ed Olsen, an economist at the University of Virginia who studies the issue, has some doubts about the dimensions of the problem. Specifically, he questions some of the statistical methodology used to determine the depth of the problem. Olsen believes that emphasizing the percentage of income spent on housing is “profoundly confused.” People often choose a nicer place to live rather than a cheaper place, he said.

What to do?

According to Terwilliger, the affordable housing crunch can be traced to two critical factors: zoning biases against low-income and mixed-income housing and the lack of financing to get new projects built. “The programs that we have now to finance new projects are not enough in the aggregate,” he said.

Part of the solution to the affordable housing crunch lies in initiatives at the local level, Terwilliger said. Cities and counties can be more aggressive in providing various incentives to build affordable housing properties. For example, a jurisdiction can provide bonus density to apartment developers that build affordable units, meaning they can build more than zoning allows if a certain percentage of the units are affordable apartments.

Also, local governments can provide tax abatements, help developers with land assemblage and require developers to set aside a certain percentage of a project's units for affordable housing. The latter is prevalent in the Northeast and in California, but not in other parts of the country, Terwilliger said.

Terwilliger believes that the current state allotment of $1.75 per resident under the federal Low-Income Housing Tax Credit (LIHTC) program would be sufficient if the nation could get a better grasp on the problem. However, “we've got a lot of catching up to do,” he said. “$1.75 is OK on a year-to-year basis if we can catch up.” The LIHTC program helps to produce 90,000 to 120,000 affordable apartment units annually.

Frequently, developers considering entering the affordable housing arena find that it's too difficult to navigate the approval processes required at the federal, state and local levels, said Nardi Riddle of the NMHC. She said that some states, such as Connecticut, have enacted laws that minimize regulatory hurdles in exchange for a pledge from developers that they will set aside a certain percentage of their apartments for affordable housing. “We believe that if a lot of the regulatory burdens were minimized or eliminated, more housing would be built,” Nardi Riddle said.

Multifamily Accelerated Processing (MAP), a HUD program launched in June 2000, is designed to streamline the notoriously protracted process of getting government-assisted housing projects built. Bernard “Bud” Malone, president of Dallas-based Malone Mortgage Co., a lender that deals heavily in Federal Housing Administration (FHA)-backed loans for multifamily properties, believes that the program is working.

“In the old days, if you would suggest to responsible and substantive developers that they consider FHA for their projects, you would get a response that life is too short to get caught in that quagmire,” Malone said. “That's no longer the case.”

Stuck in the middle

Complicating the debate about the scope of the affordable housing problem and what should best be done to tackle it is the issue of moderate wage earners such as firefighters and schoolteachers, those whose incomes are about the median in their market and who often work in cities with unusually high costs of living. In San Francisco, for example, city officials have floated such plans as providing trailers near schools to house teachers who can't afford to live inside the city.

Recognizing the plight of these people could go a long way toward removing some of the biases people have about affordable housing, Terwilliger said. “Lots of these people are working people. They're not bums,” he said. “We should remind people that this issue is affecting people like their parents and their children who don't make $100,000 a year.”

The LIHTC program, which is designed to create apartments for those making no more than 60% of an area's median income, has failed to address the plight of moderate-income households, according to Michael F. Petrie, president of Indianapolis-based P/R Mortgage and Investment Corp.

“In New York, San Francisco, etc., they need programs for people making 60% to 100% of the area median income,” said Petrie.

In a batch of recommendations delivered to the Millennial Housing Commission, a panel convened by Congress to study ways to address affordable housing issues, the National Multi Housing Council (NMHC) and the Alexandria, Va.-based National Apartment Association (NAA) claimed that most government programs are aimed at low- and very low-income families and pay scant attention to the “increasingly critical needs” of moderate-income people.

The two organizations urge the commission, in its final policy recommendations, to recommend a definition of moderate income as those households making 60% to 100% of area median income. If the commission recommends a narrower definition, future efforts to help provide housing for moderate-income households may neglect teachers, firefighters, police and other public servants, the NMHC and NAA warn.

The two groups believe that the government can help by reserving more of the HOME and Community Development Block Grant program funds for mixed-income and moderate-income rental housing, and by expanding the LIHTC program to create more mixed-income housing.

Nardi Riddle adds that government mortgage lending programs such as Washington, D.C.-based Fannie Mae and McLean, Va.-based Freddie Mac could be tweaked to direct more of their resources to encourage the building of homes for working-class people, not just the very poor.

But like so many of the facets of the affordable housing quandary, the moderate-income question is complicated. Like most of the questions involved, it revolves around economics. In April, the NMHC surveyed its members about the feasibility of building apartments for moderate-income families, or those earning roughly the median income in their markets. Nearly two-thirds of the NMHC members, approximately 63%, said that high land costs make it impractical to build such housing in urban areas, forcing developers to seek opportunities that are a healthy commute from major cities, said Mark Obrinsky, chief economist for the NMHC.

Nardi Riddle acknowledges that the notion of funneling some government housing assistance to middle-income people is not universally embraced. Many groups contend that resources should go to the poor. Olsen, for one, said that except for the wealthiest people, there are places that everyone might like to live but can't afford. So when it comes to housing teachers or police officers, pricier cities should pay them more than they'd make in smaller, cheaper places to live.

Nardi Riddle said it's up to policy makers. “What we are saying,” she explains, “is there's a huge need in the moderate-income arena, and that if communities and if governments want quality teachers, if businesses want quality workers and they're in the moderate range, they have got to work together to figure out how to provide housing.”

To build, or not to build?

The situation facing Leonard Wood provides some insight into the issues facing those interested in providing affordable housing. Wood is chairman of the NMHC and director of Atlanta-based Wood Partners, an apartment developer that this year established a business unit to focus on building affordable housing. The reason Wood Partners is entering the business is that he and his management team believe there's an unmet need for housing for poor people.

“We believe that you can do a great job of it, and still make a fair return, a fair profit on the energy you invest,” Wood said. At the same time, he acknowledges that it can't be done without government help. Wood believes that governments at the federal, state and local levels want to tackle affordable housing problems. And he figures that private-sector builders and developers can buy land, design and build apartments more efficiently than the government, but not without government help.

Wood said his company was moved to enter the affordable housing arena in part because even after the roaring economy of the 1990s, the housing shortage, if anything, worsened. The business might not be as profitable as building market-rate housing, Wood said, but he figures it can still be viable. Wood Partners plans to build mostly garden apartments in the Southeast and Texas, and hopes to develop mixed-income projects.

But Wood admits it won't be easy. “If it's a fair return, all things considered, fine,” he said. “We just don't know what ‘all things considered’ are yet. I think the whole market is evolving.”

The major cost components for a housing development are land, construction and financing. The FHA program, in which the government takes the risk of insuring loans to housing developers, only tempers finance costs. It is a rare harmonic convergence when all the elements line up to profitably produce housing for the very poor, Malone said. “If the happy combination of a fairly inexpensive piece of land, a reasonable construction budget and very reasonable financing costs come together, you may end up being able to address a lower salary range,” he said.

Affordable housing in a recession?

All of the efforts to address affordable housing are taking place against the backdrop of the nation's first economic recession in a decade, a funk exacerbated by the events of Sept. 11. In this recession, amid the dawn of an expensive war on terrorism that could last for years, are policy makers likely to channel any new funds toward housing programs?

A logical line of reasoning holds that with tax revenues likely shrinking in a weak economy, and the demands placed on that revenue by the war efforts against terrorism, the government must be smarter about how it spends on housing.

However, a recession might not be all gloom for the affordable housing movement. Malone makes the point that the FHA, the federal government's first foray into providing affordable housing, was created during the Great Depression. He figures that one good way to kick-start the economy is to pump money into the construction industry.

And one way to do that is with government spending geared toward beefing up the nation's supply of affordable housing, he said. Already, the federal government has made substantial appropriations for airport security and various elements of homeland defense. “I think you may see a justification down the road for greater government spending on housing,” Malone said. So, strangely, a recession might help cure the nation's affordable housing ills.

— Charles Davidson is an Atlanta-based writer. NREI Senior Associate Editor Stephen Ursery contributed to this report.

A primer on affordable housing programs

The federal government began spending money to improve Americans' housing in 1934, with the creation of the Federal Housing Administration (FHA). Myriad programs have come and gone since. In the 1950s and 1960s, the trend was for government to build places for poor people to live. These housing projects concentrated the poor away from the rest of their communities and have since fallen out of favor.

Today, most affordable housing is built as a result of the federal low-income housing tax credit (LIHTC) program created as part of the 1986 Tax Reform Act. The LIHTC helps produce 90,000 to 120,000 affordable units annually, according to Clarine Nardi Riddle, senior vice president and general counsel of the Washington, D.C.-based National Multi Housing Council (NMHC).

The LIHTC program is based on population and is administered by the states, which receive an annual allocation from the federal government at the rate of $1.50 per state resident. In 2002, the rate will increase to $1.75 per state resident, with adjustments for inflation beginning in 2003. From the creation of the program through the end of 2000, the rate was $1.25 per state resident.

Developers apply to state housing agencies for the LIHTCs. If their applications are approved, developers then market those credits, often through a syndicator, in order to raise equity for the apartments.

For a project to be eligible for the credit, at least 20% of its units must be rented to tenants making 50% or less of the area median gross income (AMGI), or at least 40% of the units must be rented to tenants making 60% or less of the AMGI. These income figures are determined by HUD and published annually. Eligible projects must operate under these restrictions for 15 years.

The LIHTC is available in two amounts: 4% and 9%. A tax-credit allocation is equal to, roughly speaking, 4% or 9% of a project's qualified costs. Simply stated, the 9% credit is for the construction or substantial rehab of a building with taxable funds, and the 4% credit applies to the use of tax-free funding, such as industrial revenue bonds.

Other federal affordable housing initiatives include the Community Development Block Grant program and the HOME Investment Partnership Program. The federal government uses these programs in part to distribute money for the construction or rehabilitation of affordable housing.

HUD's Section 8 program, through which local housing authorities give rent vouchers to qualified residents, is another high-profile program. For example, if a qualified resident finds an apartment that rents for $900 a month while federal regulations say his income allows him to afford only $500 a month, he gets a voucher to cover the additional $400.

A common criticism of Section 8 vouchers is that they bring the landlord loads of regulatory baggage. When a private landlord rents to a voucher holder, the landlord often must process a lease addendum, meet a set of requirements and submit the apartment to inspection to make sure that it is OK for the voucher holder. Plus, it often takes a landlord longer to get paid from a voucher holder than a market renter.
— Charles Davidson

Check out NREI's annual Multifamily Lender Directory, which begins on page 57

It's time once again for National Real Estate Investor's annual Multifamily Lender Directory. This year's directory contains corporate and contact information for more than 70 companies involved in multifamily lending. The entries are listed alphabetically and are not rankings. Among the information contained in the directory is a listing of each company's lending goals for both 2001 and 2002, and the amount each company has financed as a direct lender and a financial intermediary in the first nine months of 2001.