Here’s a question raised by three bills just introduced in the Michigan House that would offer tax credits for builders of low-income housing: If for-profit companies provide affordable multi-family housing more efficiently than non-profits, should the state tilt the playing field toward the latter? Here are the details:
Since the 1960s, government has adopted the mission of providing “affordable” low-income housing. To do so, the Michigan State Housing Development Authority (MSHDA) uses several programs. Direct lending and “multi-family pass-through” programs give developers access to tax-exempt state borrowing. MSHDA says with these it provided 1,823 multi-family units in 2002. The agency subsidized 2,844 single-family home purchases through direct lending and a federal mortgage certificate program.
By far the largest number of new low-income housing units was produced with a federal tax credit program developed in the 1980s as a more efficient multi-family alternative. In 2001, this allocated $15.9 million in federal tax credits to build 4,219 units in Michigan. 764 units built using the “pass through” subsidy also benefited from the tax credits. The program grants developers transferable tax credits for each unit of affordable multi-family housing they provide, indirectly subsidizing below-market rents, and helping to underwrite financing.
The type, quality, income level, and geographic location of projects are extensively regulated. MSHDA reports that 11 percent of the projects are built by tax-exempt non-profit organizations, but this excludes partnerships with for-profit companies. Industry sources say approximately 60 percent of the resources for projects statewide come from for-profit companies, 35 percent from non-profits, and five percent are public housing.
Since a limited number of tax credits are available, MSHDA uses an ever-changing formula to allocate them based on location and populations served. For example, extra “points” may be awarded to projects for mentally disabled Detroit homeless. “Likeliness to proceed,” and long term feasibility are also considered, with preference for financially realistic projects that already have site plans, financing, local permits, etc.
Until recently “points” were given just for being a non-profit. This ended because of repeated complaints from for-profits, and excessive “gaming” in the form of absurd shell-organizations showing non-profits as 51-percent “partners.” The private sector companies still complain that MSHDA tilts the playing field toward their competitors. If true, this raises an important question: If we want more housing units, if resources are limited, and if MSHDA already determines which populations are served, then who cares who builds them?
No one should care, because non-profits provide less housing bang-for-the-buck. No overall figures are kept, but industry experts claim for-profits build units for around $84,000, while non-profits average around $140,000 for the same unit.
MSHDA claims non-profits serve populations for-profits don’t or won’t. Yet whoever builds them, each project using the federal credits must make economic sense. Projected income must meet expenses over the life of the project, typically 15 years or more. The tax credit makes it worthwhile to serve difficult populations. If the credit is large enough, either competing entity can do the job.
Note, we aren’t talking about Habitat for Humanity here. That private, faith-based nonprofit builds single-family homes with volunteer labor and sells them at below-market prices to families that meet requirements for income, level of need, and willingness to provide “sweat equity.” The MSHDA projects, on the other hand, involve multi-unit rental properties that include ongoing professional management.
The MSHDA-chosen non-profits have no particular advantage. Just the opposite, in fact. For the year-in-year-out grind of management and upkeep, nothing beats the profit motive to get the job done reliably, continuously, and with accountability. The record shows that, notwithstanding any advantages of volunteerism and passion, for-profits use less of the scarce federal tax credits to provide the same number of multi-family units serving the same populations.
So back to the opening question: Should the rules be changed to help non-profits get more of the scarce credits? Three pending bills could do just that. House Bills 4682 to 4684 (and Senate Bills 522 to 524) would establish a Michigan Affordable Housing Fund funded by a105-percent single business tax credit. Among other things, it would allow MSHDA to give non-profits managerial tools to help them compete.
The strongest backers of the bills are non-profits competing for transferable tax credits, which suggests this is where much of the new money is headed. Based on a MSHDA’s history of bias in favor of non-profits, for-profits oppose the bills even though they could also get a piece of the pie.
Here’s the key point: The number of units built under this program is determined by the availability of the federal tax credits. A new subsidy will help non-profits compete for the same credits. Plus, the tax credit will be a direct hit on the Michigan treasury. Given the higher cost of housing provided by non-profits, a substantial state tax-expenditure on their behalf could actually mean fewer units would be built. At the very least taxpayers, will pay more per unit.
The legislation to expand tax credits for more low-income housing may seem harmless, or even helpful. But providing low-income multi-family housing is a sophisticated business, complicated by crosscurrents of history, politics, economics, and bureaucracy that legislators may not be aware of. Before moving this legislation, the motivations and likely effects of its passage should be carefully explored.
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Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, and project manager for MichiganVotes.org, a web-driven legislative database operated as a free public service of the Mackinac Center.