KEEPING the NEIGHBORHOOD AFFORDABLE: a Handbook of Housing Strategies for Gentrifying Areas

Home , Fannie Mae, Inclusionary zoning, Subsidized housing, Zoning

KEEPING THE NEIGHBORHOOD AFFORDABLE: A Handbook of Housing Strategies for Gentrifying Areas

Diane K. Levy Jennifer Comey Sandra Padilla

Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

Diane K. Levy Jennifer Comey Sandra Padilla

The Urban Institute Metropolitan Housing and Communities Policy Center 2100 M Street, NW Washington, DC 20037

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute or to its trustees or funders.

Acknowledgements

We thank the Fannie Mae Foundation for providing financial and other support for the study of residential displacement mitigation strategies of which this report is a part. We are grateful for the help of Urban Institute colleagues with this and the related report, In the Face of Gentrification: Case Studies of Local Efforts to Mitigate Displacement. Diane Hendricks produced the reports, which would not have happened without Marge Turner’s support for publication. Scott Forrey and Fiona Blackshaw provided excellent copyediting services, and Maida Tryon launched the reports on our website. As with all publications, any errors and omissions remain the responsibility of the authors.

Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

Table of Contents

TABLE OF CONTENTS

INTRODUCTION...... 1

STRATEGIES TO DEVELOP AFFORDABLE HOUSING ...... 3 Housing Trust Funds...... 4

Inclusionary Zoning ...... 5

Low-Income Housing Tax Credit...... 7

Split-Rate Taxes...... 9

Tax Increment Financing...... 10

STRATEGIES TO RETAIN AFFORDABLE HOUSING...... 12 Code Enforcement ...... 12

Rent Control ...... 15

Preservation of Federally Subsidized Affordable Housing ...... 18

Tax Relief & Assistance ...... 21

STRATEGIES TO BUILD ASSETS ...... 23 Individual Development Accounts ...... 23

Homeownership and Education Counseling ...... 25

Limited-Equity Housing Co-ops (LEHCs)...... 28

Community Land Trust (CLT)...... 30

Location Efficient Mortgages...... 31

Section 8 Homeownership Program...... 33

In the Face of Gentrification: Case Studies of Local Efforts to Mitigate Displacement

REFERENCES...... 36 Strategies to Develop Affordable Housing ...... 36

Strategies to Retain Affordable Housing ...... 37

Strategies to Build Assets ...... 38

Related Publication ...... 41

ENDNOTES ...... 42

Introduction 1

section1

INTRODUCTION

ousing prices began to rise nationally in the mid-1990s and continue to do so in both rental and sales markets in many communities across the U.S. While some observers H are concerned that we are experiencing a housing bubble that eventually will burst, leading to drops in house values, low- and moderate-income people at present face increasingly limited affordable housing options as long-disinvested neighborhoods experience renewed attention. Gentrification and neighborhood revitalization raise the issue of whether it is possible to manage neighborhood investment so that positive neighborhood change can occur without displacing lower-income residents.

This handbook describes a wide range of by considering the interplay of strategy strategies that local governments, implementation and housing-market developers, and nonprofit organizations can context. For example, efforts to build new use to create and retain affordable housing affordable housing in a neighborhood where in their communities. In the companion prices already are high will need to take a report to this handbook, In the Face of different approach from that used in an area Gentrification: Case Studies of Local Efforts with a weaker housing market. (See In the to Mitigate Displacement, we present six Face of Gentrification for a discussion of case studies of local efforts to create strategies and market context.) affordable housing and reduce displacement of lower-income residents. We present the strategies in the following Stakeholders can have an impact on the order. Though some of these strategies are availability of affordable housing in not necessarily intended to create or retain revitalizing areas if there is the commitment affordable housing, for example tax- to do so. increment financing, they can be used toward that end. This handbook is intended to support local efforts by providing an overview of • Housing Production strategies for addressing affordable ♦ Housing Trust Funds housing. The strategies are divided into ♦ Inclusionary Zoning Ordinances three categories: housing production, ♦ Low-Income Housing Tax housing retention, and asset building. After Credits describing each strategy, we consider ♦ Split-Rate Tax Structure possible outcomes and implementation ♦ Tax Increment Financing challenges. This document adds to the body of literature on affordable housing strategies

2 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

• Housing Retention ♦ Code Enforcement ♦ Rent Control ♦ Preservation of Federally Subsidized Housing (Section 236 and Project-Based Section 8) ♦ Tax Relief Assistance

• Asset Building ♦ Individual Development Accounts (IDAs) ♦ Homeownership and Education Counseling ♦ Limited Equity Housing Co-ops (LEHCs) ♦ Community Land Trusts (CLTs) ♦ Location Efficient Mortgages (LEMs) ♦ Section 8 Homeownership Program

Strategies to Develop Affordable Housing 3

section 2

STRATEGIES TO DEVELOP AFFORDABLE HOUSING

ne method to decrease the negative effects of gentrification is through affordable O housing development. Municipalities, nonprofit organizations, and for-profit developers can provide affordable housing for low- and moderate-income households by building it. The following describes three tools or strategies used to fund the development of affordable housing—housing trust funds, inclusionary zoning, and the Low-Income Housing Tax Credit. Two additional strategies, the Split-Rate Tax and Tax Increment Financing, can support housing production, although their primary function is not the development of affordable housing per se.

Developers of affordable rental or Another challenge is enticing affordable homeownership units face a number of development when land costs rise due to challenges. First, there must be available gentrification. Once a housing market space or land in gentrifying areas. accelerates and gentrification occurs, it Neighborhoods seemingly without space becomes more expensive to provide need to use creative tactics to free up land affordable housing. It then takes political will for development, such as altering zoning to create incentives or regulations to build regulations or converting vacant properties affordable housing, and the foresight to into viable units. Another challenge for produce and retain affordable housing strategies that develop new housing for before the need becomes pressing. ownership is that these strategies often A final challenge for the development of neglect very low income households. affordable rental or homeownership units is Homeownership is not feasible for many length of affordability. Most units built for low-income households due to financial low- and moderate-income households are insecurity or poor credit ratings. Rarely do required to remain affordable for only a set new housing developments include period of time. Therefore, affordable homeownership services such as down housing development might not satisfy payment and closing cost assistance or affordability over the long term. assistance with monthly mortgage payments. Developing a combination of It should also be noted that the units for rent and homeownership seems to development of affordable housing will not be the most reliable way of addressing the necessarily mitigate involuntary needs of low- and moderate-income displacement that occurs due to households. gentrification. Building new affordable housing will not affect the ability of pressured low-income households to remain

4 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

in their current units. What housing specific needs of different localities. For development can do, however, is provide instance, some cities target special affordable alternatives to involuntarily populations such as the homeless or displaced households, potentially even handicapped providing them with single- within the same neighborhood, and mitigate room occupancy (SRO) units, while other exclusionary displacement or a shortage of cities focus on the development of affordable housing for future low- and affordable housing in the downtown area. moderate-income families. Still others focus on affordable rental units. As of 2001, 150 housing trust funds were in The following describes each affordable operation, 37 of which were state-run housing development strategy separately. (Linker et al. 2001).

Housing Trust Funds Anticipated Outcomes

Housing trust funds are a public-sector tool The benefits of housing trust funds include used to funnel financial resources to having a dedicated source of funding; that housing developers, nonprofit organizations, is, funding does not rely on budgetary or local government departments to develop appropriations (Brooks 1999). In addition, or rehabilitate affordable housing for low- trust funds are protected–revenue can be and moderate-income individuals. A public used only for the stated housing purpose agency is normally responsible for the unless legislation is altered. Housing trust collection and distribution of the fund’s funds can be implemented in any size of resources. Typical sources are real estate city, large or small, or can be applied transfer taxes, accumulated interest from statewide. Some evidence shows that real estate transactions, and penalties for housing trust funds are capable of late or delinquent payments of real estate leveraging as much as seven additional excise taxes (Linker et al. 2001). dollars from private sources (Brooks 1999).

Housing trust funds are inherently flexible: Implementation Challenges agencies can decide whether to use the money for grants or low-interest loans for A challenge in implementing housing trust for-profit or nonprofit organizations to funds is that an elected body, such as a city construct or rehabilitate housing, to assist council, must vote to establish the fund. The individual households with home purchases real estate industry may oppose such (such as closing costs), or to provide other legislation based on real-estate revenue, housing services (Brooks 1999). The funds fearing that the imposed fees would stymie are also flexible in that they can meet the development overall (Connerly 1993).

Strategies to Develop Affordable Housing 5

Another challenge for trust funds is that a fund during periods of slow or moderate real thriving real estate market is necessary to estate growth, they need to find other generate significant funding. For those sources of funding, such as foundation and areas not experiencing a strong housing corporation contributions or state pooling of market, little revenue will be generated funds. through the trust fund; consequently, little affordable housing or services will be However, there are arguments for provided. Statewide housing trust funds can establishing a housing trust fund before avoid this problem. City-based funds can gentrification pressures build rather than find other creative funding sources, such as later. Lobbying for the creation of the trust foundation or corporation contributions. fund and passing the necessary legislation Similarly, some researchers argue that takes time. And accumulating enough housing trust funds do not generate enough revenue, regardless of the source, is also resources to significantly increase the time consuming. Finally, housing trust funds number of affordable units (Connerly 1990, are not designed to help low-income 1993). A survey of 15 housing trust funds households remain in their market-rate units established in the mid-1980s created once property values rise. Instead the tool is 27,278 affordable units by the early 1990s, designed to provide new affordable housing, averaging 4,160 units a year. The average so there is an incentive to build affordable trust fund assisted 278 units annually. housing (that will remain affordable) before However, there are wide disparities among gentrification pressures rise. the individual housing trust funds: five of the 15 funds created fewer than 100 units Inclusionary Zoning annually whereas another five developed 82 Inclusionary zoning, also referred to as percent of the total number of produced inclusionary housing, can be a mandatory or units. Not surprisingly, those trust funds that voluntary municipal ordinance used to captured a greater level of funding produced produce affordable housing for low- to a greater number of units (Connerly 1993). moderate- income households within new Timing Considerations market-rate residential developments. Typically, the ordinance requires that a While municipalities can establish housing minimum percentage of a new trust funds at any point in time—either development’s total units be designated as before gentrification becomes a problem or affordable, and that these units should during a period of gentrification, tying trust remain affordable for a set period of time, fund revenue to real-estate transactions usually between 10 and 20 years. Often, limits the fund’s effectiveness to periods of this ordinance applies only to developments active real estate markets or gentrification. If with a minimum number of units. localities wish to establish a housing trust

6 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

Incentives may exist to defray the costs to buyouts serve to reduce the number of the developer. A common incentive is a affordable housing units built in the density bonus, which allows developers to jurisdiction (Brown 2001). create more units on a parcel of land than Inclusionary zoning requires close would otherwise be permitted. A density administrative oversight to ensure that the bonus can either equal the required number mandatory units are built. If alternative of affordable housing units, thus reducing means are used to meet the requirements the land costs, or developers may be (i.e., fees in lieu of units), additional permitted to build additional market-rate oversight is required to ensure that units, which would increase the developer’s affordable housing units are built elsewhere. profits (Ray 2001; Burchell et al. 2000). Voluntary ordinances should provide strong enough incentives to promote the building of Other incentives include relaxing zoning affordable units (Ray 2001). restrictions, such as allowing developers to build unapproved unit types such as Anticipated Outcomes attached housing, build higher than normally allowed, provide more or less open space, The goals of inclusionary zoning are to and so on. There may be other integrate affordable housing units development incentives, such as reductions throughout higher-income communities, in required road paving by the developer or improving neighborhood opportunities for subsidization or provision of infrastructure low- and moderate-income households. by the jurisdiction. Waiving or prioritizing Improved opportunities include better permit fees or land dedication are other access to jobs, better city services and common incentives (Ray 2001; Burchell et schools, and less dangerous streets (Brown al. 2000). 2001; Calavita and Grimes 1998). Affordable housing provided through Some jurisdictions allow developers to buy inclusionary zoning ordinances often benefit out of affordable housing requirements by the “working poor,” such as teachers, police paying a fee into a fund dedicated to officers, and other service workers who building affordable housing, building struggle with the growing disparity between affordable units at another location, or lagging income and rising housing costs providing additional land for affordable (Brown 2001). Higher-income households housing elsewhere. These provisions may also benefit through reduced sprawl, traffic, be allowed when it is too costly to provide and car pollution due to such incentives as low-income housing on site or when more density bonuses, and businesses can units of affordable housing could be benefit from having a larger pool of lower- produced elsewhere. However, some

Strategies to Develop Affordable Housing 7

wage employees nearby (Burchell et al. services such as assistance with down- 2000). payments or closing costs. Therefore, this population can be underserved where Implementation Challenges inclusionary zoning ordinances do not include the development of rental Mandatory inclusionary ordinances must be properties. established through legislation, which might face opposition from developers and the Timing Considerations real estate industry. Opponents can resent the added government regulation and the Inclusionary zoning ordinances can be potential risk to profits and costs (Calavita implemented more easily during the intense and Grimes 1998). Inclusionary zoning acts periods of gentrification, although like a tax on developers, and its objective is challenges still remain. When the housing to pass the additional costs onto the market- market is strong and values increase rate housing. However, if a real estate rapidly, developers recognize profits exist market is sensitive to price differences, then for building the additional affordable units developers might find they have to reduce (Ray 2001). In a weaker housing market, their profits or not build in that area. profits are not assured and developers may Incentives are intended to reduce some of choose to build in neighboring unregulated the additional costs to the developers. It can areas. Housing affordability crises in also be challenging if a jurisdiction passes California and around Washington, D.C., an inclusionary ordinance while its during the 1970s both prompted the neighbors do not—developers might choose creation of inclusionary zoning ordinances to build elsewhere. (Burchell 2000; Calavita and Grimes 1998).

A challenge is also posed to areas with Low-Income Housing Tax Credit long-established ordinances, such as Montgomery County, Maryland. The The Low-Income Housing Tax Credit controls on the rent or sales of the earliest (LIHTC) is the major federal program built affordable housing stock eventually designed to produce affordable rental expire leading to a reduction in affordable housing. The program is attributed with housing over time (Brown 2001). generating between 550,000 and 600,000 units of affordable housing nationwide A final challenge is that inclusionary zoning between 1986 and 1996 (Cummings and that leads to the development of units for DiPasquale 1999). Stemming from the Tax homeowners may not benefit the lowest- Reform Act of 1986, LIHTC offers private income households, which cannot afford to investors federal tax credits (providing purchase housing. Inclusionary zoning equity) in exchange for the development of ordinances do not normally provide housing affordable rental housing units. States

8 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

usually administer the program, although projects located in central cities increased some local housing finance authorities do from 32 percent in 1987 to 56 percent in so as well. Administrators are responsible 1996 (Cummings and DiPasquale 1999). for setting the goals of the program, providing oversight and monitoring, and Anticipated Outcomes ensuring that the projects remain compliant. LIHTC’s flexibility is just one of the benefits The Internal Revenue Service, in turn, is of the program. Another is that with the responsible for monitoring the administrative rising competition from developers and entities. investors for the tax credits, LIHTC projects LIHTC is designed to be flexible. State or have become more efficient: more of the tax local administrators are responsible for dollar goes directly into the production of setting the program’s goals—they are not affordable rental housing than paying higher set by federal regulation. Therefore, LIHTC investor returns (Cummings and DiPasquale can cater to the needs of the local housing 1999). Gap financing from private or public markets and the populations in need. Some sources is often critical in allowing private states target special populations such as developers to target low-income populations lower-income tenants (as opposed to low- (Tatian 2002). Additional public financing (or income tenants), focus development in subsidies) has come from Section 8, underserved areas, or provide social HOME, Community Development Block services in addition to housing (Cummings Grants (CDBG), and HOPE VI. and DiPasquale 1999). There is flexibility in There is evidence that LIHTC is being used the types of rental housing built as well. For to develop rental housing where the need is instance, some localities provide tax credits great, and the credits can contribute to only for family rental housing with multiple property values in low-income areas. In bedrooms, while other localities target some neighborhoods, LIHTC units are the efficiency apartments for the elderly. only new residential construction in recent A study of roughly a quarter of the projects years. In 13 percent of the census tracts built using LIHTC during the program’s first sampled in one study, LIHTC units 10 years found that just under one-third represented 20 percent of all rental housing were built by nonprofits (either nonprofit (Cummings and DiPasquale 1999). developers or private developers contracted Properties in some neighborhoods also by nonprofits) (Cummings and DiPasquale experience increased property values after 1999). The same study also found that two- the development of the LIHTC rental units thirds of the projects were built in (Johnson and Bednarz 2002). The majority metropolitan areas: the percentage of of LIHTC units are built in low- and

Strategies to Develop Affordable Housing 9

moderate-income neighborhoods neighborhoods, for the reasons mentioned (Cummings and DiPasquale 1999). above. Therefore, LIHTC may be a strategy better implemented in neighborhoods not Implementation Challenges (yet) experiencing significant gentrification pressures. LIHTC is designed to bring the efficiencies of the private market into partnership with Split-Rate Taxes public goals; however, private and public goals are often in opposition (Cummings Split-rate taxes, also know as two-tiered and DiPasquale 1999). The state property tax reform, differentiate property administrators might set goals targeting taxes into a lower tax rate for buildings and lower-income populations or requiring social a higher tax rate for land. The objective is to services, which increases the risk for the encourage the improvement and renovation developer and investor. The result is often of buildings while creating a disincentive for that the lowest-income populations are not land speculation and vacant buildings. Flat- served by LIHTC. rate property taxes ultimately penalize building improvements when assessments LIHTC can be used either to provide better raise the assessed value of the overall quality housing in poor neighborhoods or to property. provide affordable housing in higher-income neighborhoods. Cummings and DiPasquale This strategy does not directly subsidize (1999) found that the majority of LIHTC new affordable housing for purchase or rent, units are built in low- and moderate-income but it does provide an incentive for neighborhoods rather than wealthy ones. speculators to release vacant property that Possible reasons for this include high land could be used to build affordable housing. costs in upper-income neighborhoods or This is particularly important for cities such city/county intent to provide better quality as Washington, D.C., that have a housing housing in poor neighborhoods (Cummings shortage and a high number of vacant and and DiPasquale 1999). Regardless of the abandoned properties (Washington reason, it poses a challenge as an anti- Regional Network for Livable Communities displacement strategy unless the credits are 2003). Split-rate taxes also encourage used before property values begin to rise. property owners, including low- to moderate-income homeowners, to improve Timing Considerations their property without the risk of an overall tax increase. In one state that implemented While LIHTC can be used to build affordable the split-rate tax, 85 percent of homeowners rental units in gentrified or non-gentrified paid less in taxes than they did with the neighborhoods, the evidence points to more traditional flat-rate approach (Hartzok 1997). development in non-gentrified

10 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

Anticipated Outcomes overall revenues) and gradually differentiate the two tax rates over time (Hartzok 1997). Beyond the benefits of creating incentives to improve properties and reduce vacant lots, Timing Considerations the split-rate tax is relatively simple to implement. There are low administrative Because the split-rate tax system is an costs and it is market driven, unlike other incentive to convert abandoned properties inspection programs intended to deter into viable units and improve occupied units vacant and abandoned property rather than a method to subsidize (Washington Regional Network for Livable development directly, it can be implemented Communities 2003). at any stage of gentrification. The greatest hurdle is lobbying officials to pass the Pennsylvania is the leading example of appropriate legislation. implementing the split-rate tax. Fifteen cities in the state passed split-rate legislation, two Tax Increment Financing as early as 1918, with some having a tax spread as great as 19 to one and others Similar to the split-rate tax, tax increment having a tax spread of three to one. Some financing (TIF), also known as tax allocation credit Pittsburgh’s successful downtown financing, is not a direct method of creating development to the split-rate tax, even while new affordable housing. Instead, TIF is a its major steel industry declined. Harrisburg, tool used to subsidize an economic another city that has successfully development project to stimulate or retain implemented the split-rate tax, reported a business and jobs. decrease in vacant structures from 4,200 in For a city or county to use TIF, a distinct 1982 to fewer than 500 in the late 1990s geographic area is designated as a TIF area (Hartzok 1997). for a specific period of time. It is managed Implementation Challenges by a redevelopment agency, which is responsible for financing the project(s). The Similar to the other two strategies discussed economic development projects within the so far, passing legislation to install a split- TIF area could include attracting businesses rate tax is a challenge—if only to educate by building an office building or financing the public on how it works and its cosmetic improvements to a commercial implications. One suggestion when first strip to make it attractive to shoppers. Tax implementing the split-rate tax is to maintain rates are assessed in the designated area a neutral tax base (i.e., do not increase before the economic plan is implemented, and the redevelopment agency finances bonds backed by the anticipated increase in

Strategies to Develop Affordable Housing 11

property values to subsidize the Another challenge is that the new development. businesses attracted by TIFs assisting in paying the financing might go out of While TIFs are used to finance economic business, again leaving the jurisdiction in development projects, municipalities can financial trouble. It can also be a challenge attach other requirements to TIF legislation. to raise capital or finance bonds for the For instance, some locales require a certain economic development projects because percentage of TIF revenue to be dedicated there is often no existing revenue to building affordable housing for low- and beforehand. moderate-income individuals, building new infrastructure, or providing social services All these challenges can be great, and (Hitchcock 1995). Depending on the experienced financing authorities need to be jurisdiction, the affordable housing or prepared to overcome them by finding services can be provided in the TIF- alternative funding sources and attracting designated area or outside of it. new businesses. But in regards to building affordable housing, it might be in the best Anticipated Outcomes interest of housing policymakers and housing advocates to lobby to amend TIF TIF is a creative way to finance new legislation to siphon some generated development, and it provides a good way to revenue into affordable housing leverage additional capital. Also, the tax rate development. remains constant during the lifetime of the TIF. Consequently, existing residential and Timing Considerations commercial property owners do not experience an increase in their taxes during Because TIFs are not specifically designed the TIF period. The increased tax revenue to develop affordable housing, tapping into stems from the new commercial or TIF revenue depends more on whether the residential developments. TIF area is generating revenue rather than the stage of gentrification. Affordable Implementation Challenges housing advocates can lobby city officials and the redevelopment authority for an TIFs depend on the economic development allocation regardless of whether projects to increase the assessed value of gentrification and displacement is a an area, which in turn, pays for the new problem. However, advocates may have a economic development projects. However, better argument for access to the resources jurisdictions face the risk that the assessed if they can convince the city that area’s value will not rise, leading to a gentrification and displacement may occur revenue shortfall to pay back the financing. due to TIF-financed economic development.

12 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

STRATEGIES TO RETAIN AFFORDABLE HOUSING

etention of affordable housing refers to efforts to maintain existing, affordable units in R order to reduce resident displacement and to ensure future availability of such housing in gentrifying areas. As a general approach, retention is less expensive than affordable housing production—it is often more cost-effective to keep housing that exists than to build anew.

We present a number of retention strategies implemented locally. For this reason, and in this section. The strategies involve for others included below, it is helpful for private-market and publicly subsidized tenant groups and community-based rental housing, and privately owned organizations to work together closely. housing. While the strategies differ in many regards, they also share some aspects. The literature on the retention strategies Effective community organizing is does not explicitly address strategy necessary across the strategies. Whether implementation relative to the stage of they involve the enforcement of existing gentrification. However, it is clear that with laws or lobbying property owners or most of these strategies, waiting until government officials, most of the retention gentrification has taken hold in a strategies will not succeed in reducing neighborhood could pose greater displacement if the people affected by the challenges for achieving successful possible housing loss are not organized and outcomes. The earlier retention efforts motivated to act on their own behalf. begin, the better.

The strategies also involve city, state, or Code Enforcement federal regulations in some way. Where laws related to the strategies already exist, Affordable rental housing can be lost the focus of action will be on through attrition due to lack of sufficient implementation. Where the laws do not maintenance as properties become exist, efforts can focus on lobbying dilapidated. Code enforcement, as a legislators on the need for supportive laws. strategy to retain affordable housing, refers Either way, the retention strategies require to efforts of residents and advocacy groups knowledge of related laws and how they are to pressure city agencies to enforce the appropriate codes. Through enforcement, a

Strategies to Retain Affordable Housing 13

property that is in a state of disrepair can be reason for eviction (PolicyLink 2003a; improved and, depending on the way in Washington Regional Network 2001). which enforcement occurs, remain affordable. Enforcement can focus on Anticipated Outcomes building, health, fire, or other safety codes. Code enforcement can result in beneficial or There is the risk, however, that code detrimental outcomes for tenants, and the enforcement could lead to the loss of outcome cannot reliably be predicted. affordable housing if a building is Enforcement can motivate a landlord to condemned or sold. improve property management and City agencies can conduct code inspections maintenance. It can also motivate a landlord on a regular cycle, in response to to increase rent to cover the costs of complaints, or both. As a strategy, a code required improvements, possibly displacing enforcement process begins with tenants, or lower-income tenants. Even if rents do not a group acting on their behalf, filing a increase, tenants might be displaced from a complaint with the appropriate city agency. property while repairs are made, if the If any violations are found during an necessary building rehabilitation is inspection, the agency notifies the property extensive. In some cases, code owner of the violation and requires the enforcement could result in the landlord owner to make the necessary repairs within agreeing to sell the property to tenants or to a specified period of time. If the landlord a nonprofit organization, which would better does not make the required repairs in a ensure longer-term affordability. In timely manner, she or he can be issued gentrifying areas, such a change in fines, which become property liens if not ownership can slow gentrification-related paid. An uncooperative landlord can be displacement and help build tenant wealth criminally prosecuted. If code violations are (PolicyLink 2003a). severe, a property can be condemned A city’s code enforcement practices, and the quickly (PolicyLink 2003a). location and condition of the neighborhood Tenants can argue for rent rollbacks or rent in which a property is located, can affect the abatements once violations are cited. In outcome of this strategy. If a city is “over- some jurisdictions, tenants are allowed to enforcing” codes (i.e., proactively and deduct the cost of repairs from their rent if aggressively citing landlords for violations), they pay for the work themselves. Such a the enforcement might work against “repair and deduct” program requires tenants. In gentrifying areas, an agency authorizing legislation. Tenants also can might over-enforce to further neighborhood engage in a rent strike, where this is revitalization and increase displacement allowed, as long as it will not serve as pressures on lower-income households (Rivlin 2002). If codes are under-enforced,

14 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

however, tenants can file complaints of In many instances, it is likely that the violations and work with the agency to use building in question is in poor condition and the enforcement process to the tenants’ even in debt. In such cases, it would be benefit. For example, the government can difficult for tenants to assume ownership. To negotiate improvements with the property become owners and retain the property as owner with terms that will maintain the decent affordable housing, they would need property’s affordability over time (PolicyLink to access affordable financing and provide 2003a). effective management. The local government would need to commit to Implementation Challenges supporting tenant ownership of buildings financially through grants and loans with There are a number of challenges to the favorable terms. The difficulties gathering successful implementation of code sufficient financial, technical, and enforcement as a retention strategy. First, if managerial resources to support tenant city agencies do not impose stringent ownership over time can be significant penalties for violations, early enforcement (PolicyLink 2003a). likely will be ineffective. A landlord might prefer not to make the required changes Use of this strategy relies to a great extent and pay a low fine than go to the trouble of on government agencies’ willingness to act responding to what amounts to a slap on in a manner beneficial to tenants. The the wrist (Washington Regional Network degree to which agencies enforce codes 2001). with the tenants’ interests in mind can determine the outcome. The literature on As mentioned, code enforcement could code enforcement suggests that it is best if result in the condemnation of the building tenants work with a community-based and eviction of tenants. It might also make a organization if they are interested in using property attractive to private developers, this strategy as an anti-displacement tool. which could lead to displacement if The tenants will need legal assistance, government seizes the property due to regardless of their goal, and some leverage violations and turns it over to a developer. to influence the enforcement process. If Unless there are programs in place their goal is to acquire ownership of the requiring the retention of the units as building, tenants will need assistance with affordable housing or the inclusion of accessing finance and implementing sound affordable units in new or rehabilitated management and maintenance practices housing, the units could be lost to lower- (PolicyLink 2003a). income households (PolicyLink 2003a).

Strategies to Retain Affordable Housing 15

Timing Considerations context of a diminishing stock of affordable units, rent increases outpacing wage Code enforcement can be used early in the increases, and increased capacity among gentrification process or later. Used before tenant organizations (Keating and Kahn property values begin increasing rapidly, 2001). The strategy was most popular code enforcement might more easily lead to between the late 1960s and the early improvements that will benefit incumbent 1980s. By the mid- to late 1980s, the anti- lower-income residents. Once property regulatory environment helped weaken rent values begin rising, however, landlords control laws (Keating and Kahn 2001; have increased incentives to make PolicyLink 2003c). At present, there is improvements and charge higher rents to increasing attention given to rent control capture the increased revenue potential or strategies as a way to address to sell the property to a developer, who gentrification-related displacement. For likely would renovate the housing as higher- cities that have rent control laws, the focus cost units. of activity is on maintaining them. The number of municipalities with rent control Because of the need to work with a laws has dropped from a high of 175 to community-based organization and to approximately 140 (PolicyLink 2003c). develop a relationship with the enforcing Maintaining rent control is a response to agency, as well as the risk the strategy actions of others to curtail the laws, rather involves if used in a later stage of than a proactive tool used for affordable gentrification, this strategy is probably best housing retention (Keating and Kahn 2001). used early. However, if the participating organization and tenants already have a Rent control laws specify the types of relationship with city agencies, using code buildings covered and exempted, the enforcement during later stages of amount of rent increase allowed annually gentrification might also be effective. (based on a set percentage increase or in relation to the Consumer Price Index), and a Rent Control maximum rent cap. Laws can also stipulate that the landlord must be in compliance with Rent control, or rent stabilization, is building codes and cannot reduce existing intended to “protect tenants in privately services to increase profit (PolicyLink owned residential properties from excessive 2003c). rent increases by mandating reasonable and gradual rent increases, while at the To ensure housing covered by rent control same time ensuring that landlords receive a remains in good condition, many laws allow fair return on their investment” (PolicyLink landlords to charge tenants capital 2003c). As a strategy to maintain improvement surcharges. Any surcharge affordability, rent control developed in a must be filed with the local administering

16 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

body. Surcharges are meant to cover major unit turnover before returning the unit to rent repairs and necessary improvements, not control (Struyk 1991). regular maintenance and incidental repairs. Many laws also include a procedure for Supporters of rent control offer landlords to claim hardship, or less than a counterarguments. In response to the fair return, so that they are able to receive a criticism of rent control’s interference with fair return on their investment (PolicyLink the property rights of private housing 2003c). owners, supporters point out that changes to rent control laws include mechanisms to The main criticism of rent control is that it protect a landlord’s return on investment. To denies the landlord a fair return by limiting arguments that rent control leads to rent revenue. This limit, in turn, it is argued, deterioration of affordable rental properties impedes the landlord’s ability to provide because of the reduction in possible rental decent housing at low rent on the private income to the landlord, supporters argue market. Rent control is considered to that there are other major causes of housing interfere with owners’ property rights and deterioration related to urban economic with the free market such that it can reduce decline. The lack of high rates of the number of affordable units available by deterioration and abandonment of rent- providing incentives to owners to allow controlled housing in communities with rent properties to deteriorate, and ultimately to control laws suggests there is no direct abandon the housing rather than maintain it correlation between the laws and housing on a constrained rental income (Struyk loss. The criticism that rent control is 1991). Other criticisms include inefficient because it is not targeted to low- discouragement of new housing income households is addressed by construction because new units would fall pointing out that, overall, the majority of under rent control laws; shifts of property renters are low- to moderate-income. And, tax burden to non rent-controlled properties; other housing subsidies, such as the and the lack of focus on low-income mortgage interest deduction, are not strictly households by attaching rent control to units targeted to households with lower income rather than tenants. Rent control programs levels either, benefiting wealthy developed since the 1970s are credited with homeowners as well as those with being less restrictive than previous moderate means (PolicyLink 2003c). approaches. In particular, the laws allow for annual rent increases tied to the rate of Anticipated Outcomes inflation, the exemption of new rental units If rent control laws are maintained, some from rent control, and vacancy decontrol— units will remain affordable. Laws that increasing rent to or near market rates upon

Strategies to Retain Affordable Housing 17

include vacancy decontrol will reduce the board or office. Tenants should make sure number of affordable units over time, that there is tenant representation on the however, and permanent vacancy decontrol administrative body (PolicyLink 2003c). will do so more rapidly. Permanent rent control removes units from rent control upon One problem with rent control laws can be turnover, in contrast to temporary removal vacancy decontrol provisions, whereby to increase the unit rent level. Rent control rents on vacated units are allowed to rise with decontrol provisions will slow the loss above the regular annual increase. Some of affordable rental housing units but will not ordinances set a percent limit on the retain the units in the long term (Keating amount of increase after vacancy, while and Kahn 2001; PolicyLink 2003c). others allow landlords to increase the unit’s rent to the market rent level before coming Implementation Challenges back into rent control. The latter approach can lead to a building falling out of the Rent control as a tool will involve affordable housing stock one unit at a time, communities advocating for the even as it remains under rent control. Some establishment of rent control laws, places opt for permanent vacancy decontrol maintaining the laws, or enforcing them. It is provisions, which also reduce the number of not a tool that can be implemented directly affordable units. Another problem with by residents or community groups decontrol is that it increases disparities in themselves (PolicyLink 2003c). In some rent among residents in the same building, states, state legislatures have preempted which can work against tenant unity local governments’ right to enact rent laws, (Keating and Kahn 2001; PolicyLink 2003c). so any change to or establishment of rent control laws would have to occur at the Tenants and rent control advocates should state level—this is true in Massachusetts press for establishing anti-eviction and Washington (Keating and Kahn 2001). protection if such protection is not included In such circumstances, the possibility of in current laws. Anti-eviction provisions, passing new rent control laws is slim and which specify conditions for eviction, are would be a long-term strategy at best. especially important to tenants’ well-being where there are vacancy decontrol To prevent a weakening of rent control laws, provisions and where a city does not have rent control advocates need to be familiar strong eviction protection laws in place with the arguments for and against rent (PolicyLink 2003c). control and be capable of making the counterarguments persuasively should the Timing Considerations laws come up for review and possible revision. Administration and enforcement of The stronger the housing market, the more rent control law resides with a municipal incentive landlords have to lobby for

18 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

weakened rent control laws. Landlords most pressure to convert subsidized stand to increase revenues in gentrifying housing to private-market housing occurs in areas and can argue that the increasing rent gentrifying areas, preservation will help gap creates financial hardship for them. To ensure the future presence of lower-income maintain the rent control laws that already households in an area as housing costs exist, tenants and community-based rise. organizations and advocates need to know if the laws will be brought up for Section 236 and Prepayment. A Section consideration by the local government. If 236 mortgage provides owners of review does occur and neighborhoods are multifamily properties insured loans with experiencing gentrifying pressures, those subsidized interest rates in exchange for an working to maintain the laws need to agreement to lease units at HUD-approved express their arguments and lobby rents to eligible low-income tenants. The effectively. lender receives a monthly interest rate reduction payment (IRP) from the federal There is growing interest in rent control laws government, which allows the lender to offer again as a way to retain affordable housing a mortgage with an effective interest rate of units, due to the tight housing markets many one percent. The borrower sets rent for cities have experienced. It is unclear at this tenants at an amount needed to pay the time if there is the political support to pass debt service on the one percent mortgage. new rent control laws. The IRP amount received from the government by the lender covers the Preservation of Federally Subsidized difference between the actual debt service Affordable Housing cost of the mortgage and the monthly debt payment received from the borrower Since 1965, the federal government has (Achtenberg 2002). provided two types of subsidies to private owners of multifamily housing to produce Although the program no longer offers new rental housing for low-income households— mortgages, buildings already receiving the the Section 236 mortgage program and the Section 236 mortgages can continue project-based Section 8 subsidy program. receiving the subsidy. The restrictions on Affordable housing units subsidized by Section 236 properties remain in place for these programs can be lost if landlords the term of the mortgage. Since 1996, convert properties to private-market housing however, owners may be allowed to prepay through prepayment of a subsidized Section the subsidized mortgage after 20 years. 236 mortgage or nonrenewal of a Section 8 Prepayment releases owners from the project-based housing contract. Because rental restrictions, allowing them to increase

Strategies to Retain Affordable Housing 19

rents to market levels (Achtenberg 2002; campaign, they might influence a PolicyLink 2003b). development owner’s decision regarding Section 236 or project-based Section 8 Project-Based Section 8 and Opting Out. participation. The groundwork for action The second type of federal subsidy is should begin well before a property reaches project-based Section 8 assistance. This its expiration date. Tenants and involved program offers rent subsidies to owners that organizations need to gather information on cover the difference between actual unit the property to decide if it is at risk of rent and rent collected from tenants whose expiring from the affordable housing stock. payments are limited to 30 percent of their Tenants will need to develop a plan of income. The subsidies can cover all or a action, including identification of their goal. portion of the units in a housing Do they want the owner to renew development. Rental restrictions on the participation in the program or sell to the owners of Section 8 project-based housing tenants or a nonprofit organization? Does last as long as the subsidy contract is in the information on the property and owner effect. Contracts have a term between 5 suggest that persuasion is the best and 30 years, though most are 20-year approach, or should pressure or even terms. If an owner decides to convert a litigation be considered? What will the property to market-rate housing by allowing tenants do in the event that their goal is not the contract to expire, it is referred to as met and the housing falls out of the “opting out” (PolicyLink 2003b). affordable stock? (PolicyLink 2003b).

Prepayments and opt-outs began in the Renewal. If tenants seek contract renewal, 1 mid-1980s, but have become a more they can attempt to influence the length of serious concern since 1995 after Congress the new agreement. Renewal can occur for defunded the primary programs for a short period of time, as short as one to supporting subsidizing affordable housing. five years, so it might not address longer- At local levels, strong real estate markets in term affordability concerns. There are many cities have provided incentives to federal incentives for owners to renew their owners to pre-pay or opt out of their contracts or restructure mortgages so that subsidies in order to charge higher rents the properties remain affordable to lower- and function with fewer regulations income households, including the Mark-to- (PolicyLink 2003b). Market program (PolicyLink 2003b). Congress passed the Multifamily Assisted Community organizing is the primary tool Housing Reform and Affordability Act that tenants and community-based (MAHRA) in 1997 to address expiring use of organizations have for addressing the Section 8 project-based properties that problem of expiring use. If tenants are charge rent above the market rate. The organized and conduct an effective legislation, known as Mark-to-Market, allows

20 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

subsidy costs for a property to be reduced subsidy if they extend the use restrictions so that the rents are in line with local market (Achtenberg 2002). levels (Smith 1999). The owner restructures the HUD contract so that the rent on the Purchase. If tenants or a nonprofit subsidized units is decreased to the market organization want to purchase an expiring value. In order for the property to remain use property, the same considerations financially viable, the property’s debt is come into play as with code enforcement restructured or the owner receives partial purchases: capacity of the tenant debt forgiveness. In some instances, organization, including its financial project-based subsidies are converted to resources; capacity of the nonprofit tenant-based vouchers (Achtenberg 2002; organization; inclination of the owner to sell; National Housing Law Project 2002c). local government support; and the condition of the property. HUD issued the Emergency Initiative to Preserve Below-Market Project-Based State and local governments also can take Section 8 Multifamily Housing Stock in 1999 steps to preserve the federally subsidized to preserve subsidized housing that rents affordable housing stock in gentrifying lower than the area market rent levels. areas. They can work through regulatory or Known as Mark-Up-to-Market, this initiative programmatic means to preserve affordable serves to increase rent revenue and reduce housing, including passing statutes or the incentives for landlords to opt out of ordinances granting local government, a federal subsidies. The renegotiated nonprofit organization, or tenants the right of contracts under Mark-Up-to-Market last at first refusal before an owner converts a least five years and allow for annual cost property to market rent; “right to make an adjustments in rents (Achtenberg 2002; offer” ordinances (an exclusive window for National Housing Law Project 2002c). making a purchase offer); requiring notice provisions of impending conversion so that IRP Decoupling is a way to extend the owners must alert tenants to the change in interest rate subsidy on Section 236 a timely fashion; using rent control laws in mortgages. Owners are allowed to prepay ways to support lower-income households; their mortgage and refinance it or to secure and passing laws that require owners to pay financing for building rehabilitation. They tenant relocation costs in the event of can continue the IRP subsidy if they also conversion (Achtenberg 2002; National extend the term of affordability. Under IRP Housing Law Project 2002a; Nenno 1991). Decoupling, a building that has had a Section 236 mortgage also can be bought by approved owners who can receive the

Strategies to Retain Affordable Housing 21

Anticipated Outcomes likelihood of a building falling under expiring use. As with code enforcement, tenants Possible outcomes of strategies to preserve need to be well organized and have a plan federally subsidized affordable housing will of action, with a contingency plan in the depend upon a number of factors, including event their first choice of outcomes does not tenant goals, the interests of the owners, occur. Developing strong relationships and the housing market context. An owner between tenants and community-based considering prepaying the mortgage or organizations is important. opting out might be persuaded to renew their contract or continue mortgage Timing Considerations payment. If an owner renews, tenants should encourage as long a renewal term Timing for preservation strategies is as possible. If an owner wants to convert a affected by the date an opt-out could occur, property to market-rate housing, tenants and a property owner’s decision will be can litigate if there are restrictions influenced at least in part by the immediate precluding conversion. A third-party market context in which the building is nonprofit organization can purchase the located. Because of the information that property, which could ensure longer-term tenants and any community-based affordability (PolicyLink 2003b). If a organization will need to obtain, and the conversion moves forward, tenants could planning that will be necessary in order to seek some protection through Enhanced influence the opt-out decision, the Housing Vouchers. Congress first groundwork for preservation efforts should authorized and funded these vouchers to begin as soon as possible. subsidize tenants in cases of prepayment (1996) and opt-outs (1999) so that tenants Tax Relief & Assistance could remain in place after conversion. While the previous strategies focus on Enhanced Vouchers can exceed the value retaining affordable rental housing or of regular, tenant-based Housing Choice acquiring ownership of rental properties, tax Vouchers but revert to a regular voucher if relief and assistance can help low-income the tenant moves from the property homeowners. Local governments can assist (National Housing Law Project 2002b; lower-income homeowners to maintain PolicyLink 2003b). housing affordability through tax and finance Implementation Challenges assistance. Tax relief policies tend to benefit elderly homeowners or non-elderly lower- Tenants and community-based income residents who have lived in their organizations need to understand the home for at least a specified minimum federal incentive programs and be able to number of years. Tax deferral legislation gather the information to determine the allows elderly lower-income homeowners to

22 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

defer payment of property tax increases that owners maintain upkeep in their properties, occur due to gentrification-related thereby extending the time they can live in appreciation, until they sell their home. At their homes (Washington Regional Network that point, the deferred tax payments can be 2001). paid from the profit on the sale. Other assistance to homeowners can include low- Implementation Challenges interest loans and grants to be used for The primary challenge to implementation of maintenance (Kennedy and Leonard 2001; tax deferment policies is garnering local Washington Regional Network 2001). government support for such assistance to Anticipated Outcomes lower-income households. Such a program is targeted and clearly benefits households Deferral of increased property taxes can hurt by property value increases. Low- reduce the financial barrier longer-term interest loan or grant programs for housing homeowners might face when their upkeep could be offered by a city neighborhood gentrifies. If their monthly government, a community-based house costs remain largely unchanged, they organization, or a financial institution without should be able to stay in their homes even enabling legislation or other barrier that though surrounding housing costs increase. could delay implementation. Once they sell their home, they will be able to cover the deferred tax payments from Timing Considerations sale profits (Kennedy and Leonard 2001). Tax deferment policies and low cost loans Elderly homeowners in particular often do or grants can be implemented at any stage not have sufficient income to maintain their of gentrification. It might prove easier to homes well. Providing financial assistance pass the tax deferment legislation before for maintenance and repair costs can help property taxes increase so as not to have to grandfather the previous, lower tax rates.

Strategies to Build Assets 23

section 3

STRATEGIES TO BUILD ASSETS

sset-building strategies are intended to assist low-income individuals accumulate A wealth through programs that help increase savings, purchase a home, or start a business. Such strategies have grown in popularity in part due to changes in welfare policy during the 1990s. Changes included an increase in the asset limit so that recipients of income supports could increase their savings to a higher level without risk of losing a portion or all of their subsidy (Sherraden 1991). Policymakers from across the political spectrum have shown support for asset-building programs because they are designed to aid low- and moderate- income individuals move to economic self-sufficiency. Asset-building programs have the potential to reduce residential displacement in gentrifying neighborhoods if participants’ increases in wealth allow them to stay in place as housing costs rise (Weber and Smith 2001).

In this section, we discuss the following six community members, participants, financial asset-building strategies: individual institutions, and government agencies. development accounts (IDAs), homeownership education and counseling, Overall, asset-building strategies are more limited equity housing co-ops (LEHCs), likely to prove effective if they are community land trusts (CLTs), location implemented during earlier stages of efficient mortgages (LEMs), and the Section gentrification, in part due to the length of 8 homeownership program. Although these time it can take individuals to accumulate strategies differ in program implementation sufficient assets with which to pursue their and structure, they all aim to increase the goals. Asset-building strategies tend to assets of low-income households vulnerable require extensive preparation time, thus it to neighborhood economic cycles. These can be to participants’ advantage to engage strategies focus both on place (affordable them prior to significant strengthening of the housing and land use) and people (job local housing market. training and postsecondary education), and thus have the potential to increase resident Individual Development Accounts stability and to promote equitable Individual development accounts (IDAs) are development in gentrifying communities. matched savings accounts designed to help The programs require coordination among low-income and low-wealth families many key players such as nonprofits, accumulate savings for long-term

24 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

investments, such as homeownership, job corporations and other contributors to IDA training, and small business enterprises accounts of participants below the poverty (Northland Institute 2001). Unlike individual line (United Way of Connecticut 2002). retirement accounts (IRAs) or 401(k) plans, Nonprofit community organizations most IDAs are designed for the poor because often manage IDA programs, providing they provide subsidies through matched administrative support and money savings rather than tax breaks. The majority management training to participants, who of subsidies for asset accumulation tend to receive monthly statements from the bank favor the wealthy because they require and the IDA program. existing assets (Schreiner et al. 2001). IDA programs provide lower-income households Anticipated Outcomes an opportunity to accumulate wealth without IDA programs train participants in budgeting requiring existing wealth. and money management and enhance their IDA participants must first pass a means earning capability (United Way of test before beginning to deposit post-tax Connecticut 2002). The American Dream dollars into insured, interest-bearing savings Demonstration (ADD) has been evaluating accounts, which are typically held at local IDAs since July 1997. ADD registered 2,378 financial institutions. Withdrawals of IDA participants in 14 programs across the deposits are matched if they are used to United States. The average participant purchase a home, pay for postsecondary made deposits in seven of 12 months with education, or finance self-employment. monthly deposits averaging $25.42 per Third-party funders match the savings of participant (Schreiner et al. 2001). IDA participants, who usually save regularly Individual assets can benefit the over a period of up to five years (Schreiner neighborhood as well as the individual. The et al. 2001). Financial institutions, state and individual benefits of an asset such as a local governments, employers, and home or an IDA can spill over to produce churches provide the matching funds at a neighborhood benefits that include ratio ranging from 1:1 to 4:1 (Northland increased citizen participation, improved Institute 2001). infrastructure, and expanded commercial Financial institutions have incentives to offer business as participants acquire wealth that IDA accounts. Banks are able to meet some can then be spent in the community. This of their requirements under the Community increased local spending might fuel job Reinvestment Act by holding IDA accounts growth or attract more businesses to locate in a community-based IDA initiative. In in the community. Community-based addition, some states allocate tax credits to organizations can ensure the benefits of

Strategies to Build Assets 25

asset-building programs remain in the evaluation plan (Clancy 1996; Weber and community by implementing strategies Smith 2001). aimed at retaining asset holders, providing reinvestment opportunities, and tracking Davy (2002) raises concerns regarding the local purchasing power (Weber and Smith sustainability of IDA programs. Currently, 2001). only one in 10,000 persons who qualify for IDAs actually saves in an IDA, and Implementation Challenges resources are already limited. Many in the IDA field contend that reducing the cost of IDAs can be costly. IDA program expenses delivering IDAs would free up resources that without matches were roughly $70 per could potentially create a greater number of participant each month. Total outlays in accounts. To decrease costs, some have IDAs were approximately $6 per $1 of net proposed offering “low touch” IDA deposits ($1 savings, $2 match, and $3 programs, which reduce the intensity of program expense). Costs in ADD fell as support services and the amount of staff programs grew and developed (Schreiner et contact with account holders. Others argue al. 2001). Nonetheless, the question arises that the supportive services that “high whether it would be better to give IDA touch” programs provide are necessary to participants $70 rather than help them save the success of the account holder. $25 each month, though some observers Nonetheless, IDA programs face the point to the program’s encouragement of challenge of raising enough money to savings as a key element of the model continue serving account holders. (Sherraden 1991). Timing Considerations Before implementing an IDA program, organizations must decide how the IDAs can be implemented at any stage of individual deposits will be made, how the gentrification. However, IDAs might be more matching calculations will be performed and consequential if the program is established by whom, and how the number of IDA at an earlier stage of gentrification before participants will affect program housing costs increase to the point that that administration. A successful program program participants are unable to invest in requires coordination among IDA their community. organization staff, the financial institution, and the participant (Clancy 1996). Homeownership and Education Organizations establishing an IDA program Counseling need to consider as well the demand for IDAs within the targeted population, and The homeownership rate in the United develop a program monitoring and States has risen rapidly over the last decade, yet large gaps exist in the

26 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

homeownership rates for many working original legislation that created the families, low-income families, minorities, Department of Housing and Urban and urban dwellers. Homeownership can Development (HUD). In 1974, HUD was provide families the opportunity to develop authorized to directly fund HEC programs wealth through home equity, assuming a through Section 801 of the Housing and family can maintain its mortgage payment. It Community Development Act. Support has can benefit the community by increasing increased over the years. In 1999, HUD neighborhood stability and civic involvement allocated $18 million to housing counseling (Rohe and Stewart 1996). agencies (McCarthy and Quercia 2000).

The inability of families to save for a There is no national standard for HEC downpayment has been cited as the primary certification. However, HUD does certify barrier to homeownership. In response, HEC providers, which enables them to mortgage investors and lenders and private receive training and technical assistance mortgage insurers created low from HUD and become eligible to compete downpayment home loan programs for grants. Although HUD has funded the (National Housing Conference 2001). Most majority of HEC programs in the past, it low downpayment programs and affordable never intended to cover all HEC costs, but lending initiatives now require some form of rather to establish HEC programs so they homebuyer education or counseling could attract other sources of funding (McCarthy and Quercia 2000). (McCarthy and Quercia 2000). State and local housing agencies usually work with Homeownership counseling is considered local nonprofits to provide HEC programs. an effective approach to increasing In states that do not have an extensive homeownership among low-income nonprofit network, state and local housing households (National Housing Conference agencies usually institute their own HEC 2001). Homeownership education and programs. counseling (HEC) is considered instrumental in expanding the The four types of homeownership homeownership market by reaching counseling are homeownership education, potential buyers in underserved pre-purchase counseling, post-purchase communities and by helping homeowners counseling, and foreclosure prevention. remain in their homes through minimizing Homeownership education helps default risk (McCarthy and Quercia 2000). households determine their readiness to become homeowners, while pre-purchase HEC began in 1968 when a housing counseling includes general education and counseling program was included in the intense one-on-one counseling. Pre-

Strategies to Build Assets 27

purchase counseling assists potential to join community organizations (Rohe and homeowners to establish and improve their Steward 1996). creditworthiness, to set and achieve income goals, and to save for financing down Implementation Challenges payment and closing costs. Not all HECs have proven successful, Post-purchase counseling includes default- varying in quality and content, with some prevention counseling, designed to help leading to poor loan performance (National borrowers with mortgage payment Housing Conference 2001). The American problems. In addition, post-purchase Homeownership Education and Counseling counseling includes education about Institute (AHECI) was founded in 1997 to maintenance skills and budgeting (National address the need for program consistency Housing Conference 2001). Foreclosure (McCarthy and Quercia 2000). AHECI aims prevention helps the borrower with financial to establish national accreditation standards planning and assistance when developing a for providers of HEC, develop a core debt work out plan that both the lender and curriculum, establish the means for self- borrower find acceptable. financing of HEC initiatives, and establish an informational clearinghouse for materials Anticipated Outcomes and methods (McCarthy and Quercia 2000). The American Homeowner Education and HEC expands homeownership opportunities Counseling Institute (AHECTI), which is for low-income households by providing affiliated with AHECI, provides training, valuable information and helping certification, and accreditation using AHECI households improve their financial capacity. products. Compared to borrowers who do not undergo pre-purchase counseling, HEC participants Rohe and Stewart (1996) note that are 13 percent less likely to become increased homeownership in a community delinquent on their mortgages (Freddie Mac might lead to displacement and 2000). gentrification. They find that changes in homeownership have a positive and Homeowners, it is argued, have an significant relationship to changes in economic and a use interest in their property values. Communities with steady properties because they expect to build property appreciation tend to attract wealth through property appreciation and homeowners. Landlords in these they benefit socially from their property. communities are likely to sell rather than Research has shown that homeowners are rent their properties, which means the more likely to maintain their properties at a community loses rental units that provide higher standard than renters, and are likely housing for low-income residents who may not be able to afford a home. In addition,

28 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

appreciating housing values may make ownership, such as control over the homeownership unaffordable for those that property, housing stability, and the right to have always lived within the community. pass the property to heirs; however, the Rohe and Stewart (1996) caution pushing right to sell the unit at market price is homeownership on families with highly restricted. This restriction in the resale price variable or flat income trajectories because ensures that the co-op shares are they may not be able to afford their homes affordable for the next low-income buyer over the long run. (McCulloch 2001).

Timing Considerations LEHCs can be new housing cooperatives, converted tenant-occupied buildings, sweat- Though HECs can be implemented at any equity cooperatives, or leasing cooperatives stage of gentrification, the programs are (PolicyLink 2003). The corporation can likely to be more effective during the early obtain a blanket mortgage to cover the initial stages of gentrification when low-income costs of the property and members may residents are still able to purchase a home. obtain share loans to finance their own HECs require potential homeowners to units. Many LEHCs require a subsidy, as improve their creditworthiness, if necessary, with many low-income housing and to save for downpayment and closing developments. LEHCs typically have a costs. It may take some time before a board of directors that makes decisions for potential homeowner is prepared to the cooperative, with each member having purchase a home. Post-purchase one vote in the election of the board. The counseling as part of HEC might help board of the LEHC is responsible for current homeowners avoid default and oversight, budget, finances, resales, remain in their communities once property evections, and committees. values begin to rise. Starting an LEHC requires the cooperation Limited-Equity Housing Co-ops and assistance of many key players. (LEHCs) Members of the community must be accepting of having an LEHC in their LEHCs are business corporations in which community. Some community residents residents share ownership of a building. might be advocates for LEHC (PolicyLink LEHCs are different from traditional co-ops 2003). Sellers may offer longer than usual in that the purchase price of a share and the escrow periods, which are useful for appreciation rate are limited to maintain providing extra time to pull together LEHC affordability (PolicyLink 2003). The owner in financing. Sellers can finance part or all of a an LEHC enjoys most rights connected with sale and enter into a donated sale, which

Strategies to Build Assets 29

lowers the cost to buyers. Government housing for older and newer residents helps agencies can either help or hinder the to reassure the community supports the creation of LEHCs because they are LEHC (PolicyLink 2003). influential in obtaining financing and zoning changes. LEHC members must play an Anticipated Outcomes active role by participating in the governing Cooperative properties benefit low-income and management of the LEHC. Developers people by enabling them to remain in their need to be able to work with a large group apartments as co-owners rather than be of people and accept recommendations displaced because of rent increases. In (PolicyLink 2003). addition to keeping neighborhoods In addition to key players, there are key affordable, some evidence suggests LEHCs elements to the successful development of foster community pride among residents LEHCs in the face of gentrification and a sense of security and empowerment. pressures. Members should have a full LEHCs serve to build equity, but place understanding of their commitment, which greater emphasis on retaining affordability includes accepting the equity limits and because LEHCs restrict the owner’s participating in running the LEHC. accumulation of equity. According to Community support and acceptance of the McCulloch (2001), the key value of LEHCs LEHC is crucial to its successful is making the majority of benefits of development. Developers should set aside homeownership available to low-income time to educate neighbors and local people instead of encouraging wealth community organizations about the LEHC. accumulation. Support from local politicians and key public agencies is important for access to Implementation Challenges financing and zoning approvals. An LEHC requires various types of financing such as If a rental property is converted to an LEHC, subsidies and blanket loans, which are the LEHC may contribute to displacement provided by traditional lenders. Many local, as housing is removed from the rental state, and federal programs that provide housing stock (PolicyLink 2003). One way a some type of subsidy to other types of low- community can address this concern is to income housing developments also provide ensure that current neighborhood residents subsidies to LEHCs. The three different have priority in becoming co-op owners. types of subsidies that are often used are The implementation of an LEHC requires interest subsidies, rental subsidies, and coordination among many key players. capital subsidies. A comprehensive Accessing the financial subsidies needed to neighborhood plan that calls for the creation create an LEHC can pose serious of other LEHCs in addition to other types of challenges to implementation. To overcome

30 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

these challenges, a successful LEHC housing, or acquire the land and buildings requires a group of dedicated people willing together (McCulloch 2001). CLTs often to devote much time to the development acquire city- or county-owned property from and operation of the co-op. local governments or sometimes receive gifts from individuals, as tax-exempt Timing Considerations organizations. However, most of the time they purchase property on the private LEHCs are best implemented at the early market with funding from public sources. stages of gentrification before property prices escalate greatly. Once property CLTs typically are organized as values increase, it might be more difficult to membership corporations where members access the financial support. It is elect the boards of directors. There are two recommended that LEHC organizers work groups of voting members with one group with nonprofit developers as early as composed of people who reside in CLT possible to begin the development and homes and the other group composed of financing process. community members. All CLT residents are members, but other residents in the Community Land Trust (CLT) community may become members as well.

In the 1960s, the founders of the Institute for Most CLTs assist people to become Community Economics (ICE) designed the homeowners, although some CLT homes Community Land Trust model (CLT) “to are rented. The CLT leases the underlying encourage affordable resident ownership of land to homeowners when it sells them a housing and local control of land and other home. The lease is usually long-term (99 resources” (ICE 2003). CLTs make land years) and renewable, which enables the available and housing affordable for residents and their descendents to use the residents who would otherwise not be able land for as long as they live there. CLT to afford them. Over the past three decades, homeowners are permitted to sell their CLTs have developed in urban and rural homes, but the land lease stipulates that the communities. A CLT is a private, nonprofit home must be sold back to the CLT or to organization formed to acquire and retain another low-income household at an land for the benefit of a community. Under a affordable price (Peterson 1996). CLT, land is permanently held by the trust, and the occupants own the buildings. The Anticipated Outcomes housing becomes more affordable once the land costs are reduced (Peterson 1996). CLTs assist communities in decreasing CLTs acquire vacant land and then develop absentee ownership, provide affordable

Strategies to Build Assets 31

housing, encourage resident ownership, specified percentage of the increased retain affordable housing for future market value. residents, and help develop a strong foundation for community action. CLTs can Timing Considerations alleviate the pressures in gentrifying It would be best to establish the CLTs prior neighborhoods stemming from increased to gentrification so that the organization can rents by maintaining affordable housing for afford to purchase properties at a participating households. CLTs can also reasonable price. The model may work in benefit an entire community by alleviating an already gentrifying area if the CLT the negative effects of disinvestment in acquires a city- or county-owned property at communities and absentee ownership (ICE a reduced cost. 2003).

In 1984, one of the largest and most Location Efficient Mortgages prominent CLTs was established in A location efficient mortgage (LEM) enables Burlington, Vermont, to produce and retain homebuyers interested in living in urban affordable housing for local residents. The areas to increase the amount they borrow Burlington Community Land Trust (BCLT) while making a smaller downpayment. holds roughly 500 units of housing, which LEMs are based on the idea that includes single-family homes, housing homeowners living in high-density areas cooperatives, and condominiums (ICE with public transportation options will save 2003). money because they can shop at local Implementation Challenges stores and use public transit regularly, rather than drive to shopping areas and to According to McCulloch (2001), CLTs offer work. The reduction in automobile-related homeownership opportunities to low-income expenses increases income that can then residents, but CLTs do not allow residents be directed toward mortgage payments. to accumulate the maximum equity possible LEMs are intended to reduce urban sprawl from their property. Residents do build and dependence on cars (NRDC 2001). some equity through mortgage payments Because they increase the amount of and through receiving a share of the home’s mortgage a homebuyer qualifies for, LEMs appreciating value. However, resale also can be used as an affordable housing formulas under CLTs attempt to balance tool. retaining affordability for future buyers with offering the sellers a fair return on their LEMs are 15- to 30-year fixed-rate investment. Formulas vary by CLT, but in residential mortgages that require general allow a seller to set a price that will downpayments of at least three percent of return his or her original investment plus a the appraised value of the property and

32 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

have loan-to-value (LTV) ratios of 97 be restrained by making homes in location- percent. The mortgages are available only efficient communities more affordable to for initial purchase, not for refinancing. LEM low- and moderate-income borrowers borrowers must participate in pre-purchase (Blackman and Krupnick 2000). LEMs can counseling on homeownership and location be used to buy detached homes, efficiency (Location Efficiency 2000). condominiums, and townhomes. In 1999, Fannie Mae launched a $100 million pilot The key difference between an LEM and a project to make LEMs available in a number traditional mortgage is that transportation- of cities. They are now available in Chicago, related savings are taken into account. Los Angeles, Portland, Orange County, San Transportation cost-savings are calculated Francisco, and Seattle, and likely will by using land-use information, such as become available in Philadelphia (NRDC population density, public transit locations, 2001). and census information on car ownership. The lender calculates the difference in It should be noted that LEMs do not target transportation costs between an urban any particular income level. In addition to household and its suburban counterpart, increasing the purchase power of relatively and then adds this dollar amount to the lower-income households, the mortgages borrower’s qualifying income (Location provide an incentive to higher-income Efficiency 2000). households to move into urban communities, which might intensify Anticipated Outcomes gentrifying pressures.

LEMs can affect the amount of house one Implementation Challenges can buy or who can buy a house by increasing the percent of income considered Supporters of LEMs claim that such loans available for mortgage payments. With will have a low default rate because assumed savings from reduced homeowners who live in location-efficient transportation costs, LEM underwriting areas will be able to transfer savings in shifts the standard from 28 to 39 percent of transportation costs to their mortgage gross monthly income (NRDC 2001). For payments. Researchers examining this example, a household with gross monthly claim have raised questions about the income of $2,000 would be assumed to expectation for lower default rates among have $500 available for monthly mortgage LEM borrowers. payments under the standard criteria, but $780 under the criteria used for LEMs. At the time of their study, Allen and Proponents of LEMs claim urban sprawl will Krupnick (2000) did not have access to

Strategies to Build Assets 33

repayment histories for LEM borrowers. Section 8 Homeownership Program Instead they set out to study whether homeowners with conventional mortgages The Quality Housing and Work living in location efficient areas, therefore Responsibility Act, passed by Congress in assumed to have lower transportation costs, 1998, included an option allowing the use of had lower rates of default than homeowners Section 8 housing vouchers (Housing with similar mortgages living in non location- Choice Vouchers) for payment of efficient areas. After examining more than homeownership expenses. Voucher 8,000 mortgages that met their criteria, the administrative entities can elect to offer the researchers concluded that there was no homeownership option to voucher-holders. correlation between location efficiency and The voucher can be used to cover monthly a lower probability of mortgage default. mortgage payments, utilities, major home Allen and Krupnick go on to say that offering repairs or maintenance, and condominium LEMs would be similar to offering low fees; it cannot be put toward downpayment downpayment mortgages to a random or closing costs for home purchase, sample of borrowers, an approach that likely however (Federal Reserve Bank of New will lead to higher default rates. They York 2002). The payment standards for the conclude that from a policy perspective, the homeownership vouchers are the same as benefits of LEMs, increasing access to those for vouchers used to rent housing— housing and controlling sprawl, need to be vouchers cover the difference between 30 weighed against the costs of potentially percent of the household income and the higher default rates (Allen and Krupnick total housing payment, up to the designated 2000). That said, LEMs are relatively new; payment standard (NHC 2001). studies are needed that look at actual LEM Homeownership voucher payments can be performance. made to the voucher holder or directly to the lender (CHAPA 2002). Timing Considerations To participate in the homeownership Location efficient mortgages will be more voucher option, families must be first-time effective for lower-income households homebuyers and meet the standard before housing prices appreciate. LEMs can eligibility requirements for a voucher. At be used once housing prices are high, least one adult in the family must show full- though high costs will limit home-purchase time employment for at least one year, options for lower-income households, even unless the household head qualifies as with the increase in mortgage amount. elderly or disabled. Also, the family must meet an income requirement equal to 2,000 hours of full-time employment at the federal minimum wage (currently equal to $10,300).

34 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

The income requirement does not count October 2000, participants at five of the welfare payments toward a household’s demonstration sites had closed on a home income. Participants must find a unit to buy (NHC 2001). The program has been taken that passes HUD’s housing quality up by Housing Choice Voucher inspection and must arrange for their own administrating entities located in almost financing (Federal Reserve Bank of New every state, as well as in Washington, D.C., York 2002; HUD 2003). Participants are Puerto Rico, and the Virgin Islands. There required to complete a HUD-approved have been more than 4,500 closings.2 homeownership counseling program; they have the option of attending post-purchase Implementation Challenges counseling if it is offered (CHAPA 2002). Results from the HUD funded study of the Families with a homeownership voucher demonstration program will help identify can receive assistance for 15 years on a successful implementation strategies as mortgage with a 20-year or more term, or well as barriers. Challenges could include ten years if the mortgage term is less than the ability of a family to find a home that 20 years (HUD 2003). If a family sells its passes HUD’s housing quality inspections property within ten years of purchase, or if it and to secure financing with favorable refinances the mortgage, the voucher terms. Although families are required to agency is required to recapture a participate in housing counseling, the percentage of the voucher assistance process of buying a home can still be (CHAPA 2002; Federal Reserve Bank of difficult. Both Fannie Mae and Freddie Mac New York 2002). work with the Section 8 Homeownership Program, which should reduce financing Anticipated Outcomes hurdles. The involvement of nonprofit organizations, with counseling, technical, or The use of vouchers to support financing assistance, can help improve homeownership has been described as an program outcomes. NeighborWorks has ideal way to help lower-income families buy been active in a number of sites (NHC a home in areas with low or otherwise 2001). declining landlord participation with the voucher rental program, or in areas with Timing Considerations high rental prices relative to sales prices (Federal Reserve Bank of New York 2002). The Section 8 Homeownership Program might work best if used during the early to HUD initially approved 14 demonstration mid-stages of gentrification. Participants sites to run the homeownership program. By would be more likely to find an affordable

Strategies to Build Assets 35

home before home prices appreciate out of properties in need of rehabilitation are still reach. The program could be used in areas available. considered gentrified if lower-priced

36 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

REFERENCES

Strategies to Develop Affordable Housing

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Johnson, Jennifer E. H. and Beata A. Bednarz 2002. Neighborhood Effects of the Low Income Housing Tax Credit Program. The Urban Institute. March.

Linker, Justin, Shay, Chris, and Hall, Christine 2001. “Affordable Housing Trust Funds.” Fannie Mae Foundation Issue Brief. Fannie Mae Foundation. November.

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______2002b. Enhanced Vouchers www.nhlp.org/html/pres/vouchers/index.htm. (Accessed January 27, 2003.)

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______2002c. Renewals—Four Options for Renewal of Expiring Project-based Section 8 Contracts. www.nhlp.org/html/pres/renewals/index.htm. (Accessed January 27, 2003.)

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Related Publication

Levy, Diane K., Jennifer Comey, and Sandra Padilla 2006. "In the Face of Gentrification: Case Studies of Local Efforts to Mitigate Displacement." Washington, DC: The Urban Institute.

42 Keeping the Neighborhood Affordable: A Handbook of Housing Strategies for Gentrifying Areas

ENDNOTES

1 In the late 1980s, federal laws prevented prepayment of Section 236 mortgages. Previously, owners were allowed to pre-pay the debt.

2 The HUD.gov website offers an Excel spreadsheet with the number of closings per public housing authority. Entities other than PHAs can administer the program, and the data from PHAs likely is not up to date, per HUD’s note on the spreadsheet itself: www.hud.gov/offices/pih/programs/hcv/homeownership. Accessed 2/21/06.