Portland’s Model for Affordable Housing

Last month, Portland, OR implemented a new program to spur the construction of affordable housing in the city and surrounding county. In the simplest terms, market rate apartment developers are being paid by the city to build affordable homes as part of their new communities. By helping fund the construction of these homes, Portland is offsetting the constraint on development cause by their inclusionary housing policy. While the specifics of Portland’s policy are not directly applicable to California (Portland is paying for this partly through property tax breaks for the developers, an option that is not normally available to cities in California), the concept as a whole could provide a significant boost to affordable housing development in California cities with existing affordable housing resources.

Typically, affordable housing in California is funded by a combination of State and local sources of funds. The backbone financing program is the Low Income Housing Tax Credit, administered by the California Tax Credit Allocation Committee (TCAC). These tax credits are then leveraged with local sources of funding from cities, counties, or regional housing trusts. In fact, increasing the amount of local funds, while decreasing the request for tax credits, makes it more likely that a development will receive tax credit award under TCAC regulations. As tax credits have become more competitive in recent years, the amount of local financing going into these projects continues to climb. Combined with the raising cost of construction, cities are getting significantly fewer affordable homes for their investments than they had in the past.

Cities with significant housing resources could adopt an affordable housing funding model similar to Portland’s to increase their return on investment, or in other words, by creating more affordable homes with their available funds.

Last year, of the 181 different developments that applied for 4% tax credits (one of the two types of tax credits, and the only one for which data is readily available), the average cost to build a single affordable apartment in California is $588,000. Depending on the development, the price can range from $250,000 to over $1.1 million per home. Some of this cost is paid through privately financed bank loans taken out by the developer, but a large percentage of every one of these homes is paid for by the government.

The cost of construction for market rate developers is not drastically different than it is for affordable developers. They are certainly able to build homes more economically than the high end of the range of affordable developments, but the average price of a new market-rate apartment is only a little less than the average new affordable apartment. However, under Portland’s model, the City is not funding the entire cost of construction, only the difference between the construction cost and the amount of debt the project can take on based on the restricted rent.

In Los Angeles County, for instance, a two-bedroom apartment restricted to 80% of the Area Median Income could be rented for $2,270. From this gross rent, it might be that $1,500 could be used for debt service. Under current market conditions, that supports approximately $225,000 in debt. If the construction costs for each affordable apartment is $350,000, then the city would need to pay $125,000 to ensure the additional affordable apartments are cost-neutral for the developer.

Creating a cost-neutral program to developers for the creation of affordable housing is key. First, cities must create an inclusionary policy that requires the construction of affordable housing in any market rate development. Then, to counteract the inclusionary policy acting as a constraint on development, create a way for cities to pay for the added cost of income restricting apartments.

This model could be a very effective way for cities to use their existing affordable housing resources to build more homes off the back of market rate developments already being built. It would have the added benefit of reducing competition for tax credits and would allow that program to be more effective, and allow for more certainty in the financing of affordable housing.