Knock LA

Seems like a pretty good deal, right? A federal low-income housing program — actually the federal program — uses a section of the US tax code to the tune of roughly $13 billion annually to bypass the congressional appropriations and oversight processes and fund affordable housing. In doing so, it produces approximately 100,000 low income units nationwide each year. In California alone, nearly 80% of affordable housing developments have relied on this Low-Income Housing Tax Credit.

Chinatown’s Hillside Villa, a 124-unit building built in 1998, used federal LIHTC financing in exchange for the landlord’s commitment to keep the rent low for 30 years. The building is one of 537 buildings in Los Angeles financed through the federal Low-Income Housing Tax Credit program. 

What seemed like a holistically good deal turned into a nightmare for the Chinatown tenants. After thirty years of federal tax largesse via the LIHTC, the Hillside low-income covenant expired in 2018. That allowed landlord Tom Botz to issue tenant rent increases of 200 to 300%. The struggle between Botz and Hillside tenants was protracted.

The highly complex LIHTC business model itself contributes to funneling of a significant federal subsidy not to renters, but to investors. Because of the intricacy of the financial instrument, developers hire “syndicators” who bundle credits into funds. Investors purchase the tax credits at a discount, basically transferring the subsidy value from the tenants to the investor.

Rent increases plagued another LIHTC Chinatown project, Metro at Chinatown Senior Lofts, a 123 unit building near a Metro station. In this instance, tenants faced rent increases more than double that allowed for most eligible rent-stabilized Los Angeles renters. The reason being that while tenants are clearly hard pressed economically, the LIHTC-backed building is not covered by LA’s rent stabilization ordinance.

The Hillside and Chinatown rent scenarios may be replicated. Moreover, forty years after its inception in 1986, a perilous number of LIHTC projects – approximatley one third – are nearing their scheduled low-income covenant expiration dates, which means that rent increases are subject to the owner’s whims. The Chicago Federal Reserve suggests that, as a result, the total volume of LIHTC units will stagnate or decline. Not good.

Another thing that contributes to the creakiness of the LIHTC program is the crazy quilt nature of its financing mechanism, which adds to costs for project developers. For example from 2008 to 2019, only eleven percent of the nine percent of LIHTC projects — typically with new construction — had fewer than four external sources of funding. Ten percent of projects used more than eight funding sources.

One developer noted in a Turner Center study on the costs of using LIHTC that, “You usually need at least three public agency loans or grants and a regular bank loan. The process of applying is time consuming, and usually the way it works is a leveraging game they all play.”

A breakdown of who actually benefits from the LIHTC programs is illuminating. Academic studies suggest that a significant portion of the LIHTC subsidy flows not to tenants but to investors. For example, the complexity of the financial mechanism requires the hiring of fee-charging “syndicators” who bundle tax credits into funds. Investors then purchase the tax credits at a discount, which is essentially a transfer of the LIHTC subsidy from the housing project and the tenants, to the profit margin of the investor.

Dealing with the administrative soft costs of LIHTC deals also limits the tenant subsidy as lawyers, accountants and others are paid. The LIHTC statute and related IRS regulations are 442 pages in length, and the IRS auditing guide is 214 pages. An IRS guide for building compliance is 214 pages. Meeting these arcane requirements does not come cheap, and tenants are on the short end of the stick.

Possibilities within Los Angeles

There has to be a more efficient, equitable and cost-effective way to produce affordable housing. Social housing advocates in LA and elsewhere think they have a better option: put the “public” back in social housing.

What exactly is social housing? One way to think about it is as a public option that prioritizes publicly supported affordable housing development over a private housing delivery system that many advocates argue has failed to meet demand. It challenges the longstanding belief among housing providers, public officials, and others that housing’s primary function is as a private asset that can be bought, sold, and speculated upon.

Social housing advocates argue that housing is not a commodity to be privatized. The market’s failure to deliver adequate low-income housing – a problem worsening as time goes on – suggests that market-based approaches alone have failed to deliver enough affordable housing. Social housing advocates are prepared to say goodbye to all that by decommodifying housing. Removing low-income housing from the private market is the sine qua non of various social housing endeavors. The decommodification approach, which emphasizes social equality and resident control, differs markedly from traditional affordable housing financing. Instead of renting affordability for a fixed period as provided by the LIHTC model, social housing buys affordability, a far more efficient approach. 

Moreover, with its emphasis on removing land costs through use of municipal and nonprofit sources — a key factor in cities like LA which have inflated land values — savings can accrue to tenant occupants in their long-term tenure. As UCLA’s real estate-backed Lewis Center argued in a recent paper on Los Angeles social housing, a large and increasing share of housing must now be treated as a social resource rather than a commodity yielding private windfall. According to the Center, social housing is defined not by a particular ownership model but the active prohibition of reentry of the housing project to the speculative real estate market. 

In 2020, less than 2% of all rental housing units were owned by the public. More than 40 percent were owned by limited liability corporations and similar entities. In Los Angeles, 67 percent of all rental property is owned by landlords who own five or more properties, and 75% of renters live in buildings owned by investment companies and corporate landlords.

Social housing is common in European cities, and Vienna is widely regarded as the leading example of social housing in practice. Whereas public housing in the United States largely serves the lowest-income residents, Vienna income limits are set so approximately 75% of the city’s population qualifies for social housing, thereby ensuring a broadly mixed-income tenant population. This generally prevents the “warehousing” of a given city’s poorest — one of the least appealing aspects of contemporary American public housing.  

Another big difference with American public housing, which regularly subjects tenants to frequent, burdensome and demeaning income tests: there are no income tests within Vienna’s social housing after a contract is signed. In practice, this means a tenant fortunate enough to see their income rise is not required to vacate their home. The result is long-term housing stability. Many residents stay for decades, with certain rights to pass the unit on to a relative. Unsurprisingly, most Vienna renters live in social housing.

Los Angeles Leaders Learning from Vienna

At least two Los Angeles delegations of housing advocates and policymakers recently traveled to Vienna to study social housing. A 2023 delegation included several local officeholders, such as LA County Supervisor Holly Mitchell and LA City Councilmembers Marqueece Harris-Dawson and Eunisses Hernandez. The delegations also comprised of city and county housing officials, nonprofit leaders, and housing advocates.

After surveying Vienna, County Supervisor Holly Mitchell said that beyond the facts and figures presented about Vienna’s low rent burden and housing costs, delegates from Los Angeles were overwhelmingly struck by the feeling of contentment present in Vienna’s residential neighborhoods that permeates even densely populated areas. For many in the delegation, listening to residents talk about the ease with which they can find and afford housing was the most powerful reminder of the trauma the housing crisis takes on lives back in LA.

“Over the past century, Vienna has made the development of social housing one of its top public priorities,” Mitchell said in a video she released reflecting on the trip. “Today, social housing exists in every district of the city, built side-by-side with market-rate housing, and Vienna is considered one of the most livable cities in the world.”

Gleam Davis, a Santa Monica city council member, also visited Vienna and cited the difficulty in building affordable housing. “Unfortunately, in my city, some people think finding room for cars is more important than building homes for people,” she said in an article by The Guardian. “Some of my colleagues think we can police ourselves out of this or build our share of affordable housing in the desert and move those people out there.”

This is part one in a series about social housing possibilities in Los Angeles.

Brian Michael Doherty worked as a reporter for Housing Affairs, a Washington DC-based national housing trade publication, as a housing and banking legislative aide in the House of Representatives, as mortgage lending enforcement senior staff for HUD’s Office of Fair Housing and Equal Opportunity, and as senior manager responsible for enforcing affordable housing mandates at the Federal Housing Finance Agency.