Forget NSP, Tax Credits Will Save Neighborhoods

Posted by Alan Mallach on June 21, 2013

In my last two posts, I tried first to explain why NSP hasn’t revitalized many neighborhoods and why Project Rebuild won’t do any better; and second, to suggest some principles for a program that actually might do a better job at rebuilding the nation’s distressed neighborhoods.

In this post, I’m going to suggest what such a program might actually look like. This may not be the only way to approach it, but I think it might work. I call it the neighborhood investment tax credit program.

First, enough one-shots and one-dimensional efforts. If we want to revitalize neighborhoods, we must recognize that it’s a multiyear, multifaceted project. It should be an income tax credit program, for three reasons:

  • As the LIHTC has shown, tax credit programs tend to sustain themselves better, and be more immune from the politics of the appropriations process, than annual appropriations. This is critical if the program is to have the continuity it needs.
  • They are better at leveraging private capital.
  • They are easier to administer.

The program would not be available everywhere, but only in designated neighborhoods that met two criteria: they need outside resources to move forward, but have characteristics (attractive houses, proximity to major employers, good transit connections, a strong base of existing homeowners) that offer real revitalization potential; and second, they have a strong CDC, neighborhood association or other community-based entity capable of spearheading the revitalization effort.

Designated neighborhoods would be eligible for funds from two separate tax credits:

  • A five-year tax credit for homebuyers who buy and restore houses in need of major rehabilitation in designated neighborhoods, or who buy from developers who restore such houses, and
  • A ten-year tax credit for investors who put money into pools to be used for flexible neighborhood investments in the same neighborhoods.

The purpose of the homebuyer tax credit is to counteract the market forces, in particular the market or appraisal gap, discouraging people from investing their own money in buying and restoring houses in struggling neighborhoods. We’re talking not about devastated areas, but about neighborhoods that have real assets but which have been devalued by the marketplace to the point where people are reluctant to invest.

Homeowners would start taking the credit after they completed the rehab and moved in, and would take it over five years; if they move out of the house during those five years, they would lose any credits not already taken. The proceeds of the investor tax credit would be to provide the ‘glue’ that’s needed to leverage change throughout the neighborhood, and in turn increase the likelihood that people will want to buy in the neighborhood and ultimately trigger the kind of self-sustaining market process that exists in any successful neighborhood.

Each designated neighborhood would get a chunk of funds from the investment pool each year as long as it remained eligible, which it could use for activities that would both improve the quality of life for existing residents and contribute to building a stronger neighborhood housing market. That could include rehabbing or demolishing abandoned houses; fixing up parks and public open spaces; improving commercial districts or making small business loans; or marketing and community-building efforts.

Three things are critical to making this approach work:

  • The program should be a multi-year program. Once a neighborhood is designated, it should be eligible for both tax credits for a minimum of five years.
  • There should be no income limits for people to benefit from the homebuyer tax credit.
  • There should be no cap on the number of homebuyers in designated neighborhoods who can take the credit.

All three are critical, but the last particularly so. If the credit is going to be an effective way of motivating buyers, it must be automatic; if you buy and restore a house in a designated neighborhood, you can get the credit. Period.

The way to manage program outlays is by capping the number or population of the neighborhoods that could be designated, presumably by HUD. Along similar lines, while limiting the income of those eligible for the homebuyer tax credit would be counterproductive, it would be both reasonable and appropriate to require that some percentage of the units created with funds from the investment pool be affordable to low-income households.

How much would this cost? It’s hard to say without making decisions about the size of the individual homeowner credit, and the magnitude of the investment pool. Still, a back of the envelope analysis would suggest that for a total federal outlay of around $5 billion per year, which would be reached only after many years as the program ramped up. This program could have a catalytic effect over the next decade on as many as 100 neighborhoods around the country with 3 million to 4 million residents.

Would this be worth it? I think so. I hope it will be possible to convince enough others that our urban neighborhoods are worth saving to get this approach, or something like it, a serious hearing. For more details, click here.

About the author more »

Alan Mallach, senior fellow of the National Housing Institute, is the author of many works on housing and planning, including Bringing Buildings Back and Building a Better Urban Future: New Directions for Housing Policies in Weak Market Cities. He served as director of housing and economic development for Trenton, N.J. from 1990 to 1999. He is also a fellow at the Center for Community Progress and the Brookings Institution.

COMMENTS

Mike Hodge
25 Jun 13, 4:38 pm

An interesting idea.  However, I have two questions:

1)  How is long-term affordability achieved?  If there is a five-year limit on receiving the tax credit, what is to stop the new homeowners from selling the properties at 6 years—and making a good bit of money, if the neighborhood has improved as you hope.  Then that unit is lost to the affordable housing market.

2)  How is gentrification dealt with?  Your criteria for selecting neighborhoods are all quite positive—and would indicate a neighborhood that market forces may be about to gentrify.  Even if this were not the case, wouldn’t the end result of the proposed program be to raise property values (and taxes and rents) in the neighborhood?  Wouldn’t people of modest income be priced out? 

Are there modifications to the program that might help maintain affordable housing in such neighborhoods?

If I’ve missed something here or am misunderstanding you, please forgive me.  But gentrification seems to be the elephant in the room of any neighborhood development project.

Thanks!

Mike Hodge
Neighborhoods Resource Center
Nashville, TN

Alan Mallach
4 Jul 13, 3:24 pm

Mike - I’m going to respond to your first question here - the second will be the topic of my next post. Stay tuned.

As far as the housing that gets the tax credit, it is not meant to be affordable housing, and eligibility for the tax credit should not be means-tested. The tax credit is about encouraging people with enough money to be able to do so to come in, buy and fix up houses to live in as owner-occupants, because everything we know says that that’s one of the best ways to revitalize a neighborhood. Some may leave after 6 years if they can make a profit - in which case, God bless ‘em, because they’ve contributed to the neighborhood - but the data shows that most homeowners, once they buy, stay in the house a lot more than 6 years, usually 10 years or more.

There are things that can be done to help maintain affordable housing in gentrifying neighborhoods - and I suggest you look at my paper Managing Neighborhood Change, which is available on the
NHI web site (http://www.nhi.org/pdf/ManagingNeighborhoodChange.pdf), for a variety of specific suggestions. But neighborhood revitalization and creating/preserving affordable housing are very different animals - related perhaps, but different. As I stress in my paper, the two have to operate on parallel tracks, each sensitive to what’s happening on the other track at the same time.

Greg Smith
8 Jul 13, 9:07 am

I have worked on several neighborhood revitalization projects in Dayton, Ohio and think that the proposed approach has a lot of merit.  One thing I know for sure is we have to worry a lot less about Mike’s concern of gentrification.  Providing quality housing for low income individuals is a noble and worthy goal.  But if we are truely going to make our urban neighborhoods mixed income, some low income individuals are going to be displaced.  I think that the benefit is worth the cost.  Most renters only stay 3-4 years in one place anyway and many of them are looking to get out of these neighborhoods and would prefer to live in the suburbs.  I worked on a Hope VI project several years ago where all of the displaced residents were paired with counselors and a minimum about of relocation funds.  The project displaced hundreds of people, but I have yet to found one instance of an individual that is not better off since the displacement.  The counselors helped residents find new living arrangements that were closer to family, places of employment, or in better homes. 

Those of us who support urban revitalization have got to come together and be willing to accept gentrification and some displacement or we will never have enough numbers to overcome those who believe that funneling money in urban neighborhoods is a waste.

Mike Hodge
8 Jul 13, 1:29 pm

In my original post, I asked two questions: 
1)  How is long-term affordability achieved?
2)  How is gentrification dealt with?

While I appreciate Alan and Greg taking the time to respond, the only answers I have heard are “Don’t worry about affordability” and “Don’t worry about gentrification.” 

By the way, Greg, a comment or three:
1)  Your example of Hope VI assisting residents in moving seems a little off base.  I was asking about gentrification—private responses to economic shifts—not about government relocation programs.  If there WERE assistance available to gentrifying neighborhoods, it might make a difference, although those neighborhoods would still lose affordable units.  2)  My concern is not “some displacement” but major displacement.
3)  Your discounting of renters is disheartening to hear from someone who works in neighborhood revitalization.  Many renters who are displaced to the suburbs find they cannot get transportation to work, social services are not available, and they have lost any support that they once had from their neighborhood or community institutions.

Our agency assists neighborhood organizations in different parts of town.  In almost all these areas, gentrification is happening and housing is becoming less affordable.  Is there no way to have housing options for low-mod income residents as well as the more well-off?

I guess the key questions are:
1)  What is the goal of neighborhood revitalization?  Improving the housing stock—or the lives of low-moderate income residents?  Removing low-income residents—or creating mixed-income neighborhoods?
2)  If mixed-income neighborhoods are a goal, why do we not include maintaining affordable units in revitalization plans?
3)  Why should public dollars through tax credits be used to increase income disparity in neighborhoods, when a revitalization plan could use LIHTC to insure affordability of some units?

Thanks,

Mike

POST YOUR COMMENTS register or login