Above the invisible ceiling
By David A. Smith
4 min read
Short egocentric architect Frank Lloyd Wright must have hated tall people; his homes all have low ceilings. Similarly, transportation czar Robert Moses hated trucks; clearance under his stone bridges on New York State’s parkways goes as low as seven feet.
For both of these designers, a hard ceiling was a deliberate design choice restricting access and benefits to those deemed worthy. These boundaries became hard-and-fast fundamentals around which everything else in the ecosystem adapted.
If you’re under these designers’ ceilings, whether walking through a Wright house or driving along one of Moses’ Long Island parkways, you are scarcely aware of the spatial constraints. If, however, you are above the designers’ ceiling restrictions, you will experience either crimped behavior or head-smacking pain.
LIHTC’s Invisible Ceiling
In the affordable housing world, the biggest niche in the low-income housing tax credit (LIHTC) program is empty, blocked off by LIHTC’s impenetrable but invisible ceiling: the 60% of area median income (AMI) limit for LIHTC residents and the concomitant rent ceilings. Though applicable uniformly nationwide, it produces non-uniform results: either massive airy headroom or head-smacking problems, as follows:
- For most of America by geography, what we might call the voted-red counties (Shreveport, El Paso), the ceiling is irrelevant because the maximum tax credit rent is above local market rents.
- For most of America by population, what we may call the voted-blue cities (Boston, San Francisco), the ceiling arbitrarily cuts off affordability at levels far below the total metropolitan need.
In states dominated by red counties, LIHTC without additional subsidy produces new market-rent housing with a massive capital-cost advantage. By contrast, in states dominated by blue cities, LIHTC can reach down but not up. Blue cities that need workforce or key-worker housing – health care workers, city teachers, police/fire, EMTs – cannot use LIHTC to help these people, as they are usually classified as “over-income” for a LIHTC unit (i.e. above 60% of AMI).
This is grossly unfair. These workforce customers – above 60% but below the income level needed to rent a market apartment in their supply-restricted blue cities – are the only income/tenure configuration in America whose housing costs aren’t subsidized or supported. If everyone else is being advantaged, not being advantaged means being discriminated against.
Some critics observe (quite correctly) that such high local market rents are often a byproduct of self-defeating development-restriction policies. But why should this be grounds to deny those states the ability to use LIHTC for the income niches that most need it but are not presently served? After all, LIHTC is a tax expenditure that is block-granted to the states to produce lower-middle-income affordable housing. In blue cities, today’s LIHTC program cannot fulfill that policy objective because it slams into the invisible ceiling.
A Possible Solution
Some have proposed amending the LIHTC program to allow a one-up-for-one-down approach – one apartment’s rent ceiling at (say) 80% of AMI (+20%) in exchange for one whose ceiling is lowered to 40% of AMI (–20%). But this idea has had little political traction, in part because it makes it difficult to address workforce housing.
There’s a simpler way.
The LIHTC program already allows a 30% basis boost for projects in qualified census tracts (QCTs) or difficult-to-develop areas (DDAs). Why not allow a 30% (roughly) income boost, to 80% of AMI, for projects in High-Rent Metropolitan Areas (HRMAs) – areas in which the market rent (HUD’s Fair Market Rent is a workable proxy) is at or above (say) 30% of 90% of AMI?
This mechanism would give states additional flexibility yet be optional; wouldn’t cost the federal government a dime; could be subjected to an external market test; and would be easy to administer (just change one input number on your spreadsheets). It would even help red states with burgeoning blue cities, such as Montana (Missoula), New Mexico (Albuquerque), South Dakota (Sioux Falls), and Utah (Salt Lake City).
If you live in a low-ceilinged house long enough you gradually adapt your posture and forget about standing up straight. But once you remove the impediment, you suddenly discover how cramped you’ve been and remember your previous pain. In the LIHTC program, it’s time to allow high-rent locales to raise their local ceilings so states can serve that neglected niche.
David A. Smith is Chairman of Recap Real Estate Advisors, a Boston-based real estate services firm that optimizes the value of clients’ financial assets in multifamily residential properties, particularly affordable housing. He also writes Recap’s free monthly essay State of the Market, available by emailing dsmith@recapadvisors.com.
