Attainable Housing

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Increasing Opportunities for the ‘Missing Middle’

Affordable housing advocacy and policy often prioritizes people who are most in need of housing, and understandably so—nearly one-third of Americans are housing cost-burdened. But, the aid for housing often cuts off those who aren’t low-income enough to qualify, yet aren’t wealthy enough to afford market-rate housing.

Such people are referred to as the “missing middle” of the rental or homebuying market. The housing for this demographic is called “workforce housing” or sometimes “attainable housing” or “middle-income housing.” Although it may not be a priority in current policy, some cities and states want to increase the middle-income housing supply, and in November, NH&RA held a town hall discussion on the topic.

Among the states that have embraced middle-income housing policy is California. Next City reports that its affordable housing authorities are now providing financing for middle-income housing to target middle-class employees. It can be hard to get such housing built through market-rate development alone, says Jon Penkower, director for the California Statewide Communities Development Authority (CSCDA). As he told the publication, developers cannot profit by “[building] new units and restrict the rents to 80 to 120 percent of [area median income (AMI)]. It’s too expensive.”

Brett Meringoff, senior vice president of the affordable housing development firm Fairstead, echoed this sentiment at the NH&RA panel. He noted that very little housing in the 60 to 120 percent AMI range has been built nationally since the 2008 financial crisis.

For this reason, California’s plan is for the CSCDA, through its Workforce Housing Program, to acquire properties directly and rent units at reduced rates. The state will use bond revenue for this, and cross-subsidize middle-income units in the near term via rent collection from more expensive units. The debt is amortized over 30 years.

California’s goal is to enhance affordability for residents earning 80 to 120 percent of AMI, the income group that Penkower insists is vulnerable. The agency, which has financed almost 66,000 units since 1988, hopes the program will lessen the state’s affordability crisis, which is arguably the worst of any state in the U.S., with high-profile tales of blue-collar professionals living in RVs. For now, however, the Workforce Housing Program will concentrate not on the most expensive cities, but various suburbs of SoCal and the Bay Area.

The Golden State is not the first to launch such a program. Montgomery County, MD (also of inclusionary zoning fame) is itself an expensive market that has a Workforce Housing Program. This policy doesn’t set a floor target as the California one does but has a ceiling at 120 percent AMI. The county purchases both ownership and rental units and makes them available to qualifying owners and renters. As of publication, subsidized units were available at eight properties.

Suffolk County, NY, on Long Island, also has a department dedicated to encouraging middle-income housing construction. And many local governments provide tax breaks for it, as was pointed out during the NH&RA panel. Kimball Crangle, the Colorado market president for Gorman & Company, has spearheaded middle-income housing projects, with mortgage-backed bonds provided at the county level in Colorado.

At the federal level, though, there’s less support for such development. There are no comprehensive tax credits specifically available for middle-income projects, according to Crangle. Properties qualifying for LIHTC may now target some units at up to 80 percent AMI under the Average Income set-aside rule, but the average of all imputed incomes in a project can’t exceed 60 percent of AMI. “We do not have any sort of national strategy” for the missing middle demographic, said Thom Amdur, president of NH&RA.

One barrier has been the lack of a clear definition of “workforce housing,” said Mark Shelburne of Novogradac. Additionally, he said that workforce housing often carries the same stigma as low-income housing, drawing community opposition, even though the two are clearly different.

As a result, middle-income housing developers must seek private-market funding to supplement local-level support. Crangle pointed out that unlike for some other affordable projects, social impact equity financing has been difficult to secure for middle-income projects, creating another barrier.

She expressed hope that more financers would come around to support middle-income projects, and said one path to that is through community land trusts, which purchase land and develop it to be permanently affordable housing.

But the main route to more federal support for middle-income housing is by reforming LIHTC. Currently, combining low-income LIHTC units and middle-income units in the same housing project is rare. That income mix is discouraged through the IRS’ aforementioned rules, and is not a common outcome from private capital allocation. NH&RA applauded the enactment of the average-income set-aside in the last Congress; however, the association has broadly criticized the IRS’s recent draft regulations governing the new set-aside as too restrictive and administratively cumbersome.

Amdur recently wrote a letter to the IRS making the case for reform:

The proposed rule, as currently drafted, puts affordable housing owners and operators in the impossible conundrum of choosing which federal law to violate: the Fair Housing Act of 1968, as amended, the Violence Against Women Act of 1994, as amended or Section 504 of the Rehabilitation Act of 1973, as amended…The proposed guardrails make the financing and development of affordable housing using the Average Income Minimum Set-Aside Election simply unfeasible.

It remains to be seen how IRS, under a new Biden administration, will respond to the unified opposition from the affordable housing community to its proposed rule. In the meantime, it is instead likely that middle-income housing initiatives will come from the local and state level, done through a combination of bond initiatives, community land trusts and voucher programs. The goal in each case will be to serve that missing middle demographic that is frozen out by current LIHTC rules.

This article features additional reporting from Market Urbanism Report research staffer Ethan Finlan.