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Revenue Sources for Housing Trust Funds

There is no “one-size-fits-all” source of revenue for state and local housing trust funds. According to the Housing Trust Fund Project of the Center for Community Change, real estate transfer taxes (also called documentary stamp taxes) are the most popular source of revenue for housing trust funds administered at the state level. County housing trust funds are most likely to be funded with revenue from document recording fees, while cities tend to use developer fees, such as inclusionary zoning in-lieu fees (optional payments to exempt new developments from affordability requirements) and linkage ordinances (fees paid by new businesses to help the community keep pace with increases in housing needs related to increased economic activity).

Introducing a new source of revenue for any affordable housing program can be politically difficult. Increasing the cost of new construction or real estate transfers can be seen as bad for business, or acting against the market. For example, in 2016, several builder advocacy organizations in Denver opposed using a new development fee meant to support a permanent source of funding for affordable housing. They instead proposed that the funding come from an increase on property taxes. The funding plan ultimately approved by the City Council included both developer fees and property tax increases and will create $150 million for affordable housing development or preservation over 10 years.

Below is a list of different potential sources of revenue for housing trust funds. Most of these can be administered by state, county or local jurisdictions.

  • Document recording fee – A per-page surcharge on all documents added to the public record, such as birth certificates, deeds of trust and marriage licenses. One of the most common types of document recording fees is the deed/mortgage recordation fee.
    • Passed in 1992, Pennsylvania’s Act 137 authorizes counties in that state to increase fees for recording deeds and mortgages for the purpose of raising money for affordable housing. Implementation is monitored by the state’s Housing Finance Agency, and as of July 2016, 54 of 66 counties had created a housing trust fund under this authority.
    • In 2005, Philadelphia established an Affordable Housing Trust Fund with dedicated revenue from document recording fees. As of 2016, fees for the recording of deeds and mortgages in the city provide the fund with annual revenue of $7 million to $13.8 million. The fund receives $170 from each deed recorded by the city and a series of mortgage fees of nearly $92 per document.

This program has made a significant impact. The fund has been able to partially finance the development of over 1,482 new affordable homes, preserve nearly 16,650 homes and prevent over 12,888 people from experiencing homelessness (as of 2015). Since its inception, the trust has leveraged more than $311 million in non-city funds for affordable housing initiatives.

  • Public purpose charge – A small percentage surcharge added to customer’s utility bills.
  • Real estate transfer tax – A state or county surcharge on the sale of property, levied on the seller, the buyer or both parties. This fee generally increases with the size or value of the property changing hands. The tax provides a dependable source of revenue for housing trust funds in a healthy real estate market. In less-healthy housing markets, declining home sales and prices reduce real estate transfer tax revenues, which reduces funding for housing trust funds as well.
  • Developer fees – This category includes linkage feesdemolition fees and inclusionary zoning in-lieu fees. Developer fees are even more dependent on a healthy economy than are real estate transfer taxes, because they usually (but not always) rely on new residential and commercial development, while transfer taxes can be collected on the sale of existing properties.

Linkage fees are assessed on the developers of new commercial, industrial or retail properties to help offset local housing impacts and make sure that the development of affordable homes keeps pace with local economic development and job growth. These fees are usually charged on a per-square-foot basis and deposited into a housing trust fund, from which funding awards are made according to local preferences and priorities. By establishing a direct connection between new jobs and the need for new homes, linkage fees help to make it possible for families to live in the communities where they work.

Tying funding to developer activity has its risks. The 2008 economic downturn, which severely curtailed new development, also significantly reduced revenue from these fees and highlighted the volatility of developer fees as a dedicated funding source.

    • Cambridge, Mass.’s Incentive Zoning Ordinance requires certain non-residential developers to pay a linkage fee of $4.25 per square foot of new construction; proceeds go into the city’s trust fund for the development of affordable homes. By tying the fee to commercial development, they can separate trust fund revenues from the health of the housing market.
    • In 2002, Chicago suburb Highland Park established an Affordable Housing Demolition Tax to fund the city’s Affordable Housing Trust Fund (created in the 1980s). The city became concerned that the demolition of housing in Highland Park was leading to a reduction in the diversity of the city’s housing stock and resulted in fewer affordable options. To correct for this effect, the city imposes a fee of $10,000 per building or $3,000 per residential unit (whichever is greater) on properties of which 50 percent or more is demolished. The tax does not apply in the case of demolition for the development of affordable housing, if the occupant has owned the home for five years and plans to own the home for at least five years after the demolition or in the case of city-ordered demolitions.

The tax brings in around $750,000 annually. As of 2013, the tax has generated more than $3.1 million, which has been used to leverage an additional $5 million in outside funds to help fund the development of 44 permanent affordable housing units. The majority of the revenue received is allocated to the city’s housing trust fund, while one-third goes into the city street and bridge fund. The housing trust fund also receives funding from a $400-per-unit demolition permit fee, as well as inclusionary zoning in-lieu payments.

    • In 1986, the city of Boston created the Neighborhood Housing Trust with a dedicated funding source from a linkage fee on commercial developments. The fee applies to all new or expanding office, retail, hotel and institutional developments exceeding 100,000 square feet that are requesting zoning relief. As of 2015, the fee was $8.34 per square foot.

Annual revenue from the linkage fee has averaged $6.5 million a year and has been very stable over time. Through 2014, the Neighborhood Housing Trust has invested nearly $150 million, helping to create or preserve 10,725 affordable units in 206 developments.

Developers in the downtown area are granted a seven-year pay schedule, while developers in neighborhood districts are given 12 years to pay the linkage fees. Developers may also fulfill their linkage obligation by creating or directly assisting in the creation of affordable housing units. Under municipal law, revenue from these fees can only be used to create or preserve housing that is affordable to low- and moderate-income households in the city.

  • Legislative Appropriations

The North Carolina Housing Trust Fund was created in 1987. It has been funded at varying levels over the years. It peaked in FY2007 at $21 million, but the funding level dropped to $10.4 million in FY2010 and bottomed out at $6.8 million in FY2015. Recent budgets have increased it slightly, up to $7.7 million in FY2016.

Despite the volatility in this type of funding, it is still consistently higher than the funding secured through other forms of funding. For example, the maximum amount of funding for the Maryland Affordable Housing Trust (mentioned below) since 1992 is $4 million, which is less than the funding for the North Carolina Housing Trust Fund at its lowest point.

  • Interest earned on title company escrow accounts and unclaimed property funds – Escrow accounts are maintained by title companies to hold and disburse money associated with real estate transactions. Some escrow accounts earn interest on the money while awaiting completion of the transaction. A state can require that a portion of the interest earned on the money in escrow accounts be deposited in the state housing trust fund. States release or sell unclaimed property – such as undeliverable tax refunds, abandoned bank account balances and other unclaimed money – each year. Some states reserve a portion of the revenue for their housing trust funds.
    • Since 1992, the Maryland Affordable Housing Trust has received between $1 million and $4 million annually from interest revenue collected on title company escrow accounts.
    • Arizona’s Housing Trust Fund relies on revenue from sales under the state’s Unclaimed Property proceeds. Fifty-five percent of the revenue from the sale of unclaimed property is placed in the Housing Trust Fund at the end of each fiscal year. Approximately 70 percent of the Housing Trust Fund is disbursed to affordable housing initiatives in rural underserved parts of the states.
  • Hotel/motel taxes – Most major cities generate significant revenue through hotel/ motel taxes due to tourism and convention business. Hotels and motels generate a significant amount of lower-paying jobs and many cities lack housing that is affordable to these workers. Using hotel taxes to fund a city housing trust fund can be an appropriate solution in these cities. Using hotel tax revenues to fund county housing trust funds may be an appropriate solution in expensive resort communities as well. Most resort communities require a broad base of lower-paid service workers to support their economy, and many lack affordable housing options for their workforce.
    • In 2001, the city of Columbus, Ohio, created an Affordable Housing Trust Fund with dedicated revenue from its hotel/motel tax. An 8.37 percent hotel tax (a portion of the city’s 10 percent hotel tax) is committed to affordable housing and programing and usually generates between $1 million and $1.5 million a year. Soon after the creation of the trust, Franklin County, Ohio, joined the city as a funding partner and currently contributes half of its own two-percent real estate tax to the fund. This tax adds another $3 million to $3.5 million to the fund each year. The fund acts as an independent, not-for-profit lender that provides loans for affordable rental, supportive and homeownership projects in the city. As of 2014, the fund had committed $39.3 million in loans to affordable housing developers, contributing to the creation or preservation of over 8,000 affordable units, according to the trust’s 2015 annual report.
  • Property taxes – These can be dedicated from either residential or commercial development to generate revenue for housing trust funds.
    • In Boulder, Colo., a portion of the Community Housing Assistance Program (CHAP) funding comes from a portion of property taxes, equivalent to approximately $19 per year on a $300,000 home, which helps produce affordable homes for renters and owners.
  • Tax increment financingTax increment financing sets aside the future tax revenue to finance various projects and programs.
    • The Salt Lake City Housing Trust Fund is funded through tax increment financing (TIF) proceeds. The fund administrators must apply for a portion of TIF revenues on an annual basis and typically receive between $360,000 and $1 million each year. The TIF district is set to expire in 2025.
  • Other taxes

In 2007, the State of Indiana approved a tax increase on non-cigarette tobacco products, estimated to generate up to $6 million in 2009. The tax revenues provide a dedicated funding source for its Affordable Housing and Community Development Fund. In addition to dedicating 25 percent of non-cigarette tobacco tax revenues to the Community Development Fund, the 2007 legislation also included a provision enabling any Indiana County to adopt a recording fee to support local housing trust funds—60 percent of every dollar earned through that recording fee is directed to the local housing trust fund, with the remaining 40 percent directed toward the Community Development Fund.

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