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Challenges to Developing Mixed-Income Housing

Economic Downturns & Weak Markets

Given the housing market decline after the Great Recession and the slow recovery in home prices in many markets, it is likely to be some time before a “pure” cross-subsidy strategy will work well again in many places across the country. However, not all areas were equally affected by the national downturn in home prices. Some communities have fully recovered from the downturn, and housing market conditions are strong in many neighborhoods.

Before the Great Recession and widespread decline in home prices, there appeared to be a significant number of markets in which cross subsidies could work when the market-rate units were for sale, rather than for rent, because sales prices were high relative to rents.

Cross subsidies in a purely rental context can be difficult to implement outside of cities because in much of the country there is little profit to be made in market-rate rental housing due to weak demand. There also appears to be less interest in mixing luxury and affordable rental homes in suburban and rural communities than there is in many cities. However, in strong rental markets with sustained high rents, mixed-income rental developments can generate cross subsidies that reduce the public subsidies needed to support more affordable homes. This works especially well with modest non-financial incentives, such as density bonuses and land donation.

Challenges of Using Low-Income Housing Tax Credits for Mixed-Income Developments

A declining housing market with significantly lower sale prices and rents makes the use of cross-subsidies more challenging. For cross-subsidies to be effective in this context, they often need to be combined with other approaches.  Making publicly owned land available for little or no cost, or increasing the allowable density of a development—often an incentive used in >inclusionary zoning programs—may provide greater opportunities for profits on the market-rate units that can offset the costs of affordable homes.

A key obstacle to the development of mixed-income residential projects is the challenge with using Low-Income Housing Tax Credits (LIHTCs). As the housing and economic crisis progressed in late 2008, the market for (LIHTCs) weakened due to declining investor interest and need to reduce tax liabilities. This compromised the viability of tax credits as a major funding source for affordable and mixed-income rental developments. Steps taken during the recession to support the LIHTC program, as well as rebounding demand for tax credits, have restored the LIHTC as a major source of funding for affordable housing.  Stakeholders have also developed a number of proposals to improve the LIHTC, including income averaging and expansion of the tax credit program.

There are some challenges to using LIHTCs to finance the development of mixed-income housing that are inherent to the structure of the program and how developers and investors use it. Since LIHTCs are central to the development of affordable rental homes, addressing issues with the program is essential. The challenges reported by practitioners include the following:

  • In some states, mixed-income developments with a market-rate component do not score well enough under the state’s allocation policies to obtain the competitive 9 percent tax credits.
  • Tax credit investors are less comfortable with developments that are not 100 percent tax credit eligible, apparently because of the extra risk of keeping the market-rate units occupied and the challenges that market-rate units add to compliance monitoring.

While many states understand the value of creating mixed-income communities and the cross subsidies they produce, they are also under significant pressure to create as much affordable housing as possible. In every state, the 9 percent tax credit is oversubscribed, and states must balance the need for affordable housing and mixed-income housing.

States interested in promoting the increased use of cross subsidies and development of mixed-income communities may wish to convene a task force comprising nonprofit and for-profit developers of affordable homes, affordable housing advocates and tax credit investors to discuss what steps, if any, the state can take to better support these strategies. In particular, states should look at the tax credit allocation policies contained in their Qualified Allocation Plans.

Some specific steps both states and localities could take to facilitate the use of Low-Income Housing Tax Credits for mixed-income developments include:

  • Adopting tax credit allocation plans that prioritize mixed-income housing models
  • Working with tax credit syndicators to determine how to make investors more receptive to mixed-income deals
  • Providing credit enhancement (e.g. partial loan guarantees) to mitigate the risks associated with market-rate units

Incorporating Social Services

The social services component is important to help maximize residents’ opportunities for self-sufficiency as well as to provide amenities that attract middle-income families to ensure a successful mixed-income development.

Community and Supportive Services (CSS) under HOPE VI supported:

  • Services to help residents make progress toward self-sufficiency
  • Services designed to address the needs of individual families
  • Linkage to relocation with informed choice
  • Community building
  • Management monitoring and evaluation

Funding for social services has been significantly diminished in the evolution of federal funding for mixed-income developments. Neither Choice Neighborhoods nor RAD includes replacements for the HOPE VI social services grant.

By combining HUD’s Family Self-Sufficiency (FSS) program—a well-designed program that helps low-income families build assets and make progress toward self-sufficiency and homeownership—with services provided by other community partners, housing authorities can ensure the provision of many of the same services that would have been provided with a HOPE VI grant.

The delivery of social services in mixed-income developments presents new challenges for social services providers. It can be less efficient to deliver social services to low-income individuals and families living in units scattered in market rate developments as compared to delivering services to residents living in a concentrated area or building. However, as mentioned in the benefits section, mixed-income developments facilitate the deconcentration of poverty as well as racial and socioeconomic integration that may outweigh the challenges of delivering social services. Nonetheless, social service providers must grapple with changing their service delivery models to best serve their clientele.

Furthermore, it is more efficient to offer onsite social services to low-income individuals and families living in mixed-income units than to deliver services to units scattered in market-rate developments across the city

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