Special Report: Workforce Housing

Whether tapping into credits, tax reductions, or special employee incentives, reducing the financial burden on buyers calls for innovation and flexibility.

While approaches to workforce housing must vary by region and even by city, most successful projects stay in the black by tapping numerous funding sources and partnering with nonprofits and (less frequently) private enterprise. To get started sooner rather than later, you may want to work through organizations (such as local housing authorities) that can navigate the intricacies of funding and paperwork inherent in affordable housing projects. In some cases, city planners are taking the initiative, so don't miss your chance to jump in and make alliances.

TOOL 1: Strings Attached

Down-payment gift programs help cash-poor buyers purchase a home, but others wonder about the long-term cost to the housing market.

For builders who do entry-level or affordable product, down-payment gift programs can close the gap for buyers with steady incomes but little cash. The process typically works like this: A buyer qualifies to buy a home but falls short of the required down payment. He or she then goes to a down-payment assistance organization, the most well-known of which is the Nehemiah Program, which gives the buyer a grant (usually between $2,000 and $5,000) that is used as the down payment. The builder then makes a contribution in that amount plus a small service fee to the down-payment group, which then grants the money to another hopeful buyer.

It's an increasingly popular tool. According to HUD, 25.1 percent of FHA's 874,888 mortgage loans in 2002 involved gift assistance. While most down-payment help came from relatives, 9 percent of all FHA mortgages that year involved gift assistance from nonprofits.

But others question the wisdom of builders jumping on such a trend. "The whole thing is so circular," says Barbara Allen, an analyst with Natexis Bleichroeder in New York. "Mortgage rates are at 40-year lows. Why are you fooling around with this?"

HUD has raised questions too. Last year, its inspector general audited a sampling of mortgage loans involving nonprofit down-payment assistance and found that the default rate for Nehemiah-assisted loans was 19.39 percent -- double the default rate for loans that didn't involve Nehemiah. HUD is now doing a more detailed review of down-payment assistance programs.

The nonprofits defend their record, pointing to President Bush's own proposal to provide down-payment assistance to thousands of American families in an effort to boost minority homeownership.

"We feel the federal government has affirmed our business model," says Jon Cottin, executive director of the Homeownership Alliance of Nonprofit Downpayment Providers. "There is a public policy purpose in making it possible for people to own their own homes."

TOOL 2: Tap the Web

HUD Web site allows builders to share their experiences, good and bad, on regulations that affect the availability and affordability of housing.

Ever feel like you are reinventing the wheel? Perhaps you need a quick trip to www.regbarriers .org, HUD's interactive Web site designed to highlight solutions and barriers to housing availability and affordability. Its key feature: a searchable database that allows users to look up entries by location or by topic.

Click on a subject, and you'll soon see a collection of entries, complete with key points of each situation. Each record outlines both the challenges involved and the current response or a suggested solution. Those seeking more detail can follow a link that provides a longer description of the barriers as well as a downloadable pdf of any original source materials such as a study or a state plan. If you just want to see what people are talking about, check out "What's New," a page that brings up the 20 most frequently requested records.

So far, more than 1,600 barriers and solutions have been identified and proposed, according to HUD, but everyone hopes to collect many more, including the NAHB, which had been a strong advocate for gathering such data. "We think it's an excellent resource for builders and HBAs, giving them a place to share information, so that if people are having similar experiences with regulatory barriers around the country, they can share solutions," says the NAHB's Donna Reichle. Builders can also join an electronic mailing list to stay informed.

TOOL 3: Working With City Hall

With their backs to the wall, West Coast city planners have initiated some of the nation's most progressive housing policies.

San Francisco has one of the worst workforce housing problems in the nation, with a rental vacancy rate of 0.8 percent and a median-home sales price of about $525,000.

To address this growing crisis, the city's chamber of commerce has put together a multi-part plan, aimed at attracting new development and increasing the availability of units affordable to those making up to 120 percent of the area median income (AMI). Some of the plan's principles, which could be applied in other hard-pressed regions, are:

Aid developers. Develop and initiate an expedited review and permitting process, and waive fees for those offering a certain percentage of affordable units in a project. The chamber of commerce cites Austin, Texas, which waives water and wastewater recovery fees, along with development review and inspection fees. To qualify, projects must offer 40 percent of units to families making up to 80 percent of AMI. Chicago offers a $10,000 subsidy for each new home that is affordable up to 120 percent of AMI.

Soften parking rules. The city currently requires a parking spot for every new unit of housing. But in urban areas, this may be overkill. By reducing that requirement, estimates suggest a savings of $50,000 per unit.

Adjust transit zoning. San Francisco wants to make better use of transit-oriented development. Higher-density zoning near rail terminals allows lower-income people to travel without automobiles, raises developer profits, and reduces land requirements.

Encourage green building. By keeping energy costs low, moderate-income wage earners may qualify for higher mortgages and have less likelihood of default.

But Tom McIlwain, with the Urban Land Institute in Washington, notes that even the most progressive city plan may be undermined by local NIMBYism. "Neighborhood groups in most cities have a lot of say in what gets built in their community," he says. "City councilors often have a nice little agreement not to override each other."

To really make citywide planning work, he adds, "the process has to be restructured, so that the neighborhood only gets one bite at the apple [not repeated chances to make changes]."

TOOL 4: Mandatory Participation

Inclusionary zoning isn't a panacea, but it can deliver affordable housing to the workforce.

Inclusionary zoning is a political powder keg that's tied up state court systems for years, but it's still one of the best tools that governments have to deliver affordable housing to the workforce. Whether it works for builders is another story.

The goal of inclusionary zoning is to ensure that at least a portion of new community development is available to low- and moderate-income families. A typical zoning ordinance specifies that a minimum percentage of affordable units be provided in a residential development at a particular income level, generally defined as a percentage of the median income of an area.

In exchange for building the affordable units, builders are usually allowed to extend the densities on projects. Some programs even let builders make alternative agreements in which they would forgo the affordable housing requirements but make cash payments that would go to the construction of affordable housing elsewhere in the community.

Here's how it works in Montgomery County, Md.: Under the county's Moderately Priced Dwelling Unit (MPDU) program, for projects of 35 units or more on land zoned for one-half acre or smaller, builders must set aside 12.5 percent to 15 percent for affordable units. Developers who agree to build the MPDUs can increase the density of the project up to 22 percent. Alternative agreements are also permitted. The county's MPDU program was one of the first inclusionary zoning programs in the nation and is credited for building more than 11,000 affordable units since 1974.

The MPDUs are available to people with incomes of slightly more than 60 percent of the median income. In Montgomery County, the median income for a family of four is $84,500, so the MPDUs are available to a family of four earning less than $52,000. The MPDUs include both condos and townhomes. The condos start in the low $90,000s, and the townhomes start at $110,000.

Inclusionary Zoning Blueprint

Here are the elements of a typical inclusionary zoning program. This list is based on programs adopted in California, primarily in the San Francisco and Southern California areas where housing costs are high:

  • Most programs are mandatory -- not voluntary.

  • Majority require 10 percent to 15 percent of new residential units to be affordable.

  • Minimum project size is 10 units.

  • Most do not require affordable units and market units to be identical -- just similar in outward appearance.

  • Most require that the affordable units be spread throughout the development.

  • Most permit the developer to pay a fee in lieu of building affordable units, ranging from $600 to $36,000 per unit.

  • Nearly all programs provide for both low- and moderate-income people, and about 50 percent require units for very low-income households (50 percent of median income).

  • Most require restrictions on price to remain for 30 years. Source: The Center for Housing Policy

    TOOL 5: Corporate Inroads

    New programs allow corporations to lend a hand in providing affordable housing for their workers -- at the same time increasing employee retention.

    One of the highest priorities businesses -- especially smaller, more tightly run companies -- consider when choosing a location is the availability of a reliable labor force. According to Fannie Mae's H. Beth Marcus, director of the National Community Lending Center in Washington, they may simply look elsewhere if there is no pool of employees living near the proposed location.

    But Marcus argues that new lending programs such as Fannie Mae's Employer Assisted Housing (EAH) Initiative can reverse this situation -- and that builders could actually get in on the ground level, swinging development deals with companies looking to relocate.

    "We provide free technical help to employers as they try to initiate the program," says Marcus. "So far, we've helped about 320 employers develop programs to help people get into homes."

    Instead of (or in addition to) a traditional 401(k) benefit program, EAH employers offer a special housing incentive to employees, which typically includes a forgivable down-payment loan of about 7 percent of the median price of a home in the area. The hook: The amount of the loan forgiven increases each year until the debt vanishes after five years. This formula encourages employee retention and creates equity wealth.

    The breakdown of companies using EAH includes 25 percent in the health care industry, especially nursing. But food processing plants, universities, banks, and even cities also have adopted EAH incentives. Marcus believes savvy home builders could benefit by becoming advocates for the program, especially in struggling economic areas. EAH offers a way to bring new businesses to town, by tailoring planned development projects to a specific business and building close to the location of the new company.

    TOOL 6: Hope for Homeownership

    A homeownership tax credit could stimulate single-family housing for the workforce, but it may have to wait until domestic issues are once again on the front burner.

    Getting a homeownership tax credit passed may take a few more months, or even another year or two, but it looks like builders can look forward to the measure as at least one way to deliver workforce housing.

    The homeownership tax credit would give builders a tax credit of up to 50 percent of the cost of new construction or rehabilitation. The tax credit seeks to stimulate the production of affordable homes in distressed communities for low- and moderate-income households earning roughly less than 80 percent of a metro area's median income.

    The program was included in the Bush administration's fiscal 2004 budget and has bipartisan support in both houses of Congress. On the house side, Congressmen Rob Portman (R-Ohio) and Ben Cardin (D-Md.) have introduced legislation, and Sen. Gordon Smith (R-Ore.) introduced a Senate-side bill.

    Efforts to have the homeownership tax credit included as part of the Bush economic stimulus program were unsuccessful. The hope among housing groups is that the bill has enough support to get passed once the country focuses on domestic rather than international issues once again. For progress on the homeownership tax credit, visit NAHB's Web site at www.nahb.org.

    TOOL 7: Join Forces

    In this resort town, builders worked with a major employer to create employee housing.

    In high cost-of-living areas with a shortage of affordable housing, builders can team up with a major employer to build employee housing. Such ventures can result in thousands of new dwelling units.

    Colorado's Vail Resorts develops and operates destination resorts. It sometimes builds its own projects, but it also works with other general contractors. Over the past six years, Vail Resorts also has developed $56 million of employee housing.

    Vail Resorts Development Co. is wholly owned by Avon, Colo.-based Vail Resorts, owner of not only Vail but also Breckenridge, Keystone, Beaver Creek, Bachelor Gulch, and Arrowhead resorts. In the early '90s, the company realized there was an "acute housing affordability" problem for its 3,000 to 3,500 employees, says Jack Lewis, director of development. Lewis estimates that many resort employees are at 30 percent to 50 percent of the area's $80,000-plus median income, with ski-lift operators, for example, starting at around $10 an hour.

    But orchestrating an affordable housing solution was not easy. Strong resistance from well-to-do homeowners greeted the company's first employee housing proposal, although it's unclear what the affluent residents opposed. River Edge, the first Vail Resorts housing development, finally opened in the summer of 1998. Its success made subsequent employee housing easier to develop, and the company has since added another 1,000 affordable rental apartments, each housing three to four employees, and 500 for-sale units.

    The company reports that it has a total of 1,300 "beds" for employees in Eagle County (Vail and Beaver Creek) and another 1,700 in Summit County (Breckenridge and Keystone). An additional 500 seasonal "beds" in attractive facilities serve employees who work only the November to April ski season. Corum Real Estate manages the rental properties for the resort company.

    Lewis says Vail Resorts has been directly involved in all of its employee housing projects as investor, supporter, or purchaser.

    Typical of the housing is the $21 million Breckenridge Terrace, a 180-unit, one-, two-, and three-bedroom apartment project on 10 acres in Breckenridge. Rents range from $750 to $1,150 a month.

    Sweet Sleep

    Vail Resort's Breckenridge Employee Housing

    Breckenridge Terrace Apartments:

  • One-, two-, and three-bedroom apartments: Rents range from $750 to $1,150 a month. Offers the only long-term employee housing in all of Vail Resorts. Offsite (other than Breckenridge Terrace):

  • Units spread out around Breckenridge, located in different condominium complexes.

  • The number of people to a unit ranges from three to four, depending on the number of bedrooms.

  • Each unit has a common living area, a full kitchen containing a refrigerator, range/stove, dishwasher, and garbage disposal.

  • The units are furnished, though sparely, and the beds in each unit are twin-sized.

    TOOL 8: Seek Trust Funds

    Look to build housing using municipal and state sponsored trust funds.

    Housing Funded
  • Housing trust funds are distinct permanent funds established by cities, counties, and states that dedicate revenue to support, produce, and preserve affordable housing.

  • Of the 257-plus U.S. housing trust funds, 36 are state funds with the rest in cities and counties.

  • The funds spend more than $500 million annually on affordable housing; the amount spent increases yearly.

  • On average, for every $1 committed to a housing project by a housing trust fund, another $5 to $10 is leveraged in other public and private resources.

  • Hundreds of thousands of housing units have been supported through housing trust funds.

  • Areas surrounding trust funded projects have documented increased jobs, growing sales taxes, higher property tax revenues, and many other economic benefits.

    Source: The Housing Trust Fund Project of the Center for Community Change for the National Housing Trust Fund Campaign

    For-profit builders have yet to take advantage of the opportunities to build affordable housing using the more than 257 Housing Trust Funds. To find them, look to your state -- 36 are state funds, others are in counties or cities.

    Trust funds typically dedicate a source of public revenue (more than 40 types of revenue sources exist, from stamp taxes to hotel/entertainment sales taxes) to produce and preserve affordable housing. An exception is Los Angeles which has, says attorney and Housing Trust Fund expert John C. "Chris" Funk, funded its trust from general funds thus far.

    Funk, a partner with Weston Benshoof Rochefort Rubalcava and MacCuish, says Los Angeles' fund targets housing for those making 50 percent to 120 percent of the area median income of $55,000.

    Funds tend to be catalysts in that each trust-fund dollar may be leveraged with five to 10 public/private dollars from various other sources. Moreover, the new housing spurs documented job growth and higher sales and property tax revenues. Mary Brooks, in Frazier Park, Calif., is director of The Housing Trust Fund Project for the Center for Community Change, the only national source of technical assistance on housing trust funds.

    Each fund establishes its own participation requirements, Brooks says. Staff already managing other housing programs typically administer the funds, often under the guidance of an advisory board, and most welcome for-profit builder participation.

    TOOL 9: Parnter With Nonprofits

    Leverage your strengths with the know-how of a skilled nonprofit agency or development corporation.

    For builders and developers wary of the red tape and paperwork that often accompanies affordable housing projects, partnering with a nonprofit entity enables both parties to leverage their individual strengths toward a collaborative goal. Though each project is unique in its specific structure, nonprofits generally have more experience with various local, state, and federal funding programs, political and community resistance, and other processes that either impede or encourage low-income housing.

    Meanwhile, for-profit builders may offer planning and construction management expertise, consulting and training services to the nonprofit staff (called "capacity building"), and private funding sources.

    "I wish I could say there was one formula [for such partnerships], but there are so many variables involved," says Jim Ferris, executive director of Housing Resources Group (HRG), Seattle's largest nonprofit affordable housing developer. "We look for a common set of goals [with a for-profit partner], both financially and for the community."

    A recent HRG project in downtown Seattle exemplifies a successful profit/nonprofit collaboration. Stewart Court, completed in 2002, is a $12.9 million mixed-use project of 65 studio and one-bedroom rental apartments available to those making between 50 percent and 60 percent of the area's median income. HRG partnered with Clise Properties to pull one master permit for Stewart Court and an adjacent commercial project, gaining zoning and tax credit incentives for Clise Properties, while helping secure a variety of funding sources for the residential portion. "Clise didn't see affordable housing as a negative, but actually as a boost to its project's marketability," says Ferris.

    In Flint, Mich., the Rosewood Housing Development Corp. (RHDC) collaborated with several agencies and private entities to build Rosewood Park Apartments, a 120-unit project of rental duplex apartments in nearby Mt. Morris, Mich., for families earning 50 percent or less than the area median. "As a nonprofit, we are able to access 'soft' money, such as grants and similar sources, that a private builder cannot," says Patricia Motter, RHDC president and also CEO of Shelter of Flint, a related, yet separate nonprofit development corporation. "It creates an attractive financing package to enable affordable housing."

    During the 1990s, HUD commissioned four development entities to work in 50 urban areas toward developing systems and solutions for affordable housing. Among the results is a free guidebook, Building Public-Private Partnerships to Develop Affordable Housing, which provides an overview of the three-year, $4 million initiative, offers several partnership models, and profiles case studies for all 50 markets involved.

    Types of Partnerships

    HUD's three-year Public/Private Partnership program in the mid-1990s identified a few common collaborations.

  • Affordable housing task force. Though not the ultimate workforce housing provider, a task force attracts public attention to the issue, coordinates public policy incentives, provokes strategic planning, and gains private development support.

  • Operating-support collaborative. Brings public and private support together to provide core support funds to community development corporations (CDCs) and enhances administrative capacity.

  • Developer partnerships. With the ultimate goal of developing workforce housing, the CDC or nonprofit works through the public-sector red tape of tax credits and funding, while the for-profit seeks private/commercial financing, angles for favorable zoning or approvals, bargain-sells or donates land, offers design and construction management expertise, and may share ownership or management of the finished project.

  • Program-based partnerships. Formed primarily to finance workforce housing projects by managing pools of public and private funding sources. For-profits may also eventually provide operating support, capacity-building training, and technical assistance to the CDC partner.

  • Public sector partnerships. The for-profit acts as an intermediary between the CDC and local government to improve its system for supporting workforce housing and relate better to CDCs in the market. Source: Building Public-Private Partnerships to Develop Affordable Housing, HUD