The Unintended Consequences of Deconcentration Factors

By Gail Gonzales for Texas Affiliation of Affordable Housing Providers

OVERLY PRESCRIPTIVE REGULATIONS PREVENT ELIGIBLE RESIDENTS FROM ACCESS TO QUALITY HOUSING

Government policies typically begin with good intentions but throw in a scandal and a Federal court case, and soon endless layers of rules and oversight are added, along with unintended consequences. Such is the case with efforts to avoid creating high-poverty areas in Texas, referred to as “deconcentration,” for housing developed using housing tax credits (HTC). Texas has the most regulated Housing Tax Credit program in the U.S. with a lengthy Qualified Allocation Plan (QAP) to prevent an over-concentration of poverty. In fact, developers are working hard to follow the QAP and provide beautiful, well-maintained, supportive communities with access to amenities and jobs that lift people out of poverty.

For better or worse, Texas doesn’t regulate or incentivize market-rate privately owned developments or investors to maintain or improve aging or ill-kept properties (sometimes owned and operated by what many refer to as slumlords). These impoverished areas are what most people, including lawmakers, think of when they hear the term “affordable housing.” Generally, people care about those less fortunate, but primarily with a “not in my neighborhood” stigma that pervades an industry striving to serve our working families and the elderly. To be fair, elected officials just want to represent their constituents and keep them happy. The result is that numerous, desperately needed affordable housing developments are halted by outdated, inaccurate perceptions, neighborhood disapproval, and overly prescriptive regulations, such as strict deconcentration factors (see the sidebar) delaying, or in some cases preventing, the revitalization of impoverished areas with the development of quality, affordable housing.

Industry regulations complicate matters further:

1. Multiple restrictions and costly requirements make new HTC builds nearly impossible

2. Land costs combined with zoning issues compound the problem

3. Trying to simultaneously serve the most populated cities and most rural areas in the nation with limited resources and a “one size fits all” program isn’t working

4. Our most populous cities have no authority to appeal or overrule decisions of the stateadministered housing tax credit program

How We Got Here

The issue that perpetuated poverty concentration began in 1986 when the Housing Tax Credit Program incentivized private entities to invest in qualified census tracts by offering a 130 percent credit to develop within them. The Qualified Census Tracts Program was actually set up to incentivize building or refurbishing these impoverished areas, many of which were already racially segregated. After a case was tried in federal court claiming the 130 percent credit perpetuated institutionalized segregation, the Texas legislature pre-emptively included deconcentration factors into state law. These changes resulted in about half the awards going to tracts with above-average white populations. Despite the fact that in 2015, the Supreme Court ultimately sided with the TDHCA in the case, the deconcentration factors codified by the legislature in 2013 remain.

In another case in 2000, a member of the Texas Department of Housing and Community Affairs board was convicted of mail fraud for conspiring with a developer to buy land and corresponding housing tax credits. This left another black eye on the agency, according to well-known multifamily developer and TAAHP Past President, Diana McIver, who said:

"In response to this controversy…the state legislature worked to restore credibility to the Texas Department of Housing and Community Affairs and add transparency to the application process in 2001 when they began to heavily legislate the QAP" including:

• the creation of a pre-application process

• the addition of much more transparency, such as allowing applicants to visit TDHCA offices and view competing applications, a process that is now online, instead of filing a formal request

• implementing a scoring ranking system. Previously, although applications were scored, the scoring was inconsequential. Now applications that meet threshold requirements and incorporate desired development characteristics are awarded tax credits

• requiring review and support from neighborhood organizations and state elected officials

• obtaining support from local governments

• notifying community leaders, including school district superintendents

McIver noted, “Such a high-level involvement by the state legislature is rare in HTC programs across the country; generally, the board and staff are policymakers.”

SOME REGULATIONS HAVE OUTLIVED THEIR PURPOSE OR HAVEN’T ACHIEVED THEIR ORIGINAL INTENT

What’s Working?

Housing Tax Credits and the Qualified Allocation Plan are the building blocks that help redefine our cities by creating healthy, sustainable communities that serve the needs of many different population groups – not just house people. Many members of the general public would be surprised to learn that the vast majority of housing tax credit developments include typical features found at any market-rate property, such as pools, playgrounds, fitness centers, and computer labs, as well as proximity to amenities like public transportation, childcare, and community revitalization efforts. The QAP also encourages the development of energy-efficient and environmentally sustainable affordable housing via scoring incentives for green building practices.

Breaking the Cycle of Poverty

Research shows that moving families from high-poverty areas to neighborhoods with higher incomes can lead to better economic outcomes for children and adults. Studies, such as the Moving to Opportunity (MTO) experiment, found that children who relocate to higher-income areas experience increased educational attainment, higher employment rates, and higher earnings later in life. Relocating families to neighborhoods with lower crime rates and safer environments can positively impact their safety and security and also contributes to a better quality of life. However, there are incentives to build in high opportunity areas and extreme de-concentration measures are not necessary to further encourage developers to do so.

Facilitating Public-Private Partnerships

The QAP fosters collaboration between government agencies, nonprofit organizations, and private developers, encouraging partnerships that can leverage resources, expertise, and community engagement to maximize the impact of affordable housing initiatives.

How Can We Improve?

Modify the “Two-Mile, Same Year” Rule: Created with good intentions over 20 years ago, this factor has limited the ability of large cities (except for Houston which can waive the rule by city council approval), to support highly qualified developments near dense job centers and transit-oriented development areas. Growing cities know their local landscape best and should be empowered to waive this rule. Amy Connolly, assistant director of the City of Fort Worth Neighborhood Services Department, noted the dire impact on cities with the following points:

1. Lost revenue: Most of the 9% tax credit deals pay property taxes. When deals fall through:

a. Cities and property taxing jurisdictions lose the property taxes gained when law limits them to one development within two miles.

b. Cities lose revenue from building permits and fees.

c. Cities also lose the federal investment in private housing markets when they cannot be awarded more than one development within two miles.

2. A housing shortage crisis: Fort Worth is currently facing a 32,000+ affordable rental housing unit shortage. This means denser urban areas compete with themselves for needed developments or have to wait longer to apply for additional developments — adding cost

3. Diverse areas are not recognized at a state level: Most competing developments are not in the same neighborhood and are separated by major interstates or state roads. The Two Mile Rule is too blunt an instrument for ensuring that there is no concentration in poverty.

4. Losing out on developments: Fast-growing urban villages, transit-oriented development areas, and tax increment districts are pitted against each other for new tax credit developments OR they lose out on the development altogether.

5. Zoning Competition: Where otherwise two separate developers might obtain all necessary local approvals to move forward, the knowledge that only one development will be awarded tax credits creates unnecessary competition that often results in politics playing a bigger role than policy with respect to the production of affordable housing.

What Else Can Be Done?

Remove The “One Award per Census Tract Rule”: The 9% housing tax credit program incentivizes housing developments in census tracts where there are no other existing tax credit developments. This requirement emphasizes development sites in less attractive locations where market demand is more limited and disincentivizes developments in densely populated urban areas where there is the most need. Additionally, this limitation causes developers to pursue sites in the same census tracts within a region, thereby increasing land prices when only a few census tracts are favored in the tax credit scoring matrix and multiple developers are competing for those same sites.

Lack of legislative support for modifying deconcentration seems to stem from the fear of mass expansion of impoverished areas, yet the factors TAAHP recommends keeping ensure that won't happen. TAAHP proposes that legislators view this from a conservative lens and instead loosen the regulations put in place to help more citizens, developers, and the economy by placing housing where residents need it. In the next legislative session, TAAHP will work to gather support, educate, and improve communication with decision-makers in the Capitol.

Grant large Texas municipalities flexibility on state regulations that affect where developments are located. Amending the Resolution of No Opposition (RONO) requirement for 4% HTCs and removing the clean census tract point incentive would significantly open up more areas to build affordable housing. . These major cities have robust planning capabilities, data, and the knowledge to do so effectively. The state allowed this in Houston yet has rejected it for our other major cities according to McIver.

Change local zoning restrictions: Amy Connolly stated that, “where the schools are really good, and property values are high, and income levels are higher, you tend to get more points. But the problem is, those are the hardest places to get zoning. There's plenty of multifamily zoning in Fort Worth, but the vast majority of the tax credit development that has come to us in the last two years required rezoning. So, while we have a lot of multi-zoning, it’s probably not in the places where you’re going to get a tax credit.”

Change the conversation: In the same way that ad campaigns have made smoking “uncool” and spurred public smoking bans, educating our legislators and the general public by showing what affordable housing looks like today can change public opinion – and then perhaps the need to ask for community approvals becomes moot.

Finally, the Texas Tribune cited another big issue in March of 2023: Texas just isn’t building enough homes to keep pace with its population boom. In fact, “Texas, a state of more than 29.5 million people, ranked 49th in state spending on housing and community development as a share of its overall budget.”

Texas built its reputation on providing a plethora of good jobs and affordable housing which is why so many are still moving here. Right now, we don’t even have enough housing for those who can afford it. While the right way to create affordable housing is a controversial issue and there is no single idea that will solve it, these suggestions are a start. Helping the most vulnerable among us is exactly the way a rising tide lifts all boats creating more revenue, tax dollars, and better health for all our citizens. The perfect storm is brewing for more poverty and homelessness if we don’t address our overall housing shortage and ease the stifling restrictions of deconcentration.

ARE YOU INTERESTED IN AFFORDABLE HOUSING POLICY ISSUES?

TAAHP offers several ways to stay informed and get involved. TAAHP sends e-mail newsletters monthly to members. Members who want to take a more hands-on approach can get involved in TAAHP committees. For more information, visit www.taahp.org

CURRENT DECONCENTRATION FACTORS

Any proposed development must meet the following eligibility (threshold) requirements:

1 Two Mile, Same Year – Cannot award two developments in the same year and county that are within two miles of one another. Houston can waive this rule.

2 Twice the State Average Per Capita (9% & 4% HTC) – Cannot award a development within a municipality or county that has more than twice the state average of HTC units per capita.

3 One Mile, Three Year* (9% & 4% HTC) Cannot award a development that is a mile or less from another development that was successfully awarded within the last three years that serves the same target population. Applies to counties over 1 million in population.

4 Census Tract Limitation – Cannot award a development in a tract that has more than 20% HTCs per total households. Applies to areas with a population over 100,000. Unless in a place where the population is less than 100,000.

5 Proximity to Development Sites (9% HTC) – Cannot award two developments in any given application round that are within 1,000 feet of each other that serve the same target population, applicable only in a county with a population less than 1 million.

6 One Award Per Census Tract (9%) –Cannot award two developments in the same year and same census tract in an urban subregion.