In Toronto, we often point fingers at the federal government for overspending, and at the same time, criticize it for not stepping in with enough funding and tax programs to support the delivery of affordable housing.
During a recent visit to Washington, D.C., I witnessed the positive impact these types of government incentives can have.
One of Washington’s affordable housing initiatives, bolstered by federal tax credits, has significantly increased the availability of affordable units in the city, where the majority is delivered by the private sector.
Why could Washington’s approach be a good model for Toronto?
Unlike many sprawling, horizontally developed urban areas in the U.S., Washington, D.C., is a densely populated urban centre with a high demand for housing and a diverse population, much like Toronto.
Both cities face the challenge of balancing development with affordability while welcoming thousands of new residents each year.
Toronto has seen a substantial influx of immigrants with over 100,000 new permanent residents last year alone. Although Washington, D.C., has a smaller growth rate, with about 15,000 to 20,000 new residents each year, it still experiences notable and steady growth.
While non-profit organizations play a crucial role as builders and operators, the private sector significantly contributes to addressing the affordable housing challenge, much more so than what we see in Canada.
The U.S. LIHTC program
Here is a closer look at how the private sector provides affordable housing in Washington, D.C., with federal support like the Low-Income Housing Tax Credits (LIHTC) program.
“The LIHTC program is funded by the federal government, which allocates tax credits to each U.S. state, territory and the District of Columbia (D.C.),” says Brendan Whitsitt, the founder of Imprint Development in Toronto, who previously developed both market-rate and affordable housing in Washington, D.C.
“Each state housing agency then administers its own competitive process to award the tax credits to developers for the construction of affordable housing. So, it’s a way to get dedicated dollars to build these projects which otherwise would never be built.”
1) Allocation of tax credits:
- The federal government, through the Internal Revenue Service (IRS), allocates tax credits to each state based on its population.
- State housing agencies receive an annual allocation of tax credits, which they then distribute to developers through a competitive application process.
2) Application process:
- Developers submit proposals to state housing agencies detailing their affordable housing projects.
- Proposals are evaluated based on criteria such as project location, cost, developer experience and the extent to which the project meets the state’s housing priorities.
- Successful developers are awarded tax credits, which are allocated over a 10-year period.
3) Raising capital:
- Developers do not typically use the tax credits themselves. Instead, they sell the credits to investors, often through syndicators, in exchange for equity investment in the project.
- Investors, such as banks and corporations, purchase these credits to offset their federal income tax liabilities.
- The equity raised from selling tax credits reduces the amount of debt needed to finance the project, making it more financially feasible to offer lower rents.
4) Development and compliance:
- Developers use the equity to build or rehabilitate affordable housing units.
- The housing units must be rented to low-income tenants, typically those earning 60 per cent or less of the area median income (AMI).
- Developers must comply with affordability requirements for at least 15 years (the initial compliance period), although many states require extended affordability periods, often to 30 years or more.
5) Monitoring and reporting:
- State housing agencies monitor the projects to ensure compliance with LIHTC requirements.
- Developers must provide annual reports to demonstrate that the units remain affordable and occupied by eligible tenants.
6) Benefits to investors:
- Investors receive a dollar-for-dollar reduction in their federal income tax liability over a 10-year period.
- The tax credits provide a predictable return on investment, making them attractive to institutional investors.
7) Benefits to developers and communities:
- Developers gain access to equity capital, reducing the need for traditional debt financing.
- The program stimulates the construction and rehabilitation of affordable housing, addressing the needs of low-income families.
- Communities benefit from increased affordable housing stock, economic development and neighbourhood revitalization.
Since its inception in 1986, LIHTC has been responsible for the creation of over 3.5 million affordable housing units across the United States, averaging 100,000 to 120,000 units per year.
It is the largest source of federal funding for affordable housing development and has proven to be an effective tool for leveraging private investment in public welfare projects.
“The most prolific affordable housing developers in the U.S. are for-profit companies. These are professional firms that are good at building things – usually more quickly and at lower cost than government can. But government has a critical role in creating space for private business and non-profits to execute these projects,” says Whitsitt.
Another mechanism is in the U.S. that Toronto is about to implement is Inclusionary Zoning (IZ), where local governments require developers to include a certain percentage of affordable housing units in new residential projects.
Here is a comparison between the two and how they work in the U.S.:
With the annually increased percentage of IZ in Toronto, while still awaiting provincial approval, it is about time we learned how other programs are successful.
Access to dignified, decent and affordable housing is not only a human basic need, but also a core Canadian value. Providing affordable housing is a collective responsibility we should share as a nation and we have examples from which to draw inspiration.