The U.S. has a way to build homes for low-income people. Most of southeast Ohio doesn’t qualify

Anyone who wants the government’s help to build affordable housing starts by picking a spot for a new development.

After that, a state agency looks at that spot and asks itself: Is this the best place for us to spend our limited affordable housing resources?

The competition is fierce: Last year, the Ohio Housing Finance Agency, or OHFA, greenlit just 20 such projects across the state. Without that support, it is almost impossible to build and operate affordable units. There just isn’t enough money from other sources to make it pencil out.

To low-income residents in southeast Ohio, a new development could mean escaping a squalid, decaying rental. In some cases, it could be what keeps a person from homelessness. But most of southeast Ohio scores terribly, leaving many counties with virtually no chance of winning approval for a development.

The map below demonstrates the scope of the problem. It shows how each part of Ohio rates in the crucial category of “opportunity”:

To anyone from southeast Ohio, the map may seem baffling. On the whole, this part of the state — which everyone knows is economically distressed — scores very low. Entire counties effectively don’t qualify. In those that do, the qualifying areas leave out much more than they include. For example, in Athens County the city of Athens scores well, but Glouster does not.

Few residents of Athens County would argue Glouster has less need for quality affordable housing than Athens; if anything, many would probably say the opposite. Athens at least has a code office, which, despite its flaws, maintains a certain minimum quality in the city’s rental housing. In Glouster, even the most shocking issues can go unaddressed for years.

So why on Earth would Athens, but not Glouster, qualify for new affordable units?

Because, as it turns out, that’s exactly what the program was designed to do. Its underlying philosophy is to put low-income people in places where they will have the opportunity to advance in life. In the eyes of the program’s designers, that means places with good access to jobs, healthcare, childcare and education. It means places that are growing.

In other words, it means places that are exactly unlike most of southeast Ohio.

“We can’t make individuals or we can’t make communities excel, and certainly within a community there are going to be some who succeed and some who don’t. But what we want to do is kind of put people in a location where they have the best chance to excel or succeed. So that’s how we define opportunity,” said Ange-Marie Hancock, executive director of the Kirwan Institute at The Ohio State University, which produced the opportunity map for OHFA.

Hancock acknowldged the metrics used to create the opportunity map may disadvantage poorer rural areas like southeast Ohio, but she said it was not the institute’s role to put its thumb on the scale to improve the rankings. “What we do is an empirical analysis, and we just analyze the data,” she said.

This is frustrating to people like Amy Riegel, executive director of the Coalition on Homelessness and Housing in Ohio, who question whether these metrics are necessarily the best measure of opportunity.

“There is this idea that, if you’re in a community that’s low opportunity — why would we put people there? That would decrease their opportunity to do more. But that’s not the way that people who live either in the most impoverished neighborhood of Dayton or who live in the most impoverished area of Vinton County look at it. They don’t see their neighborhood as low opportunity. That’s their social network, that’s their home. That is the place they know and trust. And in many cases, those neighborhoods have much more social cohesion than any of those other places that we’re saying are high opportunity because they have good schools and broadband,” Riegel said.

Social opportunity aside, there’s also a business reason the program doesn’t work in a place like Glouster: the balance between risk and return. Rents in Glouster are already relatively low. On paper, it looks like a place that already has plenty of affordable housing. That’s a major deterrent to developers who need their affordable units to be cheaper than the competition to justify the inherent risks of new construction projects.

“Generally speaking, your areas that have very low rents … it’s going to be much more difficult,” said Taylor Koch of Hill Tide Partners, which builds affordable housing units in several states, including Ohio.

How America builds affordable housing

Building decent housing for low-income people really doesn’t pencil out. Construction costs are about the same whether a developer is building low-income or market-rate housing. So there’s no incentive for developers to deliberately make less money or even risk losing money on a project just to make housing more affordable.

Meanwhile, a new multifamily development with rents at market rate will generally price out people who make much below the median wage. That’s the problem the Low Income Housing Tax Credit program exists to solve. Also known as LIHTC (“LIE-tech”), the program gives developers a tax credit if they agree to build units with reduced rents. Developers then sell these credits to raise money for a project.

LIHTC is the main way the federal government makes affordable housing pencil out for private developers. It originated in 1986 with the Tax Reform Act signed into law by President Ronald Reagan and signaled a major shift in the country’s approach to housing. No longer would the government directly subsidize new construction. Now it would incentivize private investors to do so instead.

In many ways, LIHTC has been remarkably successful. It has powered the construction of affordable housing throughout the U.S. and retains strong bipartisan support. Athens County has several examples of LIHTC properties, the most recent being Kershaw Greene. Those units have already helped pull people out of squalid living conditions elsewhere in the county.

But in the decades since LIHTC’s adoption, the country’s housing supply has worsened, not improved. According to the Coalition on Homelessness and Housing in Ohio, there are only 40 affordable units to every 100 Ohioans who qualify as “extremely low-income.” Places as rural as Perry County are seeing rising homelessness, which experts tie directly to the availability of housing. And even when new affordable units pop up — primarily through LIHTC — they don’t find their way into every community. Many rural areas get left behind.

“LIHTC is a solution. It is not a bad solution. The problem though is, in the version of LIHTC that’s being offered currently by the state of Ohio … southeast (Ohio) doesn’t score, and it doesn’t make it easy for that development to happen,” said Riegel of the Coalition on Homelessness and Housing in Ohio.

Integrated Services Chief Real Estate Officer Becky Eddy said she is grateful for the existence of LIHTC, which her organization has used in multiple affordable housing projects. However, she said making the program work in southeast Ohio can be extremely challenging.

“The root of the issue is how it’s designed to even function,” Eddy said. “First and foremost, it is based on a structure that requires a project to be attractive enough to attract a for-profit investor and to get tax credits. So you’re not starting from a place of, ‘Let’s build the best possible housing in the highest need areas.’ You’re starting from, ‘What project will do well enough that it can create all of this wealth on the other side of things.’”

How LIHTC works and why it matters

Understanding what Eddy is talking about will require a brief tour of the housing industry.

Say a developer wants to build a big new housing complex — no LIHTC involved. That construction is going to cost a tremendous amount of money. There’s a good chance the developer does not have that much cash just lying around. So where does the money come from?

The answer, according to Koch of Hill Tide Partners, is typically two places. The first is a mortgage from a bank, but that probably won’t be enough to pay for a big development on its own. The second is a private investor, who gives the developer money in exchange for owning a stake in the project.

To put it another way:

Mortgage + investor equity = funding for the project (i.e. the capital stack).

Capital stacks can be much more complex, but this is the basic idea.

“The way that this works is, the developer’s doing all of the work, and the investor is there to bring equity (i.e. cash) and sit back and collect on cash flow and appreciation if that project ever sells,” Koch explained.

The investor puts money into the project in the hope of getting more money out later. For that to happen, the development has to turn a profit — one big enough to justify the risk. That’s unlikely to happen with a LIHTC project because the rents will be capped to keep them affordable.

This is where the tax credits come into play.

Say a developer wants to build a new housing complex that low-income people can afford. The developer knows an investor will never join that project under normal circumstances. That’s why the developer applies for LIHTC.

Let’s assume the developer’s application is successful. Now the developer has tax credits — but still no cash. So the developer strikes a deal with a private investor: Invest in our project, and we’ll give you the tax credit.

In a sense, the developer has sold the tax credit to the investor in exchange for cash. Over the next 10 years — assuming the property doesn’t violate the agreement to provide reduced rents — the investor will be able to claim this credit during tax season. Those future tax returns, combined with the usual cash flow and appreciation, is enough to win the investor over.

(For those who are curious about how much the investor is making here: Koch said the maximum credit is $1.75 million. The investor claims that credit every year for 10 years, meaning the investor ends up with a total of $17.5 million in credits. In exchange, the investor pays the developer, on average, 86 cents on the dollar for the credit — that comes out to $15.2 million. That’s a net return for the investor of roughly $2.3 million over 10 years, or $230,000 a year. The investor will make more from the cash flow and appreciation of the project itself.)

This may seem odd to some, but it is actually how the program is supposed to work. It’s designed to imitate a typical market-rate development. The tax credit isn’t there to pay for the building itself. It’s to draw in an investor.

In other words, the same formula still applies:

Mortgage + investor = capital stack.

Except even this probably won’t be enough for a LIHTC project, Koch said. That’s where a third funding source comes into play: the deferred development fee.

“States allow for developers to put in the budget a developer fee. The policy on this varies drastically state by state, but think of that as the economic incentive that developers have to do a LIHTC deal,” Koch said. “Most of the time, after you get your tax credit equity, after sizing your first mortgage debt, there’s still a little bit of a gap there. And so you can take some of that developer fee and put it back into the deal to make it whole so that you have enough resources to construct it.”

Which leaves us with the following:

Mortgage + investor + deferred developer fee = capital stack.

It can get even more complicated, but that’s enough for now.

Here’s the problem: Both the mortgage lender and the investor still want the property to get built and fill up with tenants. Both are looking at how it will function in the overall housing market and how much it will earn in rent. The weaker the outlook, the less money the lender and the investor will want to put up.

Rural areas struggle to compete

This is where Eddy’s point about having to “create all of this wealth on the other side of things” comes in.

In areas where rents are already high, a LIHTC deal will look good. Odds are, the LIHTC project will offer a big discount compared to what’s already on the market. That means its units will be in high demand. In addition, it can probably charge a higher rent overall while still remaining affordable to those whose earnings are below the area median income. That means a steady wealth-creating revenue stream.

This is especially important to mortgage lenders, according to Koch.

“Your first mortgage … is really based on, what’s that difference between your rents and your expenses? So in areas where rents are really high, we can leverage more debt,” Koch said. “So our first mortgage is larger, and that helps to fill a pretty significant gap in the overall financing.”

Expenses — the cost of building and operating the development — generally don’t vary much. It costs about the same to build in Meigs County as it does in Franklin County — potentially more, if the infrastructure isn’t built out already. Rent is the big variable.

In areas where incomes and rents are already low — and most of southern Ohio fits this category — a LIHTC property will make less revenue from rent and won’t offer much of a discount relative to other rentals, making it less competitive.

On paper, this makes the project look like a terrible investment. It doesn’t help that the project will probably be on the small side — because of the smaller populations in rural areas — which often means a worse revenue-expense ratio than a bigger development would have.

All that means a developer may have more trouble rounding up the funding needed for the project. And that’s assuming the state decides to use its very limited LIHTC tax credits on the project in the first place.

“I think it is important to try and bring housing to all of these different areas,” Koch said. “It’s just going to be much, much more difficult to do in areas where … the rents are pretty low as it is. If you’re not seeing market-rate developers there, that’s why. If you’re not seeing LIHTC developers there, that’s also why.”

The issue is that housing in southeast Ohio already looks “affordable.” There isn’t enough, and what exists may be in terrible shape, but none of that really gets considered with LIHTC. It’s designed to follow the free market, meaning places with strong economies will look like attractive investments and places with weak economies won’t. The opportunity map from earlier just reinforces that trend.

This also helps explain why the city of Athens scores well for LIHTC deals while Glouster does not. Rents in Athens are drastically inflated by the university. The university also provides an economic base for the city where healthcare, childcare and other resources can accumulate. To an investor or mortgage lender, the risk-return ratio looks OK in Athens. In Glouster, it looks awful.

“When it comes to LIHTC, risk aversion is the driving force. And so it’s really about how you reduce as much risk as possible,” Riegel of the Coalition on Homelessness and Housing in Ohio said.

Adding to the risk is the cost of just applying for LIHTC in the first place.

Riegel explained: “In order to apply, you have to have an option on the land. You have to then make sure you could build that housing on that land. Is the soil OK? Is there some type of environmental concern that would keep you from building there? And then you also have to think about, is this in a floodplain? Is it in an area that, for some reason, you can’t get insurance? You have to think about all of those factors. And a lot of those factors, you can’t just philosophically think about them. You have to test them to make sure. That means engineers coming out. It means scientists, all these different people. … And you have to do all of this work in advance of applying.”

That could easily mean a developer sinks $100,000 into a LIHTC project before even applying for the tax credit — which could get rejected.

“If you were to call any of these developers who do a lot of deals, they can tell you that somewhere, they have a file of all the communities that have called them saying, ‘Please, please, please, please, please come to my community,’” Riegel said. “‘Please build housing. Please do this. We will throw out the red carpet for you. Please, please, please.’ And they (the developer) can do the work ahead of time and put it through some modeling and say, ‘Your area will never score, so we’re sorry, but we can’t even consider you.’”

Eddy brought up a property Integrated Services owns in Tuppers Plains, an unincorporated community in Meigs County, to illustrate this point.

“When I go to Tuppers Plains, I see a nice small community,” she said. “But because of the scoring criteria, it doesn’t score well.” That means the state probably won’t award any LIHTC credits to a project there. There isn’t enough “opportunity.”

The conundrum for shrinking rural communities is this: New housing requires economic development, but economic development requires housing. If housing isn’t being built, businesses won’t move in. It’s a catch-22, and it’s one LIHTC is not designed to solve.

Or, as Riegel put it: “The tools that are being put in place are not the right fit for the need that is in these areas.”

Let’s say a company wants to move into a community in southeast Ohio. One of the first things it will check is housing. If the housing doesn’t exist, or the existing housing isn’t the right fit for the company’s executives and employees, someone will have to build it. That’s a problem.

Given the costs of labor and building materials, and the challenges of running basic infrastructure in southeast Ohio’s hilly and rugged terrain, building homes at a price people in the region can afford may be difficult.

Mike Kingsella, the CEO of Up For Growth, a national organization that advocates for new solutions to the housing shortage, said this is happening all over the United States.

Kingsella said this is a result of economic shifts over the past several decades that “have created a great divergence of income-earning potential … and have divided America into really two separate places.”

One he described as “a handful of superstar metros where a ton of innovation, GDP growth is happening.” And then there’s the other, he said, “where we have seen the departure of longtime community anchors, community institutions, that for many, many decades and years held many, many cities across the country together.”

Tools to help rural communities face cuts

Say a developer is planning a LIHTC project. Although the project is in southeast Ohio, the developer was able to win some LIHTC credits, secured a mortgage and brought on an investor. But for whatever reason — maybe the mortgage wasn’t big enough, or the investor wasn’t willing to pay as much for the credits, or the costs are just too high — there’s still a funding gap.

One way the developer can fill that gap is with money from the Ohio Housing Trust Fund. This is a pool of money the state collects from county recorder fees.

“It’s literally, ‘Okay, hey, I have this project that’s really close to penciling out, if I had another $600,000, this project would work.’ And that money comes from the Ohio Housing Trust Fund. … It is the thing that’s made several of our projects possible,” said Eddy of Integrated Services.

The same goes for organizations throughout the state. “It actually is the number one way we fill gaps in rural projects,” Riegel said.

LIHTC gap funding is not the only thing the housing trust fund can pay for. Eddy said Integrated Services has also relied on it for rental assistance. Money from the housing trust fund can go toward home repair, or toward making handicap accessibility modifications. And a large portion must go to rural parts of Ohio.

“If we were starting from a place of just looking at the need, and just looking … where the populations have the least amount of wealth and still need housing, then you wouldn’t develop the LIHTC program. You would develop something like the Ohio Housing Trust Fund,” Eddy said.

That’s why Eddy and Riegel were both deeply concerned about a proposal in the House version of Ohio’s biennial budget to restructure the housing trust fund. Right now, all the money from recorder fees across the state is pooled and then distributed to wherever it’s needed. Under the House’s plan, that wouldn’t happen anymore. Instead, each county would have the option of keeping its recorder fees for itself.

“So if your county gets $10 million (in recorder fees), you get to keep $10 million. If your county gets $20,000, then you get to keep $20,000. That sounds hypothetical, but that’s actually an urban county in Ohio versus what currently a southeast county is receiving. So if anything were to happen to the housing trust fund, it would be another major destabilizing impact for development across the southeast,” Riegel said.

Eddy said the recorder fees from Athens County would not have raised enough money for any of the projects Integrated Services has funded through the housing trust fund.

The Senate’s version of the budget bill removed the House amendment to restructure the trust fund. House and Senate leaders are now in negotiations to reconcile their two versions of the budget, so it remains to be seen whether the trust fund will be left unchanged.

Koch said another way to make LIHTC deals in particular pencil out in rural areas is to attach project-based Section 8 vouchers to them. With these vouchers, the federal government will pay the difference between what a tenant can afford and what a landlord charges in rent. By combining a LIHTC rent reduction with a Section 8 voucher, the developer can lower rents below what LIHTC itself can accomplish.

This solves the problem of LIHTC rents being too close to market-rate rents in areas where rents are already low. Say a LIHTC property charges $500 in rent. As it turns out, this is an area where market-rate rent is also $500, so the developer attaches a Section 8 voucher to the property. Now renters can pay, say, $300, and the federal government will cover the remaining $200.

The problem with this strategy is that the Trump administration has proposed major cuts to the Department of Housing and Urban Development, which oversees Section 8. NPR has reported the cuts would effectively end Section 8. More specifically, the cuts would reduce rental assistance by 40% and give states more control of how the money gets spent.

Re-envisioning affordable housing development

One way to make programs like LIHTC work better for a place like southeast Ohio, Riegel suggested, is to rethink how areas are scored.

“In some cases, southeast Ohio and other areas might be hurt by these indices because they’re measuring the wrong thing,” Riegel said. “They’re measuring proximity to power rather than proximity to connection.”

But, she said, it’s also important not to see LIHTC as the only option communities have to address their housing shortages.

“LIHTC is not for everyone. It’s a beast. It is long, it’s arduous, it is really difficult. You have to put a lot at risk in hoping to get a reward,” Riegel said.

Mike Kingsella of Up For Growth is pushing for an alternative: A new program he said would function as “the yin to the yang of LIHTC.” It’s a federal legislative proposal called the Neighborhood Homes Investment Act.

The idea, Kingsella said, is to create a new kind of tax credit — not for building big new developments, but for fixing up existing homes.

“It is specifically geared towards home ownership and specifically addressing what the authors call the ‘appraisal gap,’ which is the gap between the cost to rehab a home and what you can essentially rent that home out for or sell it for,” Kingsella said.

Say you bought your home for $200,000. You want to sell it, but before that happens, you have to put in $150,000 dollars of work. That means you’re looking to sell for at least $350,000 — but there’s no one in the market who will buy your $200,000 home at that price.

“You are not going to do anything until the math will work,” Kingsella said. “And so what this bill does is, it provides a dollar for dollar credit for every dollar of eligible rehabilitation costs to put that home back into service.”

In other words, with a Neighborhood Homes Investment Act credit, you would get a $150,000 tax credit to rehab your home. That means you pay effectively nothing for the repairs. Now, you can sell your rehabbed house for much less — say, $250,000.

Kingsella said there would be a number of rules in place to ensure the credits went to communities where property values and incomes are low.

“There are eligibility factors just like LIHTC, but they’re different in the sense that the map you get for this credit is almost the mirror image of the map you get for the Low Income Housing Tax Credit,” Kingsella said.

Because the credit is going toward rehabbing existing homes, it doesn’t have nearly the same risk profile as a LIHTC project. The fact that each credit is smaller helps, too.

Kingsella said he believes this credit could be the solution to the catch-22 that places like southeast Ohio face when it comes to housing and economic development.

“To put the pieces together: You have an economic developer in Meigs, and they have an opportunity to bring a medium-sized manufacturing operation into the community,” Kingsella said. “There’s lots of old housing stock, but it’s in poor condition, doesn’t have working plumbing or a kitchen or working bathrooms or electrical’s a mess. The Neighborhood Homes Investment Act’s tax credit provides the funding for the necessary rehab to make that home marketable and to make it marketable at the middle-income price point, which would … create an advantage for the economic developer and their efforts of the community to bring that major employer in.”

It’s a long process to get a bill like the Neighborhood Homes Investment Act through Congress. However, Kingsella said it has bipartisan support in both the House and Senate.

“There’s no guarantees at all with Congress, but it’s been around long enough, it’s been discussed long enough, it’s got a broad enough coalition, and it’s got a long list of bipartisan supporters and sponsors, that I believe this is a policy that will be implemented at some point in the coming years, if not this year,” Kingsella said.

Eddy of Integrated Services noted the federal government has long taken an active role in promoting housing opportunities. The Homestead Act, passed in the mid-1800s, offered 160 acres to anyone who could build a home and cultivate the land, mostly in the Midwest and Western states. The Housing Act of 1937 launched several decades of public housing built with federal investments. After World War II, the GI Bill made housing more affordable for returning veterans, a benefit that continues to this day. The Section 8 program created in the 1970s subsidizes rents by covering the difference between the market rate and what a low-income person can afford.

Eddy and other advocates for affordable housing say it will take a similar commitment to get the needed housing built in places like southeast Ohio where private-sector development simply may not pencil out, or at least not at the scale needed to provide a catalyst for economic development.

“One of the things my brain consistently comes back to is that I really believe deep down that this is one of the first times, in the United States at least, that we’re expecting the market to just take care of it,” she said. “We’ve subsidized housing for a long time for a lot of people.”

“So there’s all of these ways that we have directed money into housing and into wealth,” she said, “and now we’re sitting at this place going, well, why can’t you make it work? Why isn’t there any housing? I think it’s the missed vision of how we got here in the first place. … We’ve lived in a society for a long time that valued people having a place to live and recognize the importance of that stability.”