The participants in our dialogue have identified several problems associated with housing; are there any ways that tenants can help to improve their own situations...?
Q-Many people believe housing shortages can be traced to rent-control, restrictions and regulations.
A-No doubt about it. Such restrictions keep developers, investors and lenders out of an area, capital improvements become non-existent and maintenance wears thin. Tenants have even been known to create code violations to gain the upper hand in the landlord-tenant relationship.
Q-How can tenants "gain the upper hand"? What about the rights of the property owner?
A-Talk about tenants gaining the upper hand! I've got a true story you're going to find hard to believe.
In June of 1990 the Wall Street Journal had an item about a Los Angeles couple who purchased a tenant-occupied property in Greenwich Village, intending to convert it to a single family home for their young family. The law specified that tenants could be evicted if owners intended to occupy the property themselves.
Four months after the purchase and before the eviction had been accomplished the law was changed and eviction could only occur if undue financial hardship could be shown. The regulated rents of the two tenants didn't begin to pay the mortgage or maintenance on the property and after two audits and several years that became apparent even to the bureaucrats in the rent control agency. But the saga didn't end there.
The eviction request was denied because the agency claimed the owners motivation was really the desire to occupy their own property and not the bankrupting economic losses they were suffering.
Q-You're kidding!
A-I swear; it was a case that went to New York's highest court which finally ruled that the family, after paying $280,000 for their house and six years of living in a 11 x 13 room, over $100,000 in legal fees (a fraction of what it would have cost without donated aid from the Pacific Legal Foundation and the Washington D.C. based Competitive Enterprise Institute) the family could at last evict the two tenants.
Q-I though the Supreme Court ruled that the Fifth Amendment entitles property owners to reimbursement from government agencies that unlawfully take their property, even if the taking is temporary.
A-According to the Wall Street Journal report, the family is thinking along those lines and is suing New York City.
There were two points in that article that really stayed with me, aside from the outragious incident. One was the fact that a former housing-court judge was paying only $75.17 for a two-bedroom apartment near Gramercy Park and the other was a statement mirroring my own thinking to the effect that stupid legislation turns normally honest people into theives and undermines character and integrity.
Q-I read somewhere about a single lady, I think she was in Atlanta, who had a real estate business and was buying, fixing and renting properties to low-income tenants in areas that were so rough that she went around with a gun.
A-Sounds like you might be referring to Sandra Hartman. She has a real estate license and when she was 33 she bought her first income property in Atlanta back in 1982. She's another inspirational figure who through hard work, long hours and a fearless attitude was able to increase her real estate holdings in just three years to 1,400 low-rent units in eleven complexes with a 95% occupancy .
By 1990, however, the properties were only 30% occupied, mostly due to her own eviction efforts. She was notorious for her bulletproof vest and the gun which she always carried as she made the rounds of her properties, evicting drug users, dealers, loiterers and vandals, all in an effort to hang on to her good tenants.
She took pride in providing clean, safe affordable accomodations, sanctuaries here and there on a vast battlefield. She even went as far as fencing her largest complex to insure her tenants' safety. She paid $10,000 a month for 24-hour security for her properties.
Q-You keep speaking in the past tense. What happened---isn't she in Atlanta anymore?
A-Actually, I'm not sure. Last year (1990) she was facing a lot of foreclosures and even though she had access to $500,000 in federal funds to renovate 200 low-income apartments she couldn't get a lender to come up with the additional $700,000 the proposed renovation would take.
Q-That's only $6,000 a unit compared to the $72,000 a unit used by New York City renovators!
A-Forget the 200 units---what about the 1,400 units she had already spent so much time and money making safe and habitable. She expressed disbelief that the government could let all those units revert to slums again. She even approached the mayor with an offer to house the homeless in her projects to save the city money. They mayor had planned to build more projects just for that purpose.
Q-If the city government wouldn't respond I would think she would be able to attract the attention of the federal government.
A-I think you're right. This is a classic example of Jack Kemp's operation bootstrap and something HUD would want to be part of. Besides, she was well known and admired by Secretary Kemp who only a few months earlier had praised her anti-drug approach to housing.
On the other hand, a lot of well intentioned projects simply don't make it, like the low-income buildings run by two New York entrepreneurs. They agreed to provide shelter at greatly reduced rents for 15 homeless men in return for a one-time incentive payment of $2,500 for each man.
The only trouble was the city only came up with half the incentive and fell behind in the rental payments. On top of that vandals flooded floors directly above newly renovated kitchens, stoves were destroyed, apparently so tenants could qualify for city welfare department restaurant allowances, and parts of a furnace were stolen and they were sued by the tenants.
Q-Who would want to be a landlord in disaster areas anyway?
A-Hard working people looking for an opportunity to improve their current situations and leave something to help their kids skip a couple rungs in the ladder. But we went into that already, at least as far as New York is concerned.
Q-It looks hopeless.
A- New ideas are needed. San Diego got creative recently by waiving some regulations and allowing the construction of SROs (Single-Room-Occupancy) hotels, which are definitely the cheapest type of housing to build. They don't have individual baths and kitchens and make do with less square footage and amenities than generally permitted by today's codes.
Q-Doesn't New York City have a huge number of SROs?
A-It certainly did at one time. New York's stock of SROs dropped from 127,000 units in 1970 to only 14,000 in 1983. Of course this exacerbated the so-called "homeless problem". The City started using the hotel concept for what turned out to be unsatisfactory, to say the least, temporary shelter during the mid-eighties.
The problem is not as bad as it was in 1987 when the City was using 62 hotels to house over 5,000 people. Jonathan Kozol's book Rachel and Her Children described the deplorable situations that existed from that misguided policy. Those so-called welfare hotels are mostly a thing of the past.
New York now has what they call Tier Ones, transient shelters, and Tier Twos which are the more long term shelters. They are supposed to have over 3,000 of those units.
Q-With plans to build more, I understand.
A- What kills me is the AFDC (Aid to Families With Dependent Children) maximum shelter allowance for a family of four in 1988 was $312 a month in New York when the City was authorized under federal law to pay $1,000 a month to keep public assistance families in temporary shelters.
Now wouldn't you rather be eligible for three times as much? And they blame fictional cut-backs, greed and all sorts of things for the increase in the number of homeless people around the country. Why is it so hard for policymakers to understand that if a need is catered to it grows? There is an almost infinitely elastic demand for anything that appears to be both good and free.
Q- I thought I heard somewhere the City was paying a $100 a day for the average family needing shelter?
A- That's probably including social services along with the rent. One thing is certain--the costs keep rising. In the early part of 1990 the New York Times reported that "Depending on the shelter, the cost ranges from $105 to $170 per family per day." Of course the services are the largest cost. Job counseling, child care, education programs, medical treatment, assistance in finding permanent housing---functions all provided by salaried workers.
A private-sector provider, or even a non-profit provider, might have paused and reconsidered after realizing for the same price each family could simply be given over $62,000 a year! This policy is nonsense! Absolute nonsense!
Q- I guess it wouldn't surprise you to learn that as more services were provided the average length of stay in a shelter increased. In the early 1970s it was less than two months, approximately fifteen years later a Policy Analysis by the Washington D.C. based Cato Institute found stays averaged over a year---13.6 months to be exact.
A-We must have read the same report. If you remember the real shocker came not in the exorbitant prices for current shelter services or even rehabilitating delapidated shelters, but the $800 million price tag for 15,000 units for the homeless. That works out to more than $55,000 each--beyond the reaches of the average working family. So why should anyone work and make mortgage payments?
Q-It sounds like the moderate-income working stiff is being played for a sucker!
A-Maybe, but politicians offer them programs too as incentives to make them feel better and persuade them to go along with the programs for others.
Q-Such as?
A- For instance New York has an "affordable housing" program where about fifteen percent of the subsidies go to families with incomes between 100 and 165 percent of the median, or making $32,000 to $53,000 a year.
Q-That would include pretty near half the families in America!
A-Not long ago New York City had 175,000 families waiting for low-income housing and yet they were giving publicly owned property to squatters; people who unlawfully occupied and in some cases renovated city owned property.
Q-Don't tell me you're criticizing Acorn?
A- Acorn (Association of Community Organizations for Reform Now) is an example of how not to handle our housing problems.
Acorn advocates felt justified in disregarding regulations and skipping over a large number of needy persons who had been patiently waiting for a chance at government owned shelter.
Such arrogance was met by an unbelievable mealy-mouthed response from a New York City official quoted in the Jan 12, 1987 of Insight magazine: "The government has to show some flexibility in looking at individual cases. To take a hard-line position across the board against people who in good faith invested in the renovation of those buildings would be a mistake."
Where in the world was the "good faith"? These people were willing to invest money and labor and occupy these buildings under the threat of jail. They knew full well they were breaking the law and opted to accept the consequences in hopes of changing the law.
All well and good---there is a time for arrogance and civil disobedience, but there must be consequences to suffer. Hard decisions were not made by the city of New York whose officials tried to duck the issue and give it a different name. In doing so they fostered a disregard for law and broke faith with the 175,000 families on the low-in come housing waiting list who were playing by the rules.
For Acorn to say the squatters action was a model for low-income housing is ludicrous.
Q- What happens in New York City if an owner converts his rentals to condominiums?
A- In a condominium conversion, property owners are forced to buy-out old tenants. Payments run as high a $40,000 and sometimes more in New York City. Old tenants are the special interests enjoying privileges at the expense of new tenants, property owners and the housing market in general.
In fact a study by the Center for Community Change found the money saved by rent-control goes to subsidize gourmet restaurants and the fancier more exclusive retail stores in the area. We should all question the appropriateness of landlords involuntarily subsidizing the increased consumption of luxuries such as liquor, gourmet foods and other non-essentials.
This is just another example of good intentions, in the guise of government regulation, resulting in the worst of all possible worlds: a disastrous shortage of housing that benefits the wealthy without providing the desired low rents for the poor.
Q-New York City is a special case, don't you agree?
A-Unfortunately regulation is rampant nationwide and it always results in low vacancies. Los Angeles has the same vacancy rate as New York, 2.2 percent, whereas San Francisco's is even lower at 1.6 percent. To correct the situation policymakers generally add even more restrictions. It is stupid to look to government to solve the very problem it creates.
The way I see it, New York City is a larger than life showcase of the problem that exists all around the country. For instance the City's plan to rehabilitate 252,000 units was estimated to cost $4.2 billion in 1986, then the estimate rose to over $5 billion a couple years later and recently I've heard the plan could eventually cost the City close to $10 billion.
Q-That's a prime example of something government at all levels is famous for doing; underestimating.
A-But the plan itself is ridiculous. Whereas most cities own, through foreclosure, at most 100 buildings, New York City owns over 8,000 buildings. It manages over 100,000 units and when I was looking into it in 1989 more than 51,000 of those apartments were vacant.
Q-It seems obvious that they're vacant because they need to be rehabilitated.
A-A foreclosed city-owned building is eligible for rehabilitation only after it has stood vacant for a year. Nonprofit organizations and government often spend as much as $74,000 per unit to rehabilitate these old buildings and it generally takes two and a half years before the unit can be rented.
Q-Why don't private companies contract to fix the properties up?
A-Working capital is generally available to nonprofit and government entities at a lower cost than the funds a private sector developer has at his disposal. Due to this higher cost of capital most private companies find it hard to compete. Direct federal subsidies for housing construction have proved intolerably expensive in the past and were often politically skewed to the benefit of well-connected developers. Already federal housing programs like those managed by HUD, the VA and FmHA are awash in red ink.
Q-And I guess the cost of complying with regulations and restrictions keeps private-sector developers out of areas where attempts to micromanage housing are excessive.
A-That's something regulations do all right.
Q-I heard that communities in California have accumulated close to $300 million which should have been used for low-cost housing.
A-Actually I think the figure was more like $250 million according to a 1990 study by the state Housing and Community Development agency. But just because the funds are carried on the books of those communities doesn't mean the money isn't committed. It takes time to complete a development and my understanding is that because of the "use it or lose it" bill, most of those local funds are already earmarked for projects benefiting low-income earners.
Q-Just what is the "use it or lose it" bill?
A-In 1990 the California legislature passed a bill giving communities five years to use their affordable housing funds or turn them over to the local housing authority.
Q-How were the funds generated in the first place?
A-Local communities raise money by using the power I have been complaining about--the power to grant favors and manipulate zoning and building regulations and levy property taxes. There are about seventy local redevelopment agencies throughout California whose purpose is to stimulate commercial developments such as shopping centers, warehouses and office buildings.
These developments serve as catalysts to rejuventate specific areas, and although housing is not directly involved, 20% of all taxes generated from the higher values created by the development must be set aside for low-income housing in the locality.
Q-Didn't I hear you say that excessive litigation plays a part in pushing housing costs beyond the pocketbooks of many buyers?
A-In business especially, time is money. Whether or not something productive is being accomplished, employees' salaries and business overhead keeps running. When excessive and sometimes frivolous lawsuits slow down or stop a project, the cost attributed to the delay is passed on to the consumers in sales price. Unfortunately home builders spend a lot of time in court now days.
But things may be looking up. A group of home owners attempted to block a large real estate development in southern California and ended up being countersued for the delay they caused the developer and for his legal fees.
Q-How much did the developers win?
A-There was a good chance the developers would have been compensated for the extra costs ($600,000) they incurred in their attempts to finance their project during the lawsuit. However the home owners association settled for legal fees of $100,000 which the developer contributed to three nonprofit community organizations in order to smooth relations with the public.
Q-Well I don't see how that is going to reduce the price of the houses in any way.
A-An economist for the National Association of Home Builders says multifamily sector starts are down almost 50% from their 1985-1986 highs.
Q-I thought there were a record number of building permits taken out in January 1990.
A-Sure, the permits to build five or more units were up 91% in January because builders who secured permits by January 13, 1990 were exempt from the new HUD handicapped access rules, resulting from the Amendment to the Fair Housing Act which was passed in 1988. But a permit doesn't mean units are actually going to be built. The exempt permits were insurance, in case a builder gained access to the limited financing market, he wouldn't have to contend with all the red tape and cost imposed by the new bureaucracy.
Q-Just what does the Fair Housing Amendments Act require of builders?
A-Only that multifamily housing with four or more units make ground floor units accessible to the handicapped if there is no elevator, and if the building has an elevator, all units must be made accessible. The breadth and vaguesness of the directive is the problem; no one seems to know what exactly conforming with the directive would entail. Especially troubling is the problem of accomodating wheelchairs in bathrooms and kitchens.
In a March 1990 Wall Street Journal report Dallas architect Jack Craycroft was quoted: "Everybody I talk to gives me a different answer. . .No building code has ever said bathrooms have got to have walls. We may leave the walls off the bathrooms till somebody tells us where to put 'em."
Q-I thought vague laws were unconstitutional? It looks like government has put a halt to all production with their excessive regulation. This has got to stop!
A-Absolutely! Unfortunately there are more and more regulations everywhere. The new rules are so expensive that the legislation may have the unintended consequences of pricing disabled people out of the housing market altogether.
Senator Paul Simon, in committee hearings on the legislation assured everyone the cost would be only pennies a month, Senator Kennedy estimated it would add $27 to the construction cost of each new apartment and Senator Harkin suggested it would cost only $4 to widen a bathroom door.
HUD, given the actual task of implementing the law, proposed guidelines in January of 1990 that require every public area be accessible to the handicapped; that kitchens, bathrooms and doorways all be designed to handle wheelchairs; and that hilly sites be regraded and ramped for better access.
The guidelines would add at least four inches to doorways,along with the larger bathrooms and other rooms would add at least five percent overall to apartment sizes. These mandates could increase the size of entire buildings and in some cases make the building sites impractical.
Thousands of planned apartment units marginally profitable before the new law, will simply not be built. The more onerous the requirements and the greater the litigation exposure the higher the costs.
Q-I suppose rents will rise, and there will be more shortages and calls for reform. More calls for government to reform the problem it caused.
A-Another FPH mess!
Q-What?
A-FPH stands for "fox patrolling the hen house". FPH problems are instances where we turn to government as a policing authority to protect us from government the culprit.
The head of The Paralyzed Veterans of America estimates the cost of HUD's new regulations at about $900 million a year! He has more than a warning, he has proposed an alternative solution to housing for the handicapped.
A coalition of home builders and thirteen disabled groups formed their own task force and came up with less costly guidelines requiring, for instance, only one bathroom in each unit to be larger.
The coalition guidelines, while still expensive, would cost half the amount of HUD's, adding between $1,300 and $3,700 in costs for each walk-up apartment and from $3,200 to $4,300 for a high-rise unit. As a rule of thumb, each $1,000 in cost adds $10 a month in rent.
Q-It sounds risky to build anything because there are so many regulations and they keep changing.
A-It's not supposed to be this way in the United States of America. Just as the weavers in France stopped production while waiting for orders from Louis XIV as to what weight and color of thread they were permitted use in their looms, builders have stopped construction in this country until precise guidelines are issued so that they know exactly what is necessary for compliance with the fair housing law. One builder was quoted, "Multifamily housing really can't be built today because nobody knows how to build it. Whoever does choose to build is taking a very major risk."
Q-Why haven't advocates for the homeless and low-income working families protested this new impetus to higher housing costs?
A-Would I be too facetious if I suggested such a move would not be "politically correct"?
Q-It seems pretty clear to me that if we're not careful we'll end up once again hurting most those whom we wish to help--the disabled will be facing economic barriers as an outgrowth of excessive regulation.
A-There is an exemption in the law for Town Houses so guess what---developers around the country are already requesting rezonings.
I love American ingenuity almost as much as I love its diversity. Every law has its loopholes. Instructions on how to do what needs to be done, in spite of government's braking action on the nation's productivity, start flowing from the printing presses as soon as any new regulation is proposed.
Q-Are there any private developers that build new low-income housing?
A-Not many. Stephen Ross is one of New York City's few large developers of affordable housing. He started in 1972 and claims developers such as himself get little respect. Out of 16,000 to 17,000 units a total of 12,000 were subsidized. He has raised $1.5 billion as a syndicator in order to build 46,000 units across the nation and claims it is easier to raise dollars from the public in general than from corporations.
There isn't much demand presently for commercial development but there is a very large demand for low income housing. Developing low income housing can be very profitable, often providing an eleven to twelve percent internal rate of return for investors as well as rewards for the socially conscience.
In 1987 Mr. Ross built 36,000 units in 1,400 projects and used twenty percent of low income tax credits. In 1988 he used eighty-eight percent of such credits and one hundred percent in 1989 when he build 130,000 units in 1,450 projects. He completed 1,000 units in New York in 1989 for those with sixty percent of median income. There are few federal subsidies available anymore so he was forced to work with the city.
Q-Wasn't James Rouse, the developer of the harbor areas in both Boston and Baltimore and founder of the Enterprise Foundation which provides funds to nonprofit housing groups involved in providing low-income housing in New York?
A-I heard James Rouse speak at a Urban Land Institute gathering in New York City in the fall of 1989. He told us then that the City had committed $5 billion for low income housing---where the money was coming from was not made clear. Mr. Rouse wanted to see a national campaign to house the poor with local governments footing the bill and the federal government only providing coordination.
He claimed in over 50 years he'd never seen the tinder box of unemployed and homeless he was witnessing in the nation's inner cities. Come to think of it, there were a lot of interesting people at the Urban Land Institute.
Q-For instance?
A-Patrick Johnson of the National Equity Fund, an organization which emphasizes local initiatives and gets resources from businesses and philanthropies is one. He seeks to provide predevelopment and bridge loans. Actually the Ford Foundation initiated the program in 1980 and it now has 15,000 CDC units.
Q- What are CDC units?
A- Sorry. I wrote about them in one of my books and forgot not everyone is as familiar with them.
Community Development Corporations first appeared in the late 1960s and caught on because they involved local residents in planning and managing developments. In 1979 when Franklin Thomas became president of the Ford Foundation, he founded a group called Local Initiatives Support Corporation (LISC) with $34 million of Ford Foundation money.
The LISC was designed to cut the risks of CDC projects by demanding rigorous lending and management standards. The MacArthur Foundation, Metropolitan Life Insurance Company and Cigna Corporation were all charter investors, along with the Ford Foundation.
In 1986 the LISC had more than $100 million in capital from more than three hundred corporations, foundations and three government bodies and it had funded four hundred community groups in twenty-seven cities.
Q-I've never heard of either CDCs or LISCs.
A-CDCs and LISCs have been successful in areas where efforts by other organizations have failed. In December of 1986, LISC announced the creation of a $10.5 million fund to purchase more than forty loans made to CDCs by LISC and others who had lent money to LISC projects. This created a secondary market guaranteeing decent returns to participants and making the entire concept that much more stable.
Q-You said the emphasis is on providing local solutions and involvement to urban problems. Does that mean no federal subsidies?
A-Mr. Johnson actually sees the withdrawal of federal support for housing as a good thing as it may lead to greater diversity and interest by private philanthropies.
Q-Exactly what is the role of Mr. Johnson's group?
A-CDCs provide know-how and hands on expertise. For instance a few years ago a sub-group called "Local Initiatives" worked with ten New York City agencies and developed twelve projects totaling approximately one thousand units, finished ahead of schedule and under cost. Mr. Johnson credited a coordinated delivery system.
Q-It sounds like it is on a par with Mr. Rouse's Foundation.
A-Actually Mr. Johnson's group expects to join up with Rouse and Fannie Mae. Martin Levine of Fannie Mae is a real public-private partnership advocate. By the way, Fannie Mae is the government's secondary mortgage market--a wholesaler of credit. Mr. Levine sees Fannie Mae as having a private charter to fulfill a public mission.
Over the years Fannie Mae has reduced the cost of a mortgage for a lot of people who could not otherwise have afforded to purchase a house. In 1989 $3 billion was spread around to 60,000 households with one-third of Fannie Mae's purchases under $40,000.
Q-I thought Fannie Mae issued bonds.
A-It does, via local governments, cutting out the middlemen---the investment bankers. Its guarantees also impart a higher rating to borrowers.
Q-I don't suppose those guarantees are counted as government liabilities when totaling up the national debt?
A-How right you are!
Q-I've heard the 1986 tax legislation left many real estate investors with a feeling of uncertainty. Many saw the value of their write-offs decline when the top bracket fell from 50% to 28%.
A-That's absolutely true. Unfortunately private developers and non-profits are at odds partly because the tax code gives a ten percent priority for non-profits and freezes out privates. Even the GAO (Government Accounting Office) admits the fees private developers must pay are too high and yet the non-profit default rate has been four times the private default rate.
Congress, realizing the losers could be milions of low-income people having trouble finding decent, reasonable and secure place to live, decided a tax credit was in order. But nothing too simple; one where the size of the credit depends on the kind of low-income housing.
Q-Tell me about it! If the units are not financed via government subsidies the maximum credit to build or rehabilitate became nine percent of the purchase price taken each year for ten years. If the property is ten years old or more and the construction or rehabilitaiton is government financed, the maximum credit drops to four percent each year.
A- One more stipulation; in order to qualify for the rehabilitation credit, the owner has to spend at least $2,000 for renovating each unit. 203K is an inner city rehabilitation program---waiver of the seven unit rule---under it developers can complete more than seven units.
Q-Just qualifying a project as low-income housing can be a job.
A-That's an understatement. Either twenty percent of the units must be rented to people with incomes below fifty percent of the median income for the locality, or forty percent of the units must be occupied by tenants with incomes below sixty percent of the median.
Owners must also meet state and federal guidelines in setting the rents charged to below-median-income tenants. If this were not enough, there are contradictory rules between the Treasury Department and government lenders. This is the first housing program to be administered by Treasury rather than the Department of Housing and Urban Development .
Q-Wasn't there something about the tax credits applying to the federal income tax, even though they are administered by each state according to its unique rules?
A-Every state is allowed $1.25 of credit per resident per year, ten percent of which must be allocated to non-profit organizations. This is a classic example of the micromanagement that goes on in hundreds of industries and affects millions of American citizens on a daily basis.
Q-Do you know anything about a proposal made a few years ago by the Center for Public Dialogue, which I believe is one of those Washington D.C. think tanks?
A-I don't know much about that organization but I think the idea for a double rate tax system that would treat improvements, and the land on which they were built as two distinct forms of property, may have originated there.
Q-How would it work?
A-They found that over a twenty year period building costs (materials etc.) rose approximately 14 percent a year, house-related labor costs rose anywhere from 11 percent to 15 percent whereas land values increased annually at three or four times times that rate or an average of forty-eight percent. Land used to be ten percent of the cost of a house; now it's 24% to 30% of the cost in many areas.
By adopting lower tax rates on structures, tax-relief is given to both owner-occupied and rental housing and the owners have an incentive to improve the buildings. Then taxes are raised on land values, which decreases the profit of holding idle land and slows the growth of land values.
This approach would keep housing costs and apartment rentals down and would encourage landlords to make improvements to existing buildings.
Q-That's nothing new. A lot of cities in Pennsylvania have been doing that for years and years.
A-What's new is suggesting that this layered taxation be adopted widely by communities as a way to make housing more affordable. In Pittsburgh structures are taxed at a rate six time higher than land and the average price of new and existing homes is far lower than most cities its size. In 1988 Pittsburgh homes averaged $51,300 versus $183,000 in San Francisco and $229,400 in Boston.
Q-That's ridiculous! There are many reasons completely unrelated to property taxes, for those price differentials.
A-Of course you're right, but you've got to admit having low tax rates on buildings encourages, or at least does not discourage, construction as the property tax structure in most cities does. Look at examples of cities in the same general locality.
When Scranton, Pennsylvania began taxing structures at only 25 percent of the rate it taxed land, the value of private construction rose 22 percent. Nearby in Wilkes-Barre, which taxed improvements at a higher rate than land, as most cities do, private construction dropped by 44 percent over the same two year time period.
And even if you want to discount numbers, look at the other benefits that come from encouraging development in cities: more jobs and reduction of urban sprawl, which means fewer public funds have to be allocated for services to outer-city areas like transit systems and extended sewer lines.
Q-On top of that, farmland is preserved. It looks like the only losers would be land speculators who find if they sit tight without developing their holdings their taxes keep rising.
A-San Francisco has been the beneficiary of a prolific non-profit developer since 1983 when the Bridge housing corporation was founded by Donald Terner, one-time California housing director. The group raised $5 million from local business groups to build private-sector low-income housing in San Francisco.
In its first six years Bridge built 3,500 units with 40% of them reserved for families with incomes equal to no more than 80% of the median in the area (which meant no more than incomes of $25,000 in 1989) and the other 60% of the units were sold at market rates to familes with incomes between $25,000 and $40,000.
Any profits from the market-rate units were used to expand the number of lower-income units or to reduce their cost.
These non-profit providers generally request, and often receive breaks not granted to profit-making builders, such as relief from impact and other fees and zoning waivers which sometimes allow them to build more units on a lot.
Just as Rouse's Enterprise Foundation brings expertise in finance and construction gleaned from years in the for-profit business world to local do-gooders, Bridge also teams up with for-profit developers for their financing connections and general know-how.
Q-Are you familiar with the National Affordable Housing Act, sponsored by Senator Cranston and which passed before the first session of the 101st Congress adjourned?
A- Somewhat. I know it was supposed to be to California and the rest of the nation what shoes are to Imelda Marcos.
The legislation was to provide incentives to prevent the loss of about 360,000 federally assisted low-income housing units over the next twelve years, 117,000 of those located in California.
Current law allows owners of federally assisted housing to convert their properties to condos and market rental properties after paying off their mortgages over twenty years.
The Cranston Bill would restict the opportunities for owners to take advantage of the promised conversions and would instead encourage landlords to sell the properties to their old tenants. As an incentive the bill would guarantee an eight percent return on investments if the properties remained open to low-income tenants and would also provide planning and financial help to tenants trying to purchase their units.
Q- It sounds great to me! Don't you think it was good legislation?
A-Since you asked me, I think it was a bit of smoke and mirrors since it didn't provide the money ($57.4 billion over the next 2 years) but only committed Congress to appropriate it next year. The trouble is, that will amount to a twenty-seven percent increase in HUD's FY1991 budget over FY1990.
Q-Don't tell me you disagree with government incentives?
A-I don't care what you call them--government incentives, government financing, government waivers---they're all subsidies which favor one citizen above another. When demand outpaces supply, favors become a way of life and such favors are always open to abuse.
Let me give you just one example of what I'm talking about: Use of tax-free industrial development bonds are a creation of federal law and are designed to provide cheap loans to local developers for projects to stimulate local economies. As of 1990 there was $170 billion of outstanding balances in industrial development bonds across the nation.
They are designed to keep people from using the bonds on speculative deals, but it is impossible to keep people from doing what they want to do; they'll sniff out a loophole every time. In 1984 Congress changed the law to prohibit the use of these bonds for gambing establishments.
A certain Senator from New York went to bat for a few of his friends and created his own tailor-made loophole in the law to exempt their particular situation. This customized loophole allowed bonds to be used for some gambling operations for a specified time.
This is a blatant example of using the law to favor some over others and in my mind, is the worst form of corruption!
Q-It's not surprising that politicians get federal grants and other favors for their relatives and friends. Some of these things may be available to others, but it doesn't hurt to have a person writing the laws to your specifications and making sure you know about the opportunities as they become available.
A-And if you don't have a relative or personal friend in Congress you have to be content with finding your own loopholes.
In 1987 the definition of a low-income household was one where the combined inhabitants earn less per capita than the median in the region. But as usual, the elitist policymakers misjudged the intelligence of low-income earners who quickly realized the more people but the fewer income earners the easier it is to qualify.
Q-HUD's definition of overcrowding is also easy to meet: more than one person to a room.
A-Knowing the correct definitions is the key to qualifying for most government programs--it makes it easier to make your situation fit the program planners preconceived need.
Builders may get more incentives, but what they really need from the government is less regulation.
Q-I think we agree builders pass the cost of regulation on to the consumer but small property owners can't do that.
A-I think even more than builders, property owners need and want less regulation.