Confronting the challenge of rising operating costs in affordable housing

Confronting the challenge of rising operating costs in affordable housing

February 2016
Joe Kriesberg & Don Bianchi

As we begin a new year, MACDC plans to be working on a wide cross section of housing issues. Our goal is to create an affordable housing system that is better able to meet the diverse needs of our residents and communities. This will require both more money and more flexibility. In a series of articles to be published in early 2016, MACDC is articulating some of its thoughts about how we do this. The first article talked about how we can grow the resource pie – the first and most essential step to meeting growing demand for affordable housing. In this article, we talk about how to lower operating costs so that we can use our limited subsidies more efficiently. In subsequent articles, we will talk about how to make our programs more flexible, and how to ensure that we are allocating the limited resources that we have in a way that is more responsive to local market conditions and to the hopes and desires of local communities.


Confronting the Challenge of Rising Operating Costs in Affordable Housing

One of the great challenges facing our country today is stagnant wages for most working families.  Median incomes today are almost identical to what they were in 2005.  According to the U.S. Census, median household income in Massachusetts in 2014 is just over $69,000 – the same as it was in 2004.  Even in Massachusetts, where the economy is better than many other places, wages are barely keeping up with inflation. Stagnant wages create many problems, but one of the lesser known impacts is how they negatively impact efforts to build and operate affordable housing. 

Virtually every affordable housing program in the United States restricts rents based on area median incomes, so when incomes stagnate, rents remain stagnant too.  With rental revenues flat, rising operating costs threaten the financial viability of many affordable housing developments – and make it harder to build new projects.  (Note: with rental vouchers, the government fills a portion of this gap with larger operating subsidies, but this simply means that fewer families can receive vouchers within a certain appropriation level).

For example, in the City of Boston operating costs have gone up so much over the past 15 years – relative to rent revenues – that the typical tax credit project in the City of Boston can support only $49,155 in debt compared to $117,825 in 2000.  This means each project needs nearly $70,000 more capital subsidy per unit – and, therefore, we create fewer units overall.   If this trend continues, we could see a day when Low Income Housing Tax Credit projects cannot support any debt whatsoever.

MACDC has been increasingly focused on this issue.  Recently, we hosted a peer learning session with the Massachusetts Housing Partnership to review their extensive data base of operating cost data.  The goal is to better understand which line items are driving costs up and how we might manage them. MACDC is also working with Boston LISC and others through the Mel King Institute for Community Building to offer more extensive support to our members in the area of asset management.  Currently, we are offering a seminar for CDC asset managers to help them more effectively take a “portfolio-wide” approach to managing their housing assets – and lowering operating costs.

In addition to these educational efforts, MACDC is taking specific action to address three key line items in every affordable housing operating budget.

Energy – Over a three-year period from 2012 through 2014, MACDC Members conducted energy retrofits on 3,600 rental units in their portfolios, with more units in the queue. CDCs are also tapping solar energy as a way to stabilize their energy costs for the long term.  MACDC is also working with colleagues such as LISC and New Ecology to advance reform of utility funded energy efficiency programs to make them work more effectively with affordable housing subsidies (and to make more dollars available for our sector).  And we are also working to advance solar energy legislation to lift solar net metering caps and promote more solar energy for lower income communities.

Insurance – MACDC has established a partnership with Chase & Lunt Insurance company to bulk purchase  property and casualty insurance with the goal of stabilizing premiums, while securing solid coverage. In 2016, we hope to grow the program significantly, so we can leverage more buying power in the marketplace and save more money for our members.  Over the long term, we must reverse the industry-wide practice of openly charging affordable housing projects higher premiums than comparable market rate projects.  We need to investigate this practice more deeply and then eliminate unfair (and maybe illegal) discrimination.

Property Taxes – While local assessors are supposed to account for rent restrictions when assessing affordable housing developments, we are hearing from our members and others that there is significant inconsistency with how this is done across the state and many affordable housing owners may be paying more than their fair share.  MACDC is seeking to learn more about this problem and help our members secure fair property assessments. We have recently partnered with the Lawyer’s Clearinghouse to obtain some professional guidance in shaping our strategy.

While we need to do everything we can to manage these operating costs, some increases are inevitable based on normal inflation.  Policy makers need to understand that affordable housing owners will need more subsidy – both capital dollars and operating subsidies – to build and maintain quality housing. 

Ultimately, of course, the best solution is to take concrete actions to begin lifting wages and salaries for working people, not so much because we want them to pay higher rents, but because we think all workers should earn enough to support their families, obtain a stable home and gain economic stability.