Monday, October 26, 2009

Affordable Housing and Corruption at City Hall, Part I

Dallas attorney and former city councilperson Don Hill was convicted last week on seven criminal counts related to the approval of affordable housing projects in the City of Dallas.
The whole episode has been a sordid one for the City of Dallas and, particularly, for the affordable housing industry. For two years after the investigation started, almost no significant affordable housing projects went forward, and it was only this year that the industry got back to normal. Brian Potashnik, who was probably the preeminent developer of affordable housing in Dallas pled guilty to bribing Don Hill, and is also likely to face a prison term.

The entire episode probably says a lot of unfortunate things about the City of Dallas, but I’m not going to generalize beyond the affordable housing industry, because that’s what I know. (If you want to understand something about the larger problem in the City of Dallas, then I’d suggest looking at Jim Schutze’s writings in the Dallas Observer over the past two weeks).

The big pot of money in affordable housing deals is 9% tax credits. The 9% tax credits are designed to pay about 75% of the cost of an affordable housing project. In return, the housing developer agrees to limits on the rents that can be charged on the units for a time period somewhere between 15 and 40 years. The amount of credits you get is determined mostly by your construction costs—you don’t get anything extra for land expenses.

As a practical matter (and I’ve blogged about this before), you can’t get the tax credits without the support of the community, both the neighborhood association (if there is one) and the elected political figures. There are also lots of hoops and a few tricks that you need to follow in designing the project, but after a while you learn how to comply with all the requirements.

If you want to make money building affordable housing (and thankfully I work at a nonprofit where that isn’t our main interest), then you need to find cheap land and you need to do lots of volume. By spending as little on land as possible, forming your own construction company and building virtually the same design many times, then you can maximize your efficiency and your profit.

Unfortunately, while that’s the most efficient way to build affordable housing, it’s also a recipe for corruption.

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