Subject
title
Housing Strategies Work Session: Subsidy
end
Department
Housing and Community Development
Recommendation
Staff recommends that the Mayor and Council receive the presentation, discuss, and provide direction on their priorities for strategies related to providing housing subsidies.
The following feedback is requested from the Mayor and Council to guide next steps:
• Do you agree that the Department of Housing and Community Development (HCD) should focus on the strategies identified in this work session?
• Are there any strategies in particular that should be prioritized above others?
Discussion
Purpose
The purpose of this work session is to provide the Mayor and Council with an overview of strategies, policies, and programs that the city can pursue to provide subsidies to support housing affordability and assistance and for staff to receive direction for their work. This is the second of three housing work sessions focusing on supply, subsidy, and stability strategies.
Housing Subsidy Background
Due to the current housing supply shortage, many moderate-income earners who would otherwise be able to afford market-rate housing have been squeezed out. Nevertheless, even in a well-functioning housing market, low-income households would still be expected to need some sort of assistance in order to afford healthy, well-located housing that meets their needs. For example, a recent Urban Institute study found that for the lowest-income renters, regions with low housing construction but more public housing subsidies had less housing cost burden than regions with high housing construction and fewer subsidies. For this reason, housing subsidy policies tend to be targeted towards low- and moderate-income households, who disproportionately identify with historically excluded populations.
The type of affordable housing that low- and many moderate-income households need cannot be built or bought without some sort of subsidy to make up the difference between the market-rate costs and the lower, “affordable” price. The primary reason for this is that the amount of debt available to finance an affordable project is reduced due to the lower projected cash flow and, for the same reason, the return on investment is unattractive to equity investors. Thus, subsidies are needed from public or philanthropic partners to make an affordable project feasible.
Rockville’s current affordable housing subsidy landscape includes the city’s housing trust fund, the Housing Opportunity Fund (HOF), as well as homeownership assistance programs. Rockville’s HOF has been used to support Rockville Housing Enterprise’s (RHE’s) acquisition of Scarborough Square, but it does not currently have funding to support new projects. Additionally, RHE operates Rockville’s housing voucher program.
Unlike housing supply, which is primarily within the control of local governments due to their zoning authority, Rockville will not be able to reach the levels of housing subsidy needed to adequately provide for all households who cannot afford market-rate prices. State and especially federal intervention are required, as well.
Recommended Strategies for Subsidizing the Development and Preservation of Affordable Housing
1. Offer payments-in-lieu-of-taxes (PILOTs).
A PILOT is a property tax abatement. Montgomery County offers three types of PILOTs, two of which are given in exchange for affordable housing and one of which incentivizes market-rate housing construction:
1) the Standard PILOT in exchange for providing affordable housing units to low-income residents, which is negotiated on a case-by-case basis;
2) the by-right PILOT, which abates all county property taxes for at least 15 years for a rental property owned or controlled by a non-profit if at least 50% of the units are leased to households with incomes no greater than 60% of the AMI; and
3) the WMATA PILOT, which provides a 15-year county property tax abatement for high-rise construction on WMATA-owned property with at least 25% of units set aside as moderately priced dwelling units.
Historically, properties in Rockville can qualify for a county PILOT, but the application of a city PILOT is not guaranteed. A guaranteed city PILOT for certain types of affordable housing development would make affordable housing development more attractive and competitive within the city. Should the Mayor and Council agree to pursue this strategy, staff would need to dive deeper into the question of how a PILOT would be created and administered, given that Montgomery County does the city’s tax billing.
2. Establish stable, dedicated sources of funding for the Housing Opportunities Fund (HOF).
Most mid and large-sized cities use an affordable housing trust fund as the main mechanism for supporting the construction, rehabilitation, and preservation of affordable housing. The following strategy (#3) speaks more to the kinds of initiatives the HOF might be able to support, if funded.
Staff intends to conduct a deep dive into comparable jurisdictions’ housing trust funds and the various methods of how they are funded. Stable sources of dedicated funding could come from sources that align with other land use and/or housing affordability goals, such as levying a fee on “flipped” homes (homes that are torn down and rebuilt), higher fees on short-term rental licenses, offering a stronger fee-in-lieu option for moderately priced dwelling units, exploring opportunities with recordation taxes, and/or by establishing a tax shift wherein property would be tax based on the value of the land itself rather than the structures built on it. All of these strategies would require further research into their costs versus benefits, implementation, and efficacy.
3. Develop a HOF deployment strategy.
Housing trust funds can be used in a variety of ways. The most common is to provide zero- and/or low-interest loans for land/housing acquisition, rehabilitation, and development. This type of financing would not be expected to completely fund an affordable housing project but would be one of many sources attempting to fill the funding “gap” that is created when building a project that will not charge market rates.
Other uses of HOF funds could include establishing a housing product fund, similar to Montgomery County’s, which leverages a small amount of public funding through bond issuances to create a revolving affordable housing construction fund; or creating a low-income accessory dwelling unit financing program where homeowners would receive support in return for renting either to voucher recipients or at a significantly reduced rental rate. Staff would also explore other capital and operational subsidy opportunities, such would be informed by a Housing Needs Assessment, as recommended in the housing supply strategies work sessions.
4. Explore ways to bring down construction costs.
This recommendation, and others related to it, was also included in the housing supply work session. Namely, establishing a requirement for affordable housing to be considered on public land would help to bring down construction costs since the land itself would act as a subsidy, as well as allowing for housing as a use on land zoned for religious and private educational uses. Land typically represents around a quarter of total development costs. Another way to bring down construction costs is to examine broader financial incentives, as well as consider reductions to certain fees or exemptions from certain tests that add to the cost of affordable housing development, such as those required by the county’s and city’s adequate public facilities ordinances.
Recommended Strategies for Directly Subsidizing Households’ Housing Costs
1. Update the city’s homeownership assistance program.
The Real Estate Effort for Affordable Community Housing (REACH) program is designed to assist first-time homebuyers at 100% of the area median income who live or work in Rockville with down payment and closing cost assistance. Since the third-party administrator of the REACH program no longer wishes to administer the program, staff are currently investigating the capacity to bring the program in-house and combine its administration with the city employee homeownership program previously funded by the Mayor and Council, but that has not yet been designed and implemented.
As a part of that effort, there is an opportunity to redesign the program from the ground-up in a way that is consistent with national best practices, research, and the city’s contemporary priorities. Staff has worked with the University of Maryland, College Park’s School of Public Policy to identify a graduate student who will be undertaking this issue as their capstone project, which will be completed in the spring of 2025.
2. Provide additional assistance to renters via the Rockville Emergency Assistance Program (REAP).
Rockville provides emergency housing stability assistance to renters through the REAP and Bridge programs. REAP primarily prevents eviction or utility shut-offs and the Bridge program assists households suffering from a short-term financial crisis. Staff are currently in the process of redesigning the programs to address deficiencies, improve client experience, strengthen relationships with external partners, and better collect data for ongoing program evaluation. Right now, HCD has additional resources from the pandemic era and plans to responsibly draw down funds to meet the anticipated needs of residents. After implementing the changes and seeing their effects, staff will be able to assess and recommend any funding or programmatic changes that would need the Mayor and Council's approval.
Recommended Strategies for Partnerships to Leverage External Resources
1. Build relationships with federal, state, and county housing partners and leverage potential funding sources.
Rockville will not be able to fund all the affordable housing production, preservation, and rehabilitation projects that are needed on its own. Staff will engage with partners at all levels of government to better understand the opportunities that currently exist. Examples include the Community Development Block Grant, Montgomery County Green Bank, Montgomery County’s Housing Initiative Fund, Low Income Housing Tax Credit, and the U.S. Department of Housing and Urban Development’s Healthy Homes Program.
2. Convene local financial institutions and affordable housing developers to explore needs and financing strategies.
By intentionally reaching out to financial institutions, including community development financial institutions, and affordable housing developers, staff can better understand their needs and collaborate on creative financing strategies. This strategy would be ongoing as financial markets frequently change so that the city can keep pace with what is needed to deliver affordable housing projects. This strategy can also be explicitly incorporated into a Housing Needs Assessment, recommended in the housing supply strategies work sessions.
Mayor and Council History
Housing was selected as one of the Mayor and Council’s three priority areas. On June 3, 2024, a high-level briefing <https://rockvillemd.gov/AgendaCenter/ViewFile/Agenda/_06032024-7207> was presented outlining the city's housing crisis and policy landscape. On September 16, 2024, a work session <https://rockvillemd.gov/AgendaCenter/ViewFile/Agenda/_09162024-7279> discussed strategies to increase housing supply.
Next Steps
Based on feedback from the Mayor and Council, staff will finalize ordinances and develop program proposals for approval. On November 18, 2024, the Mayor and Council is scheduled to have a similar work session on housing stability strategies.