Affordable housing: funding via real estate transfer tax

Homeless shelter resident in a tent on the Capitol lawn last May. Photo by Devra Wagner

In the fall of 1987, as the veto session was ending, a coalition of activists gathered in a basement in Springfield. They would spend two days hammering out details on what they hoped would be Illinois' first state-funded affordable housing program. In the final days of this spring session the General Assembly endorsed the idea, but it was somewhat of a surprise to its House sponsor, Democrat Arthur L. Turner of Chicago's west side 18th District, who has worked with community groups on the housing issue for the past few years.

"This bill moved a lot faster than I thought it was going to," says Turner. "And, yet, I shouldn't be surprised when I look at the growing number of homeless people in this state. A number of us as legislators are starting to realize that this issue is not just limited to Chicago and some of the other major urban areas. We're finding that the homeless are people who have lost their jobs, lost their farms. Each legislative district has its problems. I think it's hit us all smack in the face." In fact, chief sponsor of the final proposal that passed was a downstater, Sen. Richard N. Luft (D-46, Pekin).

The Statewide Housing Action Coalition (SHAC) of Illinois worked to develop the initial concept for the housing proposal with staff from the National Housing Trust Fund Project. The final version was the result of two years of negotiations with Gov. Thompson's staff, the staff of the Illinois Housing Development Authority (IHDA) and the state Department of Commerce and Community Affairs (DCCA), and the legislative sponsors. This year, the proposal also got the indispensable political muscle of House Speaker Michael J. Madigan (D-30, Chicago) as part of the speaker's commitment to the legislative black caucus, which had put affordable housing at the top of its agenda. Madigan secured the backing of the Illinois Realtors Association by including renewal of the Realtor's Licensing Act in the bill.

Still awaiting action by Gov. James R.Thompson on August 25, the housing measure authorizes IHDA, with the assistance of a new advisory commission, to draw up a plan for addressing the housing needs of Illinoisans. It calls for the creation of an affordable housing trust fund, to be established by the state Department of Revenue and administered by IHDA. Revenue for that fund would be generated through an increase in the real estate transfer tax. Other provisions call for housing demonstration projects for seniors and veterans; an open lands program; and for IHDA to find ways to export tax increment financing (TIFs) from commercial and industrial developments to housing projects outside of TIF districts.

The 15-member commission, appointed by the governor and confirmed by the Senate, is to represent community housing programs, advocacy organizations and special needs populations, such as the elderly and the handicapped. Also represented are IHDA, DCCA, the Illinois Development Finance Authority and the Chicago Department of Housing. The most innovative part of the proposal is the trust fund. Supporters believe such funds provide a stable and flexible source of money for ongoing development of affordable housing. Housing trust funds are relatively new, according to Scott Chazdon, a senior research analyst for the National Conference of State Legislatures. All such state funds have been established in the last two or three years, and Chazdon says the federal government is looking for ways to encourage other states to create them. Congress is considering an omnibus housing bill which would establish the framework for a new, more comprehensive national housing policy. That measure, sponsored by U.S. Sens. Alan Cranston (D-Calif.) and Alfonse D'Amato (R-N.Y.), would delegate responsibility for developing housing proposals to the states.

Trust funds are used by 16 other states, but states use different revenue sources for them. According to a 1988 report by the National Association of Housing Development Offices, "New Money and New Methods," most state housing trust

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funds are financed through a combination of dedicated and appropriated revenues. The Illinois proposal provides the option for general fund appropriations to its fund. SHAC explored various alternatives for Illinois, including surplus reserve funds that IHDA generates from bond financing, tenant security deposits and real estate escrow accounts. Legislative sponsors also considered dedicating revenue from a new sales tax on computer software. But Larry Pusateri of SHAC says the tax on the sale of housing seemed the most logical source.

Under the proposal as passed, the real estate transfer would double, to 50 cents from the current 25 cents on each $500. For example, sellers of a $50,000 home would have to pay the state $50 rather than $25. The increase would raise about $13 million a year, and those dollars could be used to generate private investment in low-income housing through targetted low-interest loans. That $13 million, according to the Woodstock Institute, a Chicago-based national finance research organization, could stimulate an additional $75 million in investments. Peter Lennon, IHDA assistant director, is more cautious: A lot depends on how the money is used, but he says those trust fund dollars could generate as much as $30 million in additional private money. Used wisely, Lennon says, $11 million can generate about 1,000 new low-income housing units. Given that estimate, as many as 3,000 new low-income housing units are possible.

That would be a significant jump in the housing starts IHDA has been able to broker in recent years. According to Lennon, IHDA, which operates as a financing agent for tax-exempt bonds and low-interest loans, has packaged public/private partnership projects that have generated about 3,000 low-income housing units over the past three years. Lennon says the additional $13 million doesn't solve Illinois' housing problems. "The need," he says, "is so enormous, we could use tens, if not hundreds of thousands of dollars." But Lennon believes the affordable housing program would be a step in the right direction.

Statistics on what housing activists call the "affordability gap" are alarming. Like residents of other states, many Illinoisans are stymied by the price and availability of housing. According to figures provided by the Woodstock Institute and SHAC, there were over 430,000 households in Illinois in 1985 at or below 50 percent of the median income for the state. Such families are defined as very-low-income by federal government standards. For a family of four that means a salary of $19,800 in Chicago, $10,000 in some communities downstate and up to $23,250 in the collar counties. Only 154,000 housing units in Illinois were affordable to such families in 1985. "Affordable," by federal standards, means the family pays 30

Because City Lands can utilize public subsidies, it can afford to take risks in rehabilitating the worst housing in the neighborhood. That initial investment attracts other investors, who may develop a mix of low-moderate- and high income housing, serving to regenerate an entire community

percent of its income for housing.

To measure the affordability gap, SHAC subtracts available income for housing, using the 30 percent peg, from the owner's cost of purchasing and maintaining housing. The Voice of the People, a Chicago nonprofit housing development organization, figures the owner of a heated two- or three-bedroom apartment will have to charge a tenant $475 a month to break even. (Researchers estimate the original investment in each unit of a multi-family building comes to $225 a month, assuming a $30,000 loan for that portion of the building at 8 percent for 29 years. The owner will spend another $250 a month in operating costs, including taxes, insurance, utilities and maintenance.) A renter with a $15,000 annual salary or $1,200 per month has $375 available for housing, but if housing costs at $475 a month, then that individual has a $100 affordability gap.

That same person would have a hard time finding housing to fit the family's budget. The state's stock of low- and moderate-income rental housing has been in short supply and is threatened. Older, and generally cheaper, housing units are disappearing as urban neighborhoods go upscale. Thousands of privately owned apartments, which have been subsidized by federal funds, could be rented at market rates in the near future under loan agreements which allow owners to prepay their 40-year mortgages after 20 years. At the same time federal subsidy programs are disappearing, and the development of new projects is financially risky, In "Financing Affordable Housing: The Evolving State Role," written for the January/February 1989 Fiscal Letter of the National Conference of State Legislatures, Chazdon points out that "between 1980 and 1986, federal assistance for construction of low-income housing was slashed by 70 percent." Also, 1986 changes in the federal tax code made low-income housing investments less attractive to private developers and limited the states' ability to issue tax-exempt bonds. As a result, new and rehabilitated housing is not keeping pace with the loss of older units.

More Illinoisans are feeling the housing squeeze. At the bottom end, more than 45,000 of this state's citizens have no home at all. About 40 percent of them are families with children. Single-parent families are at greatest risk of being poor and of having housing problems. But the elderly, whose numbers are increasing, are also vulnerable when a range of affordable housing is in short supply. The plight of so many has forced the states to consider the political and economic implications of intervention when the private market seems unable to meet agreed-upon public needs. In his article on the states' role in housing, Chazdon writes that policymakers are beginning to view housing programs as an investment in the broader goal of economic development, especially where it intersects with social policy.

Sara Lindholm, president of City Lands Corp., views low-income

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housing development from that perspective. A for-profit housing development corporation affiliated with South Shore Bank in Chicago, City Lands has developed 1,400 units of low-income housing in the South Shore and Austin neighborhoods of Chicago over the last 10 years. Lindholm says her organization serves as a lightning rod in those communities. Because City Lands can utilize public subsidies, it can afford to take risks in rehabilitating the worst housing in a neighborhood. That initial investment attracts other investors, who may develop a mix of low-, moderate- and high-income housing, serving to regenerate an entire community. Lindholm says she supported the affordable housing bill in Illinois, with its emphasis on low-income housing, because, "It's a formula that works." Rep. Toner agrees: "You build a house, the next thing you know you've got schools, you've got stores, shopping centers, and, through all that, additional jobs are created, additional revenues and tax monies are generated." Rep. Turner's district includes Lawndale, one of the poorest communities in the state outside of East St. Louis.

SHAC's Pusateri likes to talk about DuPage County's need for affordable housing. One of the richest counties in the state, DuPage has a shortage of on-site low-wage workers and faces each day the problems of transportation gridlock as commuters drive in and out of the collar counties and Chicago. Pusateri says the problem would be eased if more workers could afford to live in the communities that ring Chicago. Indeed, a number of business groups supported the affordable housing bill, believing that it makes economic sense.

Gov. Thompson, the state's biggest economic development booster, has been putting out a few cautionary flags. Throughout this spring's legislative session, he supported the concept of a state housing program financed through an increase in the real estate transfer tax. This summer, however, Thompson surprised housing activists by vetoing $5 million in general revenue which had been appropriated by the legislature to start up the trust fund. At the same time Thompson raised the issue of housing needs for moderate-income people. "I happen to believe," Thompson said when asked in July whether he planned to sign the affordable housing bill, "that Illinois should be active in promoting an increase in the stock of affordable housing in this state at all levels of income." Thompson explained that it would be poor public policy to ignore the housing needs of moderate-income professional people: "If housing for young people in professional services, a rapidly expanding part of the economic base, is way out of line in New York City, perhaps Chicago will have a chance to capture that market if we have a better housing policy." The affordable housing bill makes some provision for moderate-income housing if the legislature wants to appropriate additional funds for that purpose. But Barbara Shaw of the Center for Neighborhood Technology, the chief lobbyist on the affordable housing bill for SHAC, stresses the need is greatest in the low-income community. That community is the hardest to serve, she says, because low-income housing is the riskiest housing pool to develop.

Some cautionary points have also been raised on that front. Robert Ellickson of Yale Law School specializes in affordable housing. He argues that dedicated funding sources serve to insulate housing policy from the give-and-take of the political process. Further, he's a critic of supply-side funding. Ellickson says there are three options for solving the problem of affordable housing: subsidizing the developers of housing projects; giving low-income people housing vouchers; and giving those individuals unrestricted welfare checks. "The advantage of the last two options," he says, "is that they are more likely to benefit low-income people, rather than the developers." He believes such a policy may mean more housing for less money. According to Ellickson, income redistribution would affect housing demand, and the problem of housing supply would, in turn, correct itself. This conservative "invisible hand" approach to the housing market is getting a lot of discussion on the national level. Two articles on the scandal-ridden U.S. Department of Housing and Urban Development in the August 21, 1989, issue of The New Republic focused on the cost and placement of government-subsidized low-income housing. "By supplying housing itself," the editors write, "rather than the means to buy housing — and by usually insisting on doing this through 'incentives' to 'the private sector' — the government wastes money, creates slums, enriches a few business people, and invites corruption."

Surprisingly, developers themselves raise a few concerns about the proposed Illinois housing program. Their concerns center on the political pressures that grass-roots groups could exert on the new Affordable Housing Advisory Commission when it comes time to make decisions about how and where to spend trust fund dollars. Community groups, this argument goes, might be more disposed to meet immediate needs at the expense of long-term gains by committing funds to neighborhoods where there has already been massive disinvestment, and where there would be little inclination on the part of private developers to re-invest in housing stock. On the other hand, Shaw worries that IHDA and the housing commission might not devote sufficient resources to the creation of not-for-profit and community-based housing development programs in down-state communities where they don't now exist. Most supporters hope that the ultimate criteria for distribution of the funds will be getting the most bang for the public buck and preventing the creation of a mini-HUD with all of its massive problems.

A number of last-minute changes were made in the bill, and some could argue that the measure got too loaded up with side issues. Administration of the housing program, for instance, was moved to IHDA from DCCA, a shift supported by Gov. Thompson's staff. The Open Lands section of the bill, which promotes the set-aside of recreation space in developed areas, was added to attract more support from downstate and suburban lawmakers. And realtors got renewal of their licensing.

But many can agree with Sara Lindholm of City Lands, who says that whatever faults the proposal might have in its details, the affordable housing bill establishes for the first time the principle that the state has responsibility for helping to house its citizens. "That," she says, "is a great victory."□

Peggy Boyer is Statehouse bureau chief for Sangamon State University's WSSU-FM, the anchor station of the Illinois Public Radio Network.

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