Paul L. Caron

Friday, May 24, 2024

Weekly SSRN Tax Article Review And Roundup: Layser Reviews Cowing's Equity And Ownership In Affordable Housing

This week, Michelle Layser (San Diego; Google Scholar) reviews Adam Cowing (UC-Irvine), Equity and Ownership in Affordable Housing, 2024 U. Ill. L. Rev. 399.


In the U.S., homeownership is often essential for wealth building. For middle-income households, “home equity is the largest single financial asset,” and it accounts for 50-70% of net wealth. In 2022, the wealth gap between homeowners and renters reached a historic high, as the median wealth of homeowners rose to $85,000 and the median wealth of renters remained stable at $950. Tax-based homeownership subsidies are common (the mortgage interest deduction is one, and the exclusion of imputed rent is another), but none aim to make home ownership attainable for low-income families. Instead, tax subsidies like the Low-Income Housing Tax (LIHTC) credit (and proposed renters’ tax credits) have focused on providing affordable rental housing. Nevertheless, a new article by Professor Adam Cowing argues that the LIHTC has untapped potential to transform low-income tenants into homeowners.

The article begins with a history of homeownership assistance programs and an overview of nongovernmental models like community land trusts, housing cooperatives, and other shared equity arrangements. Then, Cowing turns to the LIHTC program. The LIHTC is a tax credit used to finance development of affordable rental housing. Scholars do not usually consider it a homeownership subsidy. However, Cowing argues that homeownership was an early goal of the program, and several features of the law reflect this objective. For example, the statute confirms that a right of first refusal held by tenants will not threaten tax credit eligibility. The statute also requires that states include “projects intended for eventual tenant ownership” among the criteria they use to allocate the tax credits to developers through a competitive process. Thirty-six states have implemented that requirement by providing points to projects intended for future ownership by tenants. In other words, the LIHTC is not only designed to subsidize rental housing, but also to create opportunities to transfer equity to low-income tenants.

But the LIHTC is rarely used for that purpose. In the next part of the article, Cowing explores the reasons why. They are about what you would expect. Financing is a big one. Low-income renters don’t have much savings, and small down payments necessitate larger mortgages—but tenants may lack access to traditional financing, or they may struggle to afford their loan payments. And even if the financing piece can be solved, Cowing notes that there are other legal and practical challenges related to the complexity of LIHTC deals. LIHTC deals require specialized legal assistance, and low-income tenants may not have access to lawyers. Many aspects of the legal arrangement, including “purchase rights, debt structures, and operations during the compliance period” can impact the purchase price, but those details are set at early stages of the project—before tenants are involved. 

These obstacles are significant, but Cowing has identified one place where the LIHTC program has nevertheless been used to finance “a critical mass” of affordable housing sold to low-income tenants: Cleveland. The context is niche, but very cool. A Cleveland-based, nonprofit affordable housing developer called CHN Housing Partners (CHN) operates a lease purchase program in which it develops LIHTC-financed single family homes for the purpose of transferring them to tenants after the statutory compliance period. CHN sells the homes to the low-income tenants for $20,000-25,000, with a $1,200 down payment and a mortgage financed through its own loan fund. CHN employs an “equivalency principle” to ensure that tenants’ mortgage payments are the same as their previous rent payments, helping to keep the payments affordable.

According to Cowing, the “Cleveland model reflects the reality that eventual tenant ownership or equity-building models likely need a sponsor to navigate the LIHTC program, maintain relationships in the affordable housing industry, and guide tenants along a path to ownership.” Cowing notes that, in Cleveland, the nonprofit sponsor not only capitalized a loan fund to extend mortgages to low-income tenants, but it also lobbied the state for a set-aside of tax credits for projects earmarked for eventual sale to tenants. (Interestingly, Cowing’s research on states’ LIHTC allocation procedures showed that only Ohio and Utah had set aside credits for projects that would be sold to tenants—and the most recent Ohio legislation has apparently eliminated that set-aside).

Cowing admits that the Cleveland model may not be easily transferred to other, more expensive cities with higher density. It’s also unclear how many nonprofit developers would be able to “capitalize a loan fund or serve as a mortgage lender.” But there are things that could be done to make it easier to expand the Cleveland model. Cowing suggests several reforms, including reforms to state allocation procedures to prioritize projects that contemplate transfers to tenants, clarification of rules related to purchase rights, and larger tax credits for projects intended for tenant ownership.

I love the idea—but I’m not sure how much these changes would move the needle. My sense is that the LIHTC is not used to finance housing for sale to tenants because it is not specifically designed for that purpose, and the existing incentives that Cowing identifies are simply too weak and attenuated. (Removing barriers to selling housing to tenants is hardly the same as providing a strong incentive to do so.) Cowing’s recommendations would strengthen the incentives, but it may make more sense to address the problem of low-income homeownership directly. State and federal governments could implement the Cleveland model by developing public housing and selling it to tenants with the help of public loans that embrace the equivalency principle. There would be steep political barriers to implementing such a program, but doing so would fill an important gap in the current housing policy landscape. 

This Article offered a fresh perspective on the role of the LIHTC in housing policy, and I recommend it to anyone interested in tax credit financing, tax expenditures, wealth and income inequality, or affordable housing.

Here’s the rest of this week’s roundup:

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