Exposing corruption in the affordable housing industry

By Deborah Goonan, Independent American Communities

Do governments and private individuals spend affordable housing taxpayer dollars wisely? Critics say the industry is plagued by fraud and corruption.

What exactly is “affordable housing?”

How many times have you heard the industry claim that it’s essential to build condominiums in order to provide more affordable housing?

Condo or apartment building

Multiple meanings

It depends on who is promoting affordability.

Real estate agents and developers often sell home buyers on the concept that condos are “affordable” in comparison to single family homes. Why? Simply because the sale price for a condo unit is lower than the sale price of a detached home on its own plot of land.

But the home buyer will rarely be told the truth. The cost per square foot in a small condo often exceeds the cost per square foot of a single family home.

And, don’t forget to add up the high cost of condo assessments. Condo fees can substantially increase monthly cost of living, when compared to lower assessments in a planned community. Bonus: if you choose to buy a home without HOA governance, you’ll pay no HOA fees at all.

In some real estate markets, a modestly sized detached home can be just as affordable to own as a condo (if not more affordable), despite the higher purchase price of the single family home.

However, when city planners work with developers and nonprofit organizations to promote “affordable housing,” they’re often talking about housing that is subsidized in some way by tax dollars.

Among the common sources of funding for affordable housing are two federally funded programs: the Low Income Housing Tax Credit (LIHTC) and the Housing Choice Voucher (HCV).


Low Income Housing Tax Credits

The LIHTC provides tax credits to developers, who then sell these tax credits to private investors through middlemen called syndicators. Developers use the money from the sale of tax credits to build or redevelop rental properties, where a small number of new apartments will rent at below-market rates for a period of 10 to 30 years.

Through LIHTC, investors gain tax advantages, while developers partially offset their construction costs for new apartment housing. Local and state governments reduce the need public housing for their low-income residents. For the stakeholders, it’s a win-win situation.

However, benefits to housing consumers – and taxpayers at large – are far more limited.

Because private developers are usually in business to make a healthy profit, most new apartments they build will not qualify as affordable housing. In other words, apartment owners will collect whatever rent the market will bear.

A few of the many tenants who apply for affordable housing will be offered one of a handful of smaller apartments at a rent payment that is capped at 30% of their monthly income.

The much higher rent collected by market rate apartments makes up for the owner-landlord’s “loss” on the affordable housing units.

One of the criticisms of the LIHTC program is that a relatively small percentage of federal tax credits are set aside for non-profit developers serving the lowest income households.

Condo apartmentInterior 3
Condo/ Apartment interior (morguefile.com free image)

Housing Choice Vouchers

An even smaller number of low to moderate income tenants will apply for vouchers (through the HCV program).

A housing voucher — commonly known as “Section 8” rent voucher – pays the landlord the difference between what a tenant can afford (no more than 30% of household income) and the current market rate.

For example, if the market rent is $1250 per month, but the tenant’s income only supports a maximum rent of $850 per month, a housing voucher will pay the landlord $400 each month to make up the difference.

Other affordable housing programs

States and cities have taxpayer-funded affordable housing programs, too. Sometimes the funds are used to build affordable housing for sale, rather than rent. Usually, that takes the form of condominiums, which could be stacked like apartments, attached townhouses, or even small detached homes on commonly owned land (site condominiums).

For example, East King County, Washington provides taxpayer-funded incentives to developers through its ARCH program (A Regional Coalition for Housing). According to its website, ARCH has served more than 3,250 people since the mid-1990s.

Homebuyers apply to ARCH, and, if they qualify, they can purchase a condo for a price that is well below current market value. As a condition of purchase, however, the buyer must agree to live in the condo as a primary resident.

According to the details of the ARCH program, a condo buyer must meet income limitations at the time of purchase, but can retain ownership of the home for the remainder of the contract (typically 30 years), regardless of any increases in the owner’s income.

The catch is, when the owner resells the condo, its price is usually capped well below the market value at the time of resale. Thus, theoretically, a future buyer also has opportunity of purchasing an “affordable” home in a condo association.

For Rent sign
For Rent sign (Pixabay.com free image)

What could go wrong?

Affordable housing programs vary considerably by state and regional markets. But many of them are based on some sort of artificially manipulated real estate market though taxpayer-funded, government-enacted housing policy.

In theory, affordable housing programs might appear to be serving a noble cause. But, in practice, opportunists often find ways to scheme and scam the system.

East King County’s ARCH program providing rental income to affordable condo owners

For example, a King 5 news investigation uncovers the fact that owners of three out of nine affordable units in McKee Condominiums do not reside in their condos, in violation of contracts they signed at the time of purchase.

Furthermore, the non-resident owners are well-to-do, and don’t really need the extra savings provided by affordable housing.

But, remember, as noted above, the ARCH program only requires income qualifications at the time of purchase. After that, household size can be reduced and income can be increased, yet the condo owner will not be expected to sell or move out of McKee Condominiums.

Even with the cap on resale price, that can be a sweet deal for a home buyer.

The problem is, one-third of the affordable condo units at McKee are not owner-occupied. The unit owners collect rent from tenants and live elsewhere.

And although this violation had been reported to ARCH by the condo board of McKee, no one at ARCH bothered to hold condo owners to their agreements until after Chris Ingalls of King 5 shed light on the issue.

Owner of Bellevue affordable housing unit forced to sell after years of rule violations

The former owner of a Bellevue condo purchased it through a taxpayer-funded affordable housing program and then moved to California, violating the provisions of an agreement while she rented it out.

Author: Chris Ingalls
Published: 2:03 PM PDT October 30, 2018
Updated: 2:11 PM PDT October 30, 2018
Sandy Yin was the longtime owner of a condominium in Bellevue purchased through a taxpayer-funded affordable housing program.

According to the terms of the contract she signed in 2005, Yin was required to make the condo “her personal residence and not a rental.”

But since 2012 Yin has faced complaints filed by the McKee Condominium homeowner’s association that she violated the provisions of that affordable housing agreement by renting out her unit.

Read more (video):


Money $100 bills
Image courtesy of https://quincemedia.com (3D illustration by Quince Media)
Missouri Senator McCaskill’s husband reportedly making a fortune syndicating LIHTCs

Back to the issue of Low Income Housing Tax Credits, some recent investigations in Missouri have uncovered a complex, non-transparent scheme that allows tax credit syndicators to reap unlimited profits arranging deals between buyers and sellers.

According to the following article in the Free Beacon, and another article in the Kansas City Star, Businesses linked to McCaskill’s husband get $131 million in federal dollars, Senator Claire McCaskill’s huband, Joseph Shepard, made at least $11 million dollars “flipping” tax credits in the past eleven years.

The exact amount of money involved is unknown, due to the reported lack of transparency in the operation and record keeping of Shepard’s companies and foundations.

The Free Beacon article notes that the GAO has called for increased oversight of the LIHTC propgram. And a Missouri auditor recently determined that only 42 cents of every LIHTC dollar ultimately helps create affordable housing. Ultimately, most taxpayer dollars go to syndicators like Shepard.

Not surprisingly, some tax and policy experts are highly critical of the program. For example, the Cato Institute has called for an end to the inefficient, supply-side LIHTC program.

McCaskill’s Husband Makes Millions Flipping Government Tax Credits
Husband used government program for poor to build own fortune

BY: Brent Scher
October 5, 2018 4:59 am

Since Claire McCaskill joined the Senate, her husband Joseph Shepard has made at least $11 million through a business that buys up tax credits awarded to Missouri affordable housing developers and sells them to high-income entities seeking tax relief.

Shepard’s company, the Missouri Tax Credit Fund, operates within the Low-Income Housing Tax Credit (LIHTC), a $9 billion a year federal program that awards tax credits to developers building qualified affordable housing projects. The LIHTC program is designed for developers in need of cash to attract investors for projects by offering them tax credits.

Analysis by policy institutions and government investigators, however, has found the LIHTC program to be inefficient, with much of the money—intended for affordable housing—ending up in the pockets of middlemen syndicators who connect developers with investors, earning lofty fees from both sides.

Shepard plays the lucrative role of syndicator and has made millions off the government program.

The Future of the Low-Income Housing Tax Credit
The LIHTC program has come under increased scrutiny in recent years due to findings such as the one reached by the Missouri State Auditor, which found that only 42 cents of each credit dollar awarded actually goes to low-income housing projects, with much of the remainder ending up in the hands of middlemen syndicators like Shepard.

The St. Louis Post-Dispatch reported in 2014 that a major obstacle to changing the program is the political clout of syndicators such as Shepard, who declined to be interviewed for the story. Shepard purchased more tax credits than any other syndicator in the state that year, the paper wrote.

Experts on the tax credits such as Cato’s Edwards have advocated for ending the “costly, complex, and corruption-prone” program, arguing that a demand-side system where housing vouchers are given to those in need of affordable housing would be more effective.

“The supply-side approach is very inefficient, and a lot of money ends up disappearing with the middle-men,” Edwards said. “The great irony of this program is it’s intended to help the needy, but it seems to be benefiting the top one percent.”

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