Outline of the Policy Framework

Housing partnerships are seeking to be more actively engaged in shaping federal housing policy so that it reflects and builds upon their successful experience. Some belong to housing policy groups in Washington, but they may not feel that the established trade associations adequately represent their entrepreneurial and regional approaches. Although they have some goals in common with many in the for-profit development industry, the social mission of regional nonprofits promotes a distinct policy agenda. Furthermore, their regional perspective and business orientation differ in some important ways from the traditional, neighborhood-based nonprofit sector.

Our members have identified policy and funding priorities that would enable them to substantially expand their impact. This policy framework offers a new paradigm for expanding the role of high-capacity nonprofits in the production and preservation of affordable housing. It is a rough outline that needs further refinement, but it presents a vision of how to foster a dynamic, self-sustaining, and entrepreneurial nonprofit sector.

Working Capital and Retained Earnings

Housing partnerships need sources of working capital for the acquisition, production, and preservation of multifamily rental and homeownership projects, and for the internal business expansion of existing and new product lines. For-profit real estate companies use net earnings and private equity to finance business expansion and the early, higher-risk stage of housing development. There are misconceptions among many policymakers and funders that nonprofits should not earn net income, and must instead rely on philanthropic and public support to maintain their organizations. To the contrary, housing partnerships need reliable cash flow from projects they develop and sponsor in order to finance property acquisitions, to fund new developments, to pay for asset management, and to provide resident services.

There are a number of potential sources of this capital that should be explored. National foundations could sponsor a grant and loan program modeled after NCDI and Living Cities that provides working capital and equity for mature nonprofit organizations. HUD, state housing finance agencies, and private lenders could enable nonprofits with strong records of performance to borrow against project operating reserves for predevelopment and short-term acquisition loans. Restrictions could be lifted on many government-sponsored programs that prohibit nonprofits from receiving cash flow and earning fees, as long as the proceeds are reinvested to pursue an organization's community development mission.

Flexible Sources of Equity for Development

New federal funds for production or preservation should be made available as grants to nonprofits, thereby enabling them to expand their productivity, reduce the transaction costs that consume scarce resources, and build long-term net worth. Wherever possible, restrictions should be removed from current programs that limit the nonprofit sponsor's ability to access equity built up over time within housing projects that could be used to finance new acquisition and development, or the renovation of existing projects.

Additional funding is critically needed to support very-low-income and mixed-income housing production. A new production program should have as one of its explicit goals the creation of capable and financially strong nonprofit housing organizations that are self-sustaining, without the need for continuing government subsidies for their operation. The most efficient way to accomplish this goal is through a capital grant program that increases the net worth of organizations, and allows them in time to access their own credit facilities and operate successfully in the marketplace. As long as nonprofit developers uphold long-term affordability use agreements, they should be able to borrow against the equity in these projects to finance new development, thereby leveraging additional production.

Tax Policies to Promote Preservation and Production

Tax incentives can also be an effective method of preserving existing affordable housing and providing equity for new production. The Network strongly supports legislation that provides tax incentives for the preservation of multifamily housing and the production of affordable single-family homes. Both of these initiatives will require the aggressive advocacy of the nonprofit sector to ensure that the resources are targeted to achieve the maximum community development impact.

Exit tax relief should be provided to owners of rental housing developments that sell their properties to "preservation entities" — particularly nonprofit housing organizations. A preservation tax incentive would encourage owners who want to sell but face a heavy tax penalty on their non-cash gain (caused primarily by depreciation deductions) to transfer the properties to qualified buyers that will rehabilitate and maintain the housing as affordable, well-managed communities. A homeownership tax credit would provide incentives to investors to provide equity to lower the cost of homes built or rehabilitated for lower-income homebuyers. The public capital subsidies for these programs are limited, and the tax credit could generate valuable new resources to expand production.

Strengthening of the Community Reinvestment Act

The Community Reinvestment Act of 1977 has enabled housing partnerships to access credit, investment, and services from banks to promote affordable housing and community development. CRA has encouraged the public/private collaboration that is the very foundation of the housing partnership model, and, in some cases, has stimulated the local private-sector leadership that forged the housing partnership institutions.

The Financial Services Modernization Act of 1999 changed the landscape within which CRA operates. The creation of big conglomerate financial institutions, the emergence of nontraditional banks that operate without branch networks, and the greater use of technology to screen and underwrite credit access pose enormous challenges to how low-income and moderate-income consumers — and the housing partnerships that serve them — get access to credit.

CRA is at a crossroads. Whereas some members of Congress have sought to weaken or eliminate the law, the challenge of the community development industry is to expand its provisions to apply to all parts of the new financial holding companies authorized by the Financial Services Modernization Act. Housing partnerships must be actively engaged in this debate. They have been among the chief organizational beneficiaries of CRA and therefore need to articulate its impact. Their efforts to forge business relationships — directly and through the Housing Partnership Network — with larger financial conglomerates and insurance companies would be greatly facilitated by broadening the coverage of CRA.

Metropolitan Housing and Development Strategies

Most housing policy and funding initiatives are neighborhood-focused and targeted to community-based housing organizations. However, many of our critical housing and community development challenges require a regional or metropolitan approach. Smart-growth development strategies, moving to opportunity mobility and voucher programs, welfare-to-work employment linkages, large-scale multifamily preservation efforts, and homeownership development and counseling are often most effectively addressed on a regional basis with organizations that can structure broad partnerships across the housing, employment, and service sectors.

Incentives for federal block grant housing programs, and any newly authorized production program, should be provided for states and local jurisdictions to fund nonprofit organizations that develop housing or sponsor programs on a metropolitan basis. Regional nonprofit housing organizations should be eligible and should be encouraged to administer housing subsidy and welfare-to-work programs, and undertake new comprehensive initiatives that link housing, employment, and community services.