New Data Highlights Local Benefits of Tax Credit Housing
In most developers’ experience, it’s difficult to persuade residents of single-family homes that bringing multifamily housing to their neighborhood is a positive thing…but when that multifamily development is a low-income tax credit project, it’s beyond difficult. Even in towns and cities where polls show general agreement that more affordable housing is needed, most people still support it only if it’s in someone else’s back yard. So local governments find themselves torn between the conflicting aims of making constituents happy and providing the community with necessary housing resources.
NAHB’s Housing Policy economists have responded to our members’ difficulties with an model that quantifies the substantial economic benefits for the community in which apartment construction takes place. The benefits include income and jobs for local residents, and revenue for local governments. Similar benefits are generated by a multifamily project built using Low-Income Housing Tax Credits (LIHTCs).
The model captures the effect of the construction activity itself (Phase I), as well as the “ripple” impact that occurs when income earned from construction activity is spent (Phase II), and the ongoing impact that results from the new apartments becoming occupied by residents who pay taxes and otherwise participate in the local economy year after year (Phase III). In order to fully understand the economic benefits that a tax credit project generates in a market area, it’s important to include ripple effects and ongoing benefits.
Newer data on Tax Credit Properties Improve the Model
A recent report produced by NAHB updates the analysis of a “typical” tax credit project of 100 units, based on new data from 21 specific tax credit projects for which it was possible to obtain the necessary information.
Based on a typical 100-unit tax credit project defined this way, the estimated one-year local impacts (the construction activity of Phase I plus the ripple effect of Phase II) of building the project include
• $7.3 million in local income,
• $783,000 in taxes and other revenue for local governments, and
• 151 local jobs.
The additional, annually recurring impacts of building the typical 100-unit tax credit project include
• $2.2 million in local income,
• $372,000 in taxes and other revenue for local governments, and
• 38 local jobs.
A 100-unit project is larger than average for recently built tax credit properties, but not by much. HUD data on tax credit properties placed in service between 1995 and 2004 show an average project size of 72 units, but the average increased consistently over that time, topping 84 units for projects placed in service in 2004.1 The number 100 was chosen primarily to generate a typical project size based on a convenient round number
Although the 21 projects on which the study is based don’t constitute a sample scientifically designed to be representative of the entire country, they do capture data from a number of states in different regions. The sample includes only “family” (that is, not intended specifically for the elderly) tax credit projects. The projects range in size from roughly 25 to 350 housing units. Development costs per unit range from just under $75,000 to just over $135,000.
In particular, the impacts summarized above were estimated under the assumptions that the new tax credit apartments have an average market value of $110,253; embody an average raw land value of $12,002; require the builder and developer to pay an average of $3,014 in impact, permit, and other fees per unit to local governments; and incur an average annual property tax of $451 per unit. These numbers are weighted averages of the 21 projects that contributed data, with the weights based on the number of units in each project. Because the tax and impact fee information comes from actual tax credit projects, it incorporates any relief local governments may have granted to those projects in terms of lower fees or taxes.
Other than property taxes, the project is assumed to be located in a typical metropolitan area where taxes and other sources of local government revenue (measured as a fraction of personal income) are set equal to national averages.
The version of the NAHB model designed for a tax credit project differs from the generic multifamily model primarily in the way tenant incomes and spending tendencies are estimated. In the tax credit version, the ongoing benefits for a tax credit project tend to be somewhat lower, because the estimate of renters’ income is lower (for the projects in this study, the average estimated income of tenants is $30,743). This is partially offset by the tendency of tax credit residents to spend a larger share of their relatively low incomes on locally produced goods and services.
The tables below shows the economic benefits in slightly more detail.
The model generates results in even more detail than shown above. The detail includes separate impacts on income and employment in 16 industries and the local government. The 102 local jobs generated in Phase I of the model, for example, include 79 local jobs in construction, 11 in business and professional services, and 9 in wholesale and retail trade. The 49 local jobs generated in Phase II include 11 jobs in local government, 10 in wholesale and retail trade, and 5 in eating and drinking places. The 38 jobs, supported on an ongoing basis in Phase III of the model, include 9 in wholesale and retail trade, 5 in local government, and 4 each in eating and drinking places and health, education, and social services.
The model also produces as information about a wide range of taxes and other types of local government revenue in detail. A longer report containing this level of detail is available on NAHB’s Web site.
As previously noted, the estimates presented above are for a typical tax credit project located in an average metropolitan area. Like other versions of NAHB’s Local Impact Model, the tax credit version can be customized by replacing the average inputs with information about an individual tax credit project and a particular local area.
The comprehensive nature of the model places some restrictions on the definition of local area that can be used. The area has to be large enough to capture most of the economic activity in local labor and housing markets. In other words, it must include the places where construction workers live and spend their money, as well as the places where the new home occupants are likely to work, shop, and seek entertainment. In practice, this means either a Metropolitan Statistical Area (generally an aggregation of counties determined to belong to the same market area by the U.S. Office of Management and Budget), or a non-metropolitan county. The construction itself may be confined to an individual project in a very specific location, but the local impact generated will be spread in some fashion throughout the metropolitan area or non-metropolitan county.
To date, NAHB has produced over 450 of customized reports analyzing residential construction in various metropolitan areas, non-metropolitan counties, and states across the country. Several of the reports completed recently have analyzed the impact of tax credit development in several states at the request the Housing Finance Agencies in those states. For more information about applying the NAHB model to a particular project, contact Elliot Eisenberg in NAHB’s Housing Policy Department: (202) 266-8398, eeisenberg@nahb.com, or consult the “local economic impact of home building” page on NAHB’s website: http://www.nahb.org/generic.aspx?sectionID=784&genericContentID=35601.
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1 See HUD National Low-Income Housing Tax Credit Database: Projects Placed in Service Through 2004: http://www.huduser.org/Datasets/lihtc/tables9504.pdf
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