The Case for Nonprofit Housing Developers

The government isn’t providing enough affordable housing and for-profit builders won’t keep rents low.

America has a serious affordable housing problem. Since 2001, rents in constant dollars have risen by 32 percent while wages have stagnated. As a result, roughly one in four renter households spend more than half their monthly income on rent. For low-income families, the only way to afford housing in most cities is with subsidies. But increasingly, government aid is unavailable and inadequate.

Meanwhile, the debate over how to solve this issue is at an impasse. Many development advocates point out that strict zoning laws prevent companies from building new apartments that would drive down the cost of rent. But liberals often worry that developers, motivated by profit, won’t deliver housing that is affordable over the long term. Both parties’ concerns are justified. One key lesson from the last seventy years is that the type of entity that owns or controls the property matters a great deal. While government and for-profit housing developers play key roles in supplying low-income Americans with homes, they are clearly not enough.

Fortunately, there’s a third option: housing developed and owned by nonprofit organizations. In approximately 4,600 neighborhoods across the United States, there are community development corporations that develop or rehabilitate roughly 100,000 housing units each year for low-and moderate-income families. Along with nonprofit intermediaries like the Local Initiatives Support Corporation (LISC) and Housing Vermont, these neighborhood-based nonprofits have developed outstanding track records of serving those in need. The quality of their housing is generally quite high, and they work much harder to find solutions that prevent evictions. Since Congress created the Low Income Housing Tax Credit Program (LIHTC) in 1986, default rates on housing developed by community development corporations and other nonprofits using LIHTC financing has been close to zero, even during the 2008 recession. Leading banks across the country continue to invest large sums of money each year in their projects. While nonprofit landlords cannot fix America’s affordable housing crisis alone, they are making a real difference—and could be doing even more.

The U.S. federal government made a major commitment to provide housing for low- and moderate-income families shortly after the Second World War. Unfortunately, much of it was designed to be temporary, since the government assumed that the booming post-war economy would lift everyone out of poverty and into the middle class. As a result, many units have deteriorated over time, and housing authorities have often deferred maintenance to save money. In fact, since the 1960s, direct government ownership has decreased, transferring the task of developing, managing, and owning affordable rental properties to for-profit and nonprofit organizations.

As the focus of federal housing policy shifted from government ownership to subsidizing private sector developers, Congress passed legislation designed to create powerful incentives to build affordable units. Section 236 of the 1968 Housing Act, for example, stipulated that both for-profit and nonprofit developers could obtain mortgages covering 90 percent of the development cost (100 percent if the developer was a nonprofit) at a 1 percent interest rate, as long as they agreed to charge rents that were reasonable for low- and moderate-income residents. Developers and their investors also received substantial tax benefits. As a result, for-profit and some nonprofit organizations together built 544,000 units in the four years before the program was suspended in January 1973.

But Section 236 showcased a fundamental difference between the two approaches. For-profit developers promised their investors good returns. Nonprofit organizations, by contrast, promised to provide stable housing for low-income people. A 1978 study by the Urban Institute compared twenty units of Section 236 housing owned and managed by for-profit developers with twenty units owned and managed by nonprofit organizations. As the chart below indicates, the latter group scored significantly higher on the twenty-four measures of management performance, like per-unit operating costs, occupant rating of the conditions, and eviction rates. It is noteworthy that the nonprofit groups who did this work in the 1970s had little experience with housing development and management, unlike the twenty-first century nonprofit organizations that develop housing today.

After twenty years, Section 236 housing developers had the opportunity to turn their units into market-rate apartments. Many for-profit developers discovered that market rents greatly exceeded the rents from the existing low- and moderate-income residents. They therefore paid off the remaining mortgage balances, evicted their tenants, and sold their property at a huge profit. Other for-profit owners threatened to convert their properties to market-rate apartments, forcing the government to pay large amounts of money to “incentivize” them to keep the properties affordable.

In contrast, apartments owned by nonprofit organizations generally did not pay off their mortgages, or if they did, they then used money from new mortgages to rehabilitate their units. I teach real estate at business schools, have served on housing organization boards, and spent over six years building affordable housing as the executive director of a Boston-based developer, and as far as I can tell, none of the Section 236 housing owned by nonprofit organizations was converted to market-rate apartments. All of them continued to serve low- and moderate-income families.

There are, of course, for-profit developers who act in noble ways. A group of Atlanta developers formed the Atlanta Real Estate Collaborative (AREC) to combat homelessness by finding apartments in their complexes—and in those of willing peers—for homeless people. Since 2013, more than 5,600 formerly homeless Atlantans, including nearly 800 veterans, have been housed through the program, which is called Open Doors. But even in this example, private developers depend on nonprofits. AREC relies on fifty-six nonprofit service agencies, and Open Doors itself was established as a 501(c)3 nonprofit to make it more sustainable.

The importance of nonprofit ownership is also clear from affordable housing programs in Montgomery County, Maryland, which has long been regarded as a national model. In 1974, the county enacted a law that required at least 12.5 percent of the homes in a new development to be “moderately priced dwelling units” (MPDUs). Because of this law, developers have created more than 12,500 affordable housing units.

MPDUs are rent-controlled for 99 years. But even with this lengthy restriction, Montgomery County recognizes the importance of ownership, requiring 40 percent of newly developed MPDUs be offered for sale to the Housing Opportunities Commission, the county’s public housing agency, or to nonprofit housing providers.

In 1986, Congress created the Low Income Housing Tax Credit, which has been the primary source of financing for more than 90 percent of U.S. affordable housing built since—more than 3 million units. But, like its predecessors, it has some notable shortcomings. As with Section 236, the government has sometimes ended up paying twice. Similarly, private developers sometimes take advantage of loopholes to evict low-income tenants and convert properties to market-rate apartments.

Section 8, a different government program, provides housing vouchers to 2.2 million families. These vouchers enable households to pay market-rate rent. But the section 8 program now faces significant difficulties. As the New York Times reported, “67 percent of Philadelphia landlords refused to even consider voucher holders.” Rejection rates are even higher in Fort Worth and Los Angeles, “where three quarters of landlords turned away section 8 tenants.” Part of the reason is that in the current market, many landlords believe they can get a higher rent from tenants without federal subsidies. Another reason is that developers face less scrutiny and paperwork when they rent to unsubsidized tenants rather than tenants with vouchers.

But nonprofit owners welcome tenants with Section 8 vouchers and appreciate the way these vouchers help them fulfill their mission of serving people of modest means. Furthermore, these nonprofit providers are, in some ways, better positioned than ever to help those in need. In the mid-1960s, there were roughly 100 local nonprofit housing organizations. By 2005, there were approximately 4,600. Some now operate on a regional or even a national scale. According to Rachel G. Bratt, a senior research fellow at Harvard’s Joint Center for Housing Studies, the fifty largest nonprofit developers owned a total of 149,289 units in 2014.

Putting more of the ownership of affordable housing in the hands of experienced, nonprofit organizations is not a cure-all. Construction costs continue to rise in much of the country, making it difficult to build rental housing that people can afford. Local opposition to affordable housing creates barriers that are time consuming and expensive to overcome. Zoning laws make it hard to build multi-family housing. And the lack of sufficient, straightforward financing often makes affordable housing development expensive, difficult, and complicated.

But who owns affordable housing does matter, especially over the long term. Nonprofit ownership or control offers the best protection by ensuring that the property will always serve low- and moderate-income people. Now that affordable housing has once again emerged as a priority, legislators and other people responsible for housing policy should avoid short-term fixes. If we combine smarter policies with additional resources, we might get closer to fulfilling the goal of the 1949 Housing Act: “a decent home and a suitable living environment for every American family.”

John Vogel

John Vogel has served on the faculty at the Yale School of Management, Harvard Business School, The Harvard Graduate School of Design, and the Tuck School of Business at Dartmouth. He spent six-and-a-half years building affordable housing as the Executive Director of the Neighborhood Development Corporation of Jamaica Plain.