It is no surprise to us that Jamie Ding, a self-described “faceless bureaucrat” from the state of New Jersey with a degree from Princeton, would end up as one of the all-time great Jeopardy champions with 23 game appearances and wins (as of this writing). Our own daily double just so happens to be that he’s also a YIMBY champion who auctions off Low-Income Housing Tax Credits (“LIHTC”) and funds affordable housing construction for the state.
So we’re using Jeopardy as a chance to educate you about how New Jersey uses LIHTC to fund affordable housing at the state level.
I’ll Take Faceless Government Bureaucrats for $600, Ken
Ding works for the New Jersey Housing and Mortgage Finance Agency (“NJHMFA”), the state agency responsible for expanding New Jersey’s supply of affordable rental housing, promoting first-time homeownership programs, and administering money from various federal programs that flow through the state.
At NJHMFA, Ding is the Multifamily and Tax Credit Program Administrator. In this role, Ding works with New Jersey’s private developers to finance and build income-restricted affordable housing in multifamily apartment buildings across the state.
As Ding notes in his jeopardy appearance, New Jersey has been a leader on housing production in the northeast for some years now. The state famously has the Mount Laurel doctrine, which we will discuss in a future article, that works to ensure wealthier municipalities across the state provide their fair share of low-income and moderate-income housing under inclusionary zoning.
Answer: This is the primary federal program for encouraging private investment in affordable rental housing. “What are Low-Income Housing Tax Credits or ‘LIHTC’?”
Along with tax-exempt state bonds, LIHTC is the main way NJHMFA finances income-restricted affordable housing in multifamily apartment buildings.
LIHTC is, to put it mildly, a complicated and incredibly technical program. We had to use Jeopardy as a conceit just to trick you into reading about it! But LIHTC is worth knowing about and we are going to explain it as simply as possible.
LIHTC should not be confused with other government subsidies used for affordable housing production like the Aspire Program, which is a tax credit program run by the New Jersey Economic Development Program, or Payments in Lieu of Taxes (PILOT) agreements that cities can grant in exchange for affordable housing in redevelopment areas.
LIHTC basically replaced public housing development as the federal government’s main program for supporting low-income housing construction by the late 1980s and mid 1990s. It was authorized under the Tax Reform Act of 1986. And since 1987, LIHTC has built over 3 and a half million apartments [Tax Policy Center]. It costs the federal government over $10.5 billion to finance between 100,000-150,000 new rent-restricted apartments for construction or rehabilitation a year.
In New Jersey, around 60,000 apartments have been built using the tax credit program, ranging from mixed-income projects to 100% affordable housing [Affordable Housing Finance]. Around 20 new construction and rehabilitation projects funded through LIHTC move forward in New Jersey each year [NJHMFA]. Historically, most LIHTC construction has taken place in Newark, Camden, and other low-income cities. Since 2013, NJHMFA has tried to shift focus to produce more affordable housing in richer New Jersey towns like Holmdel, Princeton, and Saddle River as well as in Opportunity Zones in cities like New Brunswick to better align the program with Mount Laurel obligations [Affordable Housing Finance].
The federal government awards tax credits to the states where agencies like NJHMFA award them to projects that elect one of three minimum set-aside options:
- The 20/50 test: at least 20% of units are rent-restricted and occupied by households earning under 50% of AMI;
- The 40/60 test: at least 40% of units are rent-restricted and occupied by households earning under 60% of AMI; or
- The Average Income Test (added in 2018): at least 40% of units are rent-restricted, with individual units designated anywhere from 20–80% AMI, as long as the average across designated units does not exceed 60% AMI.
Demand for the tax credits is high as the tax credits are quite valuable to developers. In New Jersey, demand for LIHTC exceeds available supply of credits by three-to-one, which indicates the program is successful in incentivizing affordable housing production through private development [NJHMFA].
LIHTC equity pricing is the rate per dollar of tax credit used to calculate how much funding a project receives. This pricing mechanism is a critical part of the developer’s “capital stack,” as investors generally provide 99% of the equity in exchange for a dollar-for-dollar reduction in their federal income tax liability over a 10-year period.
Answer: This is the most common variety of tax credit under the LIHTC program. “What is the 9% option?”
LIHTC comes in two flavors — the competitive 9% credit and the non-competitive 4% bond-financed credit. The percentage is a reference to the annual credit rate needed to finance a project over the period of ten years for a “present value” subsidy target. A “9% credit,” for example, covers 70% of a project’s eligible costs over the ten-year period; whereas the 4% option covers only about 30% of a project as a subsidy and requires developers to go out and seek additional subsidies, normally in the form of tax-exempt bonds, to finance the construction of rent-restricted low-income housing.
Eligible costs are the development costs (design and construction) minus ineligible costs (land, interest payments, ground-floor retail, fee-based amenities) multiplied by the LIHTC percentage. So a $10,000,000 project with $1,000,000 worth of ineligible costs with 60% rent-restricted housing using a 9% LIHTC credit would receive an annual credit of roughly $486,000 in subsidy over the course of ten years ((10,000,000-1,000,000)*0.6*0.09 = $486,000). New Jersey has around $12,000,000 worth of 9% credits that it can allocate to projects during each round (two rounds, annually) with demand for those credits far exceeding supply.
One potential downside of this formula is it tends to create buildings that are exclusively residential rather than mixed use as the ineligible retail space makes the project more difficult to pencil.
Answer: This market condition causes LIHTC-financed housing to not increase the total quantity of housing. What is elastic supply and inelastic demand?
Jamie Ding was right to call out New York, Connecticut, and Pennsylvania as laggards on housing construction compared to New Jersey. But how much of New Jersey’s success is attributable to Ding’s work with LIHTC at NJHMFA?
The answer is a little more ambiguous based on the economic research on “crowd out” due to the subsidy from LIHTC. There is some evidence that when demand is inelastic (doesn’t change much) and housing supply is elastic (can change much) that LIHTC-financed projects can displace non-subsidized housing projects. Sinai and Waldfogel (2005) estimated that for every three units built using LIHTC (and pre-LIHTC affordable housing programs), two units that would have been built without subsidy were lost. Sinai and Waldfogel’s research indicates the government’s LIHTC subsidy increased housing by about 33%. But Eriksen and Rosenthal’s 2010 research that focused on LIHTC and complete metropolitan areas estimated total crowd out due to LIHTC such that each unit of subsidized housing replaced an unsubsidized unit that would have been built otherwise.
The research of Baum-Snow and Marion (2009), clarifies this contrast somewhat. Baum-Snow and Marion’s research shows low-income housing construction does not crowd out any development in stable or declining low-income neighborhoods but it does crowd out construction in gentrifying neighborhoods.
Subsequent research by Diamond and McQuade (2019) showed LIHTC-financed construction increased surrounding home values by 6% in low-income areas and was correlated with a decline in crime in those communities. The new housing investment acted as a strong amenity effect, which helped revitalize low-income neighborhoods. A quick note to readers who might be unfamiliar with economic research on housing. While LIHTC investments may cause property values to increase in low-income neighborhoods due to amenity effects, at the same time new rental supply will cause surrounding rents to fall due to supply effects and filtering [Asquith, Mast, Reed (2021)]. In short, communities may see both rising property values and falling rents due to amenity effects and supply effects playing out on different aspects of the housing market.
The 2019 Diamond and McQuade research showed that LIHTC in higher income neighborhoods lowered home values by 2.5%. While subsequent research by Eriksen and Yang (2022) confirmed findings that property values increased in low-income communities due to LIHTC, they also found that added supply — LIHTC or otherwise — in dense communities did not adversely impact property values at all when controlling for the neighborhood density.
Despite LIHTC potentially crowding out unsubsidized development in higher income areas, we should put the potential benefits of rent-restricted affordable housing in context. First, we know income-restricted housing creates more space for families with children in multifamily housing [The School Age Children Study]. We also know higher income neighborhoods tend to have better public schools. We can pair those findings with the Chetty, Hendren & Katz (2016) research that found affordable housing (like LIHTC) investments in higher-income neighborhoods with good schools have socially beneficial impacts, notably higher college attendance and higher wages for children whose families move to better neighborhoods. From a social welfare perspective, there are arguments to be made in favor of recent attempts to build more rent-restricted housing in good public school districts like Princeton and Holmdel to further the goals of inclusionary zoning advanced by Mount Laurel.
There is debate as to whether housing vouchers (Section 8) or income-restricted affordable housing programs are more efficient at allocating housing for low-income families. Based on the research, we think “it depends.” Better Blocks has discussed previously how vouchers, too, can have adverse effects on housing prices in supply constrained housing markets, driving up rents due to the demand shift. It is important to keep in mind the magnitude of these market distortions when determining the best policy approach to low-income housing.
At the very least, it is clear that LIHTC is an incredibly valuable urban revitalization tool, which New Jersey has used to great effect in places like Newark and New Brunswick. Ding’s work at NJHMFA has clearly helped provide more opportunities for growth in New Jersey’s cities and chances for low-income children to get a quality public education in wealthier suburbs.
Regardless, at Better Blocks, we are proud that one of New Jersey’s key affordable housing financing programs has won much needed recognition due to the stellar performance of Jamie Ding. As the now 23x jeopardy winner said about our neighboring states, “Shame on you. Build more housing.”
The Better Blocks team wishes Jamie Ding continued success on Jeopardy!