The External Neighborhood Effects of Low-Income Housing Tax Credit Projects Built by Three Sectors

ABSTRACT:

This study examines the external neighborhood effects of Low-Income Housing Tax Credit (LIHTC) Projects built in Santa Clara County, California from 1987 to 2000. Three types of developers have built LIHTC projects in this area: nonprofit, for-profit, and a county public housing authority. Using a difference-in-difference hedonic regression approach, this study finds that almost all the LIHTC projects examined have generated significantly positive impacts on nearby property value. In particular, the study also finds that most nonprofit projects have delivered benefits similar to those of for-profit projects. Yet projects built by some of the largest nonprofits and the county housing authority have generated the greatest neighborhood impacts. Low-income neighborhoods have also benefited more from LIHTC developments than other types of neighborhoods.

Notes

1 There are two types of tax credits, the “9%”credits and the “4%” credits. The 9% credits are used for both rehabilitation and new construction. The applicable rate is reduced to 4% if the project receives other federal subsidies or uses tax-exempt bond financing. Projects using bond financing automatically qualify for 4% tax credits and are not subject to state allocation.

2 The LIHTC program has faced serious challenges due to the national mortgage market meltdown and the subsequent credit crunch, which have significantly reduced financial institutions’ demand for the tax credits.

3 According to Cabrera (2007), nationwide approximately 230 PHAs have developed 775 LIHTC projects, about 97,930 units, as of 2005.

4 As required by our university’s Institutional Review Board (IRB), which reviewed our interview protocol, all our interviewees must remain anonymous in any reports we produce.

5 For many LIHTC projects built by PHAs, HUD’s database lists only the limited partnership name instead of the PHAs that built these projects. As a result, HUD’s database has significantly underestimated the number of LIHTC projects built by PHAs. For example, in our study, we identified 13 LIHTC projects built by the Housing Authority of the County of Santa Clara by 2000. Yet, in HUD’s database, the county housing authority was credited for only three projects.

6 To be eligible for tax credits, a project must have at least 20% of its units affordable to households with incomes of less than 50% of area median income, or 40% of its units affordable to households with incomes of less than 60% of area median income. A qualified unit is a unit that is affordable to such households.

7 The production capacity of the nonprofit developers examined in this study ranges from 600 units to 13,000 units, with a median production level of about 4000 units.

8 This study uses the 1990 census data to identify these neighborhood clusters, which can help capture the neighborhood conditions before an LIHTC development since almost all the LIHTC projects in this study were built after the 1990 census. We use census block groups not only because they are the smallest geographic units for which we could get these socioeconomic data, but also because they are the closest to the impact areas of LHITC projects as defined in our hedonic price modeling. For more information about the cluster analysis, please contact the author.

9 To ensure that the measured property value impacts come only from the LIHTC projects examined in this study, we exclude some housing transactions from 2000 to 2002 that are affected by more recent LIHTC developments beyond our study period. While we were able to exclude the impacts from more recent LIHTC projects, we were not able to identify the location of other subsidized housing developments built in this area. If there is any spatial overlapping between the LIHTC projects and these other subsidized developments, the effects from these developments could be spuriously attributed to the LIHTC program. We acknowledge this limitation. However, we do not believe this is a significant problem, given the large number of LIHTC projects being examined in this study. The spatial overlapping may occur for some LIHTC projects, but it is hard to imagine that it would systematically affect all the 51 projects being examined.

10 There is no consensus with regard to how the impact area of an affordable housing project should be defined. For example, while some studies have used 2,000 feet to define the impact area (such as Santiago et al. [2001]), Ding et al. (2000) have found that the impacts of nearby housing developments were limited to an area as small as 300 feet. This study chooses 1,000 feet, but it also allows the impacts to vary within the zone by including a distance variable in the hedonic price model.

11 Tables describing the characteristics of the 51 sample projects and their neighborhood environments are available from the author upon request.

12 Before introducing these variables, we did a Moran’s I test of the regression residual and found that the spatial autocorrelation problem was present. Thus it is necessary to include the five control variables.

13 Besides the baseline model presented here, we also ran separate models with some subsets of the impact-post variables and found that the coefficients for the key impact variables remain very similar, showing that there is no strong multicollinearity problem in the baseline model.

14 Results are not reported here, but are available from the author upon request.

15 Results are not reported here, but are available from the author upon request.

16 Our cluster analysis shows that over one-third of the LIHTC projects built by non-HPN nonprofits are located in low-income neighborhoods, versus only 9% of projects built by other sponsor types.

17 The average construction cost per unit for projects built by for-profits and non-HPN nonprofits is around $100,000, while the average construction cost per unit for projects built by HACSC and the HPN nonprofit is around $120,000 (in 2000 dollars).

18 In our database, six of the 13 LIHTC projects built by the county housing authority have received some type of national or regional award for design excellence.

19 I thank one reviewer for pointing this out.