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Multifamily Trends - March/April 2006 - Point of View

Public housing authorities are looking for opportunities to partner with the private sector to build the next generation of affordable housing.

Public Housing Redux

by John McIlwain

Public housing today is not like your father’s housing program. It is in the midst of an epochal, albeit slow, revolution. Change began in the early 1990s and is ongoing, as each of the 3,050 local public housing authorities faces a new future.

The fact is that these housing authorities are no longer able to rely on federal funding obtained by following U.S. Department of Housing and Urban Development (HUD) rule books. They are being forced instead to become public real estate developers, using dwindling public funds to leverage private debt and equity and to partner with the private for-profit and nonprofit sectors to renovate old public housing, build new affordable housing, and provide services to their modest-income clientele. For the private sector, this means new business opportunities, as well as opportunities to help local governments meet their growing need for affordable housing. Developers expecting to negotiate with a local government over zoning and planning approvals should take note.

Public housing has long been the ugly stepchild of affordable housing. Most Americans think of it as “the projects”—ugly high rises surrounded by vacant, littered plazas that are populated by gangs, drug dealers, and welfare mothers, and run by antiquated, cumbersome bureaucracies. The truth, however, is quite different. The National Commission on Severely Distressed Public Housing, established by Congress in 1989, reported in 1992 that of 1.4 million U.S. public housing units, only 86,000—less than 6 percent—were severely distressed, and virtually all of those were in major cities.

Some public housing properties are old and need significant modernization due to constant underfunding by Congress and inefficient local authorities, but the vast majority of today’s 14,000 public housing properties provide decent housing decently run. Most are moderately sized, low-rise garden-style buildings—with high rises only for the elderly—primarily located in smaller cities, suburbs, and rural areas.

The conditions in those 86,000 distressed units identified by the commission, however, were horrific, devastating families for generations. Built in the 1950s and 1960s by local authorities ineptly following Le Corbusier’s then-dominant modernist architectural philosophy, they were dense, located in inner-city ghettos, and racially segregated, and they concentrated the poorest of the poor in one area. Most residents were unemployed, schools and social services were inadequate, and rules governing everything from eligibility and rent to tenant behavior and repairs and maintenance were dysfunctional.

In 1992, however, in response to the commission’s findings, Congress created the HOPE VI program to replace the worst public housing with mixed-income communities combining low-income and market-rate housing, and offering homeownership. This new housing has been well designed, often employing traditional neighborhood design principles such as low-rise housing for families, defensible space, lower densities, and “eyes on the street.”

The results have been dramatic. Project after project has been transformed—albeit slowly—from neighborhood-destroying horrors into community assets that raise property values and attract market-rate housing and retail services around them. As Renee Glover, executive director of the Atlanta Housing Authority, said last fall in testimony before Congress, “Without exaggeration, the HOPE VI demonstration program is the most important urban revitalization effort that America has undertaken.”

HOPE VI requires a local authority to partner with private developers and to combine the limited grant amount from HUD with other funds to finance the project, such as low-income housing tax credits, tax-exempt bonds, and private debt. In traditional public housing before HOPE VI, HUD effectively paid the full cost of building public housing.

Today, unfortunately, HOPE VI is on life support. The program expired several years ago, but has been extended through this year because of its importance and level of success. Last year, legislation was introduced in the Senate (S. 1513) and House (H.R. 3888) to reauthorize it. Despite a Capitol Hill environment deadly to housing programs, there is strong support for reauthorization of HOPE VI on both sides of the aisle. It is too early to tell if this support will be sufficient, but an end to the program would be a sad legacy for Congress and the Bush Administration.

The success of HOPE VI could even serve as a model for France’s government housing. Urban social housing in France differs little from the worst U.S. public housing, though it is located in the inner suburbs, not inner-city ghettos as in the United States, simply because the French middle class liked living downtown (at least until the 1980s) while middle-class Americans until recently have chosen the suburbs.

Last fall’s French riots occurred in these poor inner suburbs, or banlieues, among immigrants living in wastelands formed by mammoth government housing projects built in the 1950s and 1960s—vacant, wind-swept plazas surrounding endless tall towers that, in fact, were early models for many U.S. urban housing projects. The United States, spurred perhaps by the urban riots of the 1960s and the 1992 Los Angeles riot, woke to the incredible cost of these projects to residents, most especially the young, and to the whole of society. The French might well follow suit, understanding that the projects are only one piece of a complex set of causes for the riots, just as HOPE VI proponents realize the program alone cannot eliminate all the causes of multigenerational poverty and dysfunction in inner cities.

HOPE VI, however, is not important only because of the transformation it is bringing to communities around the country; it also is transforming public housing efforts overall. HOPE VI has forced many local housing authorities and, more important, HUD to use the tools of the private market, partner with the private sector, and use private financing. It also has shown that market-rate housing can be a successful and important component of affordable housing developments. As Glover said in her testimony, “The creation of the public/private partnership guarantees a built-in ‘accountability’ feature because private sector involvement guarantees that the communities remain sustainable and desirable, and the introduction of private investment results in higher community performance standards and expectations.”

Around the country, housing authorities, whether or not they have participated in HOPE VI, are beginning to embrace the direction the future is taking. For example:

Some authorities partner with developers to renovate older public housing. For instance, the District of Columbia Housing Authority (DCHA) sold an old housing project for seniors to a local nonprofit organization, providing a grant for renovating the property, which now is run by the nonprofit.
Authorities are obtaining loans secured with future modernization funds from HUD. In the DCHA example, the housing authority borrowed the funds for the grant to the nonprofit from the Bank of America and Fannie Mae. Other authorities, most notably the Chicago Housing Authority, have sold bonds on Wall Street to finance redevelopment of older properties.
Housing authorities are hiring private property managers. All Atlanta Housing Authority units, for instance, are managed privately.
The Austin Housing Authority created a profit-making subsidiary that contracts with HUD to handle all HUD program compliance needs throughout Texas and Arkansas. It has used these profits to acquire apartment buildings and a neighborhood shopping center.
Other authorities have swapped land or sold it to developers who commit to build mixed-income housing.

In short, the ways the private sector can work with local authorities is limited only by local needs, patience, and imagination. Working with local authorities is seldom easy because many still have limited experience of the private market. It is important to put together a team experienced in working with local authorities and HUD; often it is up to the developer to teach the authority—and sometimes HUD—what is possible. A private sector partner with deep pockets is also helpful because these opportunities take time to unfold.

The benefits, however, can be significant. Around the country, each of the more than 3,000 local housing authorities has needs and can provide access to funding not otherwise available. The result can be much-needed affordable housing for a community, as well as business for a developer. The housing also can be a valuable community benefit that a developer can offer as part of negotiations over planning or zoning approvals. And providing such housing is a growing business—driven by the worsening shortage of affordable housing—that will be around for years to come.

John McIlwain is a ULI senior resident fellow and the ULI/J. Ronald Terwilliger Chair for Housing.