The houses that eminent domain and housing tax credits built: imagining a better New Orleans.

• Author: Brown, Carol Necole

Throughout its history, New Orleans has been largely immune to brilliant and innovative ideas. Indeed, this is one of its principal charms. If you are not a native New Orleanian, ask yourself why you decided to live here and chances are it has something, to do with what Ignatius J. Reilly described as New Orleans' "stagnation and apathy which I find inoffensive." (1)

Still, she longs for the Quarter--lights, riverboats churning, the tinkle of ice in a slim bar glass. Each night a refrain, its plain blue notes carrying, her, slightly swaying, home. (2) TABLE OF CONTENTS I. Introduction II. A History of the New Orleans Rental Housing Market III. Eminent Domain as Part of a Rebuilding Strategy IV. The Low Income Housing Tax Credit Program A. How the Program Works 1. Allocation of Credits 2. Qualified Projects and Eligible Tenants B. Segregation, Poverty, and the LIHTC 1. Evidence of Racial Segregation and Poverty Concentration 2. A Fair Housing Act Challenge to a QAP 3. The "GO Zone" QAP C. Priorities for LIHTC Projects 1. Mixed-Income Neighborhoods and Projects 2. Using LIHTC Units to Provide Emergency Shelter D. Eminent Domain and Tax Credits V. Conclusion I. INTRODUCTION

Proposals for investing in and rebuilding urban enclaves such as New Orleans are layered with controversy and difficulty. One of the most significant impediments to rebuilding New Orleans will be addressing the need to replenish the depleted rental housing market. Racial and economic integration of housing markets and appropriate use of private sector money to replenish the rental housing stock within a "reasonable" time period are indispensable components of a responsible revitalization and renewal plan?

This Article contends that a combination of the smart exercise of eminent domain and of "housing production subsidies"(4)--housing tax credits--is necessary to rebuild the rental housing market in New Orleans. In a climate of appreciating markets, private developers do not have natural incentives to construct affordable rental housing. (5) If provided the proper financial motivation, prescient developers will step in and invest in the New Orleans and regional rental markets. There is no guarantee that developers will reap huge profits in the affordable rental housing market, even under optimal market conditions. Certainly, post-natural disaster conditions--widely dispersed populations, high unemployment levels, devastated infrastructure, disorganization and finger-pointing, and a lack of a unified vision of what the reconstructed built environment should be--pose even greater uncertainties for developers.

A thoughtful approach to eminent domain, combined with strategic use of housing subsidies, can complement other aspects of regional comprehensive planning as New Orleans and the surrounding communities move forward. One of the most promising tools available to address rental housing needs is the Low Income Housing Tax Credit program ("LIHTC"). (6) Created by the Tax Reform Act of 1986, the LIHTC is currently the most significant program that seeks to meet poor citizens' needs for rental housing production and rehabilitation. (7) LIHTCs increase the nation's rental housing stock for the poor by targeting high-income taxpayers. (8) The program "provides an incentive for the construction and rehabilitation of low income rental housing by lowering its overall cost through the use of tax credits to developers and owners of qualified rental projects." (9) The U.S. Department of the Treasury administers the program in conjunction with the housing finance agencies of the states and some cities. (10) Having produced almost 1.3 million units of housing between 1987 and 2003, the LIHTC has eclipsed the public housing program and holds great promise as a program for increasing mixed-income housing and racial integration. (11)

Though the LIHTC is a potentially useful program for addressing New Orleans's present rental housing needs, the LIHTC, if not properly implemented, may also worsen the economic divide and concentrated housing for the poor that characterized New Orleans before Hurricane Katrina and the 2005 storm season. Improper balancing of the allocation of housing tax credits can reinforce historic race and class segregation and may have a blighting effect on communities. (12)

Part II of this Article reviews the history of the New Orleans rental housing market. Parts III and IV of this Article examine eminent domain and LIHTC, highlighting the tensions inherent in using these doctrines to assist in providing affordable housing. Each part discusses potential tensions and social policy issues and demonstrates that the proper combination of both promises a stronger, more economically integrated, New Orleans. Part V concludes that by implementing the proposals set forth in this Article, policymakers and citizens, partnering together, can rebuild a better New Orleans.

2. A HISTORY OF THE NEW ORLEANS RENTAL HOUSING MARKET

   The subsidized and unsubsidized rental housing stock in the New Orleans region must be sensibly redeveloped--a failure to do so will result in consequences that reverberate throughout the economy and the social fabric of New Orleans. (13) "In the market-driven, status conscious society of [the] United States, affluent families live in different neighborhoods than poor families.... " (14) And, to the extent this has resulted in an over-concentration of the poor and of subsidized rental housing in areas of New Orleans, the redevelopment efforts for the City should require other communities near New Orleans to integrate a modest portion of subsidized rental housing units into their neighborhoods.

   Approximately 82,000 rental housing units in southeast Louisiana were destroyed or damaged last year by hurricanes and levee breaks. (15) More than 51,000 of these units were located in New Orleans. (16) The devastation visited on the rental housing market was particularly severe for those renting the nearly 18,000 subsidized rental units located in New Orleans. (17) Even before the 2005 hurricane season, New Orleans experienced a serious housing affordability problem, (18) which was exacerbated by last year's storms. The affordable housing dilemma was more a function of low incomes than it was of high housing costs. "Prior to Katrina, housing expenditures for nearly half of renter households in the City exceeded 30% of income--the federal benchmark for determining if a renter's housing expenditures are burdensome.... More than 85 % of households making less than $20,000 spent in excess of that level for housing." (19) Over two-thirds of the City's rental housing, both affordable and market-rate, has been damaged in the past year, only worsening an already difficult situation. (20) Two state agencies, the Louisiana Recovery Authority ("LRA") and the Louisiana Housing Finance Agency ("LHFA"), are presently working together to develop housing programs focused on revitalizing the affordable housing market in New Orleans. (21) Toward this end, the LRA adopted the Road Home Workforce and Affordable Rental Housing Program ("Road Home Program"). The Road Home Program is the largest housing recovery program in the United States. (22) It assists homeowners and owners of rental property through various compensation and loan programs. The Small Rental Property Program is a component of the overall Road Home Program and is most relevant for this Article's purposes. (23) The Small Rental Property Program's main objective is to assist in rebuilding properties containing between one and four rental units and to encourage regional development of rental properties, particularly focusing on small rental properties and those with affordable rents. (24)

   The LHFA is a state entity and administers housing tax credits. (25) The LRA and the LHFA have committed to working together toward the goal of developing mixed income housing and "ensur[ing] the restoration of rental housing in the most heavily impacted parishes" of New Orleans. (26) These entities hope to motivate the private sector, with the lure of financial incentives from the LIHTC program and other programs, to build affordable housing and create "new mixed-income communities that accommodate families from across the income spectrum." (27)

   Though the aims of the LRA are laudable, its program has come under significant criticism by a nonprofit, independent research organization, the Bureau of Governmental Research Housing Committee ("BGR"). (28) Initially, the LRA proposed a mixed income housing plan to "use the powerful incentives of the low income housing tax credit program and [Community Development Block Grant ("CDBG")] funding to motivate developers to build new mixed income communities...." (29) But this initial proposal elicited very little interest from private developers. The LRA and the LHFA responded by revising the initial program proposal.

   Most notably, the [revisions] ... reduce the emphasis on classic mixed income development, which combines low income, subsidized housing and market rate housing, reserving only 18% of the tax credits for such development. The remainder would be available for the development of very low income units in 100% low income housing tax credit developments. (30) In its September 2006 report, the BGR issued a statement that the current LRA programs threaten to exacerbate existing housing problems in New Orleans and even create new ones. (31) Specifically, the BGR found that the LRA's programs would result in concentrated poverty and the construction of housing stocks consisting entirely of low-income housing tax credit units. (32) From a regional perspective, the plan would continue to disproportionately concentrate the area's poor in Orleans Parish and would stymie the ability of the tax base to grow sufficiently to meet citizens' needs. (33) Finally, the BGR was concerned that the LRA programs might leave large portions of New Orleans blighted. (34)...