REAL ESTATE LAW
BY ELIZABETH PEETZ AND BRIDGET GARCIA
Communities around the country face challenges in addressing their affordable housing needs across the entire housing spectrum. This article considers creative approaches to increasing the supply of affordable housing.
The holiday season and new chill in the air bring to mind something nearly everyone has in common-the desire for shelter and a place to call home. But homeownership is increasingly out of reach for many Americans, with high-growth areas particularly susceptible to the challenges of providing affordable housing.
According to the U.S. Census Bureau, Colorado grew by nearly 80,000 people between mid-2017 and mid-2018, giving it the seventh-fastest growth rate in the country. Colorado is often cited as a great place to live, which no doubt fuels this growth rate. U.S. News & World Report recently ranked Denver second and Colorado Springs third for “best places to live” in the United States, based on such factors as value, desirability, availability of jobs, and quality of life.2
The entire state is affected by the population growth, which positively impacts the state’s economy but also strains its housing supply. Colorado and states across the nation are tackling housing demands by using creative funding sources and both traditional and nontraditional partnerships, while working within their budgetary and regulatory restrictions.
This article looks at how various states, including Colorado, are addressing the nationwide problem of affordable homeownership.
Affordable Housing Overview
In many areas, housing fees and taxes dedicated to affordable housing are collected only from those who purchase or sell a house. This means that when the housing market changes, these fees and taxes change accordingly. In this type of system, affordable housing funds are not a sustainable revenue source, even when the dollars are allocated directly to a housing purpose and strategically address goals set by the needs of the state or local community. To remedy this problem, many states are creating innovative funding sources for additional revenue streams, as discussed below.
State governments generally prioritize a citizen’s ability to own a home. Extraordinarily creative people throughout the country are considering how to breathe new life into housing discussions and find sustainable solutions that work best for communities in widely varying contexts. Federal, state, and local governments all play important roles in making policy decisions and creating investment strategies. And the private and nonprofit sectors are increasingly playing a larger collaborative role in creatively leveraging the public sector to address affordable housing challenges.
Innovative Funding Sources
Recent innovations in affordable housing funding include the use of marijuana revenue, social impact bonds, and community land trusts and banks.
The use of marijuana tax revenues as an affordable housing funding source is a growing trend across the country, with the City and County of Denver leading the way in pursuing this type of nontraditional revenue source. In 2018 the Denver City Council partnered with the Denver Housing Authority to increase the city’s sales tax on marijuana to fund the building and preservation of affordable housing units and the purchase of property.4 This approach offers a model for other states that permit marijuana use5 on how to raise revenue to fund affordable housing.
Local jurisdictions that allow marijuana use typically have a city tax on marijuana-related sales and can allocate some or all of that revenue for a housing purpose. For example, the municipality of Aurora approved allocating a portion of its marijuana revenue to focus on the homeless population.6 Municipal decisions are local and generally do not require enactment of state laws for their implementation, so this is an expedient affordable housing funding source for municipalities.
Another option for allocating state marijuana revenue to housing needs is through citizen initiatives. This would require collecting signatures to get on the ballot statewide. In Colorado, a less burdensome option could require that new revenue bills introduced in the General Assembly allocate some of the revenue to the Marijuana Tax Cash Fund to be used for affordable housing. Each year new allowable purposes can be created by the state legislature to adjust how Colorado marijuana dollars can be spent.7
Social Impact Bonds
Social impact bonds allow governments to use private financing to fund social programs. They are essentially contracts between a private entity and a public sector entity under which the private entity agrees to pay for a social program. The private investors are repaid if and when contractually agreed upon objectives are achieved.
The use of social impact bonds is a growing national trend to fund affordable housing. Again, Colorado, and Denver specifically, is a leader in this field. In 2016, Denver launched an effort to use social impact bonds to bolster its limited resources by investing in a preventative, permanent supportive housing program for the chronically homeless. This pay-for-success8 model allows the City and County of Denver to partner with lenders and community service providers to pay for services and to shift its spending from short-term to long-term solutions. After just a few years this novel approach seems to be working well, and the program is expanding to address early childhood programs. Colorado passed social impact legislation in 2015 that enabled Denver to initiate this novel approach to supportive housing.9
Several other states have passed social impact legislation10 and many more are taking action to allow these innovative funding approaches. Social impact funding could allow for national partners, and potentially combined federal agency and private sector support. To date at least 24 states and the District of Columbia have enacted state legislation on social impact bonds.12 While many early pay-for-success models have focused on supportive housing or green building, creative uses of partnerships for affordable housing funding is limited only by the imagination.
Community Land Trusts and Banks
Community land trusts and banks are other popular affordable housing resources. These land trusts and banks tend to be localized to specific county, municipal, or regional areas. Many perform laudable work in their communities and often offer opportunities to maintain neighborhood character or focus on specific local needs or a particular population, such as veterans.
Land banks vary in size, shape, and scope, but typically are accountable to a board that targets where and how the funding is spent. Many land banks focus on acquiring and selling unused property for redevelopment in cooperation with both nonprofit and private sector developers and/or cities. They also fund rehabilitation of old residential structures as well as the development of vacant or abandoned property for new productive uses.
Michigan implemented a unique approach to this funding source by creating a statewide land bank focused on promoting economic growth through the acquisition, assembly, and disposal of public property.13 The properties include tax-reverted properties that can be redeveloped in a coordinated manner to support land bank operations on the county and local levels.
Michigan passed the Land Bank Fast Track Act,14 effective January 5, 2004, which created the first truly expansive statewide land bank authority in the country.15 Essentially, this law allows the bank’s Board of Directors to enter into intergovernmental agreements with local municipalities and the Michigan Economic Development Corporation. The law created authority for the transfer of funds and established procedures to create opportunities for economic growth across the state through the recycling of land to productive use. Michigan’s statute is considered one of the strongest and is often emulated.16
The enactment of land bank legislation has ebbed and flowed over time,17 but this tool is often cited as an example of good smart growth policy.18
Best State Practices for Using Housing Funds
While the use of housing funds to promote affordable housing is nothing new, there is always room for improvement in how states raise and use such funds. Below are six best practices that states may want to consider:
1. Develop a statewide strategy to address past, present, and future housing growth that has the flexibility to respond as states’ needs...