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What is Workforce Housing and How Can You Benefit?
Workforce housing is housing built to serve families that are sitting in the middle between true affordable housing and luxury housing. There are a few different versions of workforce housing. Typically, they come into play at an income level where you’re serving families that earn between 80 and 120 percent of median income, the exact amount depends on the county and state and whatever market you're in.
In the workforce housing space, firms are typically looking to create a product that serves, as the name suggests, working families. Unfortunately, incomes for many of these families are insufficient, and they are currently dropping ever lower in the housing marketplace food chain. They don't make enough to qualify for luxury housing, and they make too much to qualify for true affordable housing, which is another term for government-subsidized affordable housing.
This creates a widening gap between those two spaces. This is caused in part by the fact that rents and housing costs are going up for the most part in all major urban metro markets, but wages are stagnant for this group. In essence, these families are stuck in the middle.
Workforce Housing vs Affordable Housing vs Section 8
These three terms, workforce housing, affordable housing, and Section 8, are often confused with each other. That isn’t surprising, the terms are often used broadly, so we’ll explain them in the context used by most actors in the commercial real estate world.
The industry-standard definition for affordable housing would be any housing that serves families that are at or below 60 percent of median income. 0 to 60 percent is what I call, and this is my own definition, true affordable housing because it is often a class defined specifically by local municipalities and most government programs as being in need of affordable housing.
Workforce housing is between 61 percent and some upper figure; essentially middle-earners who are not dependent on government-subsidized rents. In some marketplaces like New York, they may use 120 or 150 or 180 percent of median income. However, in most cases, roughly 80 to 120 percent would be considered to be the moderate income space associated with workforce housing.
Section 8 relates to both affordable and workforce housing. The Section 8 program provides a voucher to a family in the same way that most housing authorities issue vouchers. They have waiting lists of families that need help with housing through government programs. It's really a HUD program that allocates vouchers through the local housing authority and whatever market that project is in or where the tenant may want to live.
The Section 8 tenant can go into any unit at all that accepts a voucher – this is the key. California just passed a law that says that landlords cannot now bar Section 8 tenants because of their Section 8 voucher alone. In other places, there are other criteria that landlords need to underwrite such as credit history and rental history, for example. California state law as of January 1st, 2020, says no landlord can exclude a Section 8 tenant because of the fact that they are using a Section 8 voucher – though they can still be disqualified for other reasons.
The way it works is that the voucher is issued by the housing authority to the family and then the family will go find a housing unit that will accept the voucher. The rent is generally consistent with the standards that the housing authority considers to be appropriate. There are some published figures out there that define the Fair Market Rent (FMR) which says this is what HUD and the local housing authority consider to be the fair market rent relative to what a tenant would pay for a unit that has a voucher. The tenant moves in and that's the rent that they pay and the voucher covers the rest.
Workforce Housing Tax Credits - What are they and how much are they helping to bolster the demand side of the economics?
There are no workforce housing tax credits currently available in the market though that could change in the future. If the divergence of housing prices and stagnant incomes continues to widen, it is more likely than not something that will come along.
The Opportunity Zone initiative is in part designed to allow capital to flow into marketplaces and serve moderate income projects. It serves any kind of project that's in a qualified census tract for the Opportunity Zone. But it's not a tax credit – it is a tax incentivized investment vehicle that pairs relatively well with moderate income housing.
There are Grants for Low Income Housing Development and Other HUD Grants out there--Are There Similar Programs Available for Workforce Housing Development?
For pure workforce housing, there are no grants available right now. You need to be careful about workforce housing because some people will equate true affordable tax credit finance – as mentioned above – as workforce housing.
One thing to keep in mind. If you look at true affordable housing, almost all of the programs are set up to allocate capital to the lowest-income families. To get the tax credits for affordable housing there is a capability to do income averaging on a tax credit project where you could actually have 80 percent rents. However, on the other end of the spectrum, you have lower rents down to 30, 20, 10 percent of median income. As long as you achieve a 60 percent or below-average rent projects can qualify under the tax credit programs
These are specific terms defined in the industry because in places like California, where there is a deep need for homeless housing and services or permanent supportive housing, those incomes need to be even lower.
What you get is nonprofits and other people who are in the space with a goal to get all the incomes across the entire project as low as possible. That requires government capital or subsidy. What this illustrates is a desire for those who work in true affordable housing is a desire to see rents driven down until they are as low as possible.
Affordable By-Design and Workforce Housing
There's a term people use called attainable housing. This refers to a type of affordable housing different from that we mentioned earlier, which was true affordable housing as defined by government regulations and directly subsidized. Attainable housing is a term used to describe the development of housing that, by some other mechanism than government subsidy, makes it more affordable. This might be that it is affordable by design where, for instance, a developer lowers costs of construction which allows them to charge market rents that can be lower because their costs of construction are lower. This might be, for example, by building smaller units or developing more units on a single land tract thus lowering the cost per unit of the land.
What’s the opportunity for investment in affordable housing and workforce housing development?
To begin with, recall that for the purpose of this discussion, affordable housing and workforce housing are not the same. True affordable housing is that in which residents are dependent on the government for subsidies to stay sheltered, while workhouse housing simply refers to any housing that sits between high-end and affordable housing, typically designed for middle income workers. What this means practically, is that the opportunities for investment in affordable housing and workforce housing development are different. Let’s look at each property type and see how different opportunities manifest themselves.
Affordable Housing Investment
Developing affordable housing is a very different game than developing market-rate housing. The first thing to know is that the number of affordable housing developments is falling. Local, state, and federal government authorities have moved away from the policies involved with “warehousing” lower income folks in massive housing projects, partially due to the stigma associated with such housing.
These days, a great deal of affordable housing comes in the form of a certain number or percentage of units that are designated to be low-income within a single development, while the rest remain at market rents. This approach is particularly popular in places like California, but can be found in cities, counties, and states across the country.
True affordable housing development offers some benefits over market rate housing development in that much of your cash flow will come directly from the government, rather than sometimes unreliable tenants. Additionally, land, construction, maintenance, and amenity costs can be lower for an affordable housing development when compared to market rate housing because there are numerous federal, state, and local tax incentives and benefits offered for developers who choose to work in the affordable housing space.
Workforce Housing Investment
Workforce housing comprises a much broader segment of the market compared to true affordable housing. In practice, it describes almost all market affordable housing; housing that is affordable compared to the rest of the market, but not government subsidized. This type of housing is meant to fill the gaps between the government housing system and the free market, to provide for workers who make enough to be disqualified from government assistance, but not enough to afford much of the new construction going up in areas across the US.
As homeownership slips out of reach for millions of working Americans, the demand for this type of housing will continue to increase. Developing in this space comes with substantially fewer regulations when compared to government-sponsored affordable housing. As a developer, your tenant base will also be larger when working in the workforce housing sector. True affordable housing tenants are limited by the amount of government assistance available, with workforce housing you are only constrained by market demand.
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Workforce Housing FAQ
Is workforce housing Section 8?
Workforce housing is not the same as Section 8 housing, though Section 8 vouchers may be used at workforce housing properties. Section 8 refers to these government-subsidized vouchers that are provided to help house underprivileged individuals and families, while workforce housing refers to a particular type of housing meant to fill the gap between truly affordable housing and luxury options.
What is a workforce housing program?
The term “workforce housing” is used to designate those housing programs that are aimed at tenants or buyers who earn too much to qualify for standard affordable housing subsidies.
Why is workforce housing important?
The targeted clients for workforce housing programs are those who are unable to afford new or luxury construction but make enough money that they can’t benefit from government subsidies. Despite not qualifying for subsidies, these individuals still need access to affordable housing and workforce housing programs fill in these gaps.
What is the definition of affordable housing?
Traditionally, affordable housing has referred to government-subsidized housing available to the lowest-income Americans. The term has broadened in use over the years, so this type of specific government-funded affordable housing is also referred to as true affordable housing.
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