Jaime P. Luque· Nuriddin Ikromov

William B. Noseworthy

A ordable

Housing

Development

Financial Feasibility, Tax Increment

Financing and Tax Credits

Affordable Housing Development

Jaime P. Luque

•

Nuriddin Ikromov

•

William B. Noseworthy

Affordable Housing

Development

Financial Feasibility, Tax Increment Financing

and Tax Credits

Jaime P. Luque

ESCP Europe

Madrid, Spain

Nuriddin Ikromov

California State University

Sacramento, CA, USA

William B. Noseworthy

McNeese State University

Lake Charles, LA, USA

ISBN 978-3-030-04063-5 ISBN 978-3-030-04064-2 (eBook)

https://doi.org/10.1007/978-3-030-04064-2

Library of Congress Control Number: 2019933391

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Preface

This book grew out of a major class project that Professor Jaime Luque designed to

give students real-world experience in solving problems after the fashion of the

teaching style of Professor James A. Graaskamp. Graaskamp, who was a leader,

establishing real estate as a ﬁeld of academic training, consistently emphasized an

ethics-based approach to the study, training, teaching, and practice of real estate

development. Following upon Graaskamp’s inspiration, this course was awarded the

prestigious Ideas Worth Teaching Award by the Aspen Institute, placing Professor

Luque’s course among just 20 exceptional peers who led courses in 2018 at

top-ranking business programs across Europe, the Middle East, North America,

and the Paciﬁc. Most importantly, it was the content of the course, especially that

which focused on addressing a local affordable housing crisis, that motivated this

award and, indeed, this book. Both students and local community ﬁgures from the

municipal and county levels saw tremendous beneﬁt from it. As the project grew,

and local expert practitioners, as well as an increased number of community mem-

bers, became involved in the project, we realized there was great value in writing a

book speciﬁcally about affordable housing development. We hope that the book

provides a guide for students, instruct ors, and practitioners to look at the problem of

the lack of affordable housing in mid-sized midwestern cities in the United States

through the lens of economists, real estate experts, and potential developers.

Madrid, Spain Jaime P. Luq ue

Sacramento, CA Nuriddin Ikromov

Lake Charles, LA William B. Noseworthy

Acknowledgements

In this project, we beneﬁted substantially from the intellectual contributions of local

policy experts, researchers, and industry experts in urban development. We are

particularly grateful for the lectures and interviews that they allowed us to draw

upon in the writing of this book. We would especially like to thank Mayor Paul

Soglin (City of Madison), Matt Wachter (City of Madison), Karla Thennes

(Porchlight), Steve Schooler (Porchlight), David Ginger (WHEDA), Tom Landgraf

(Wisconsin School of Business and Dimension Development LLC), Lisa

MacKinnon (Dane County), Olivia Parry (Dane County), Todd Violante (Dane

County), Rob Dicke (Dane County Housing Authority), Karin Peterson Thurlow

(Dane County), Mary Kolar (Dane County), Karyn Knaak (Cinnaire), Chris Jillings

(Cinnaire), Katherine Rist (Foley & Lardner LLP), Mike Mooney (MLG Capital),

Mike Harrigan (Ehlers), Kristin Rucinski (The Road Home), Ruben Anthony (Urban

League), Renee Moe (United Way), Ron Cramer (Wisconsin School of Bus iness),

Suzanne Dove (Wisconsin School of Business), Steve Malpezzi (University of

Wisconsin-Madison), and Chris Herbert (Joint Center for Housing Studies, Harvard

University).

If there are any successes of this project, they lie with the contributions of these

individuals. If there are any shortcomings or concerns, the responsibility lies with the

authors.

vii

Contents
1 Housing Affordability Crisis: The United States ............... 1
The Case of Madison, Wisconsin . ........................... 5
References . . .......................................... 11
2 Homelessness, Housing Public Policy and Urban Planning ....... 13
Principles of Need and Creation of Urban Space ................. 13
Development of Cities .................................... 14
Affordable Housing and Public Policy: Who Pays and Who Beneﬁts ? . . . 16
Where Do We House the Homeless? ......................... 18
The Case of Madison, Wisconsin . ........................... 21
The City of Madison’s Urban Policy and Development Initiatives . . . . 22
Local Policy At the County Level: Initiatives and Challenges . . . . . . . . 27
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
References . . .......................................... 30
3 The Low-Income Housing Tax Credit (LIHTC) Program ........ 33
Introduction to LIHTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
How the LIHTC Program Is Administered at the State Level . . . . . . . . 37
WHEDA: How Wisconsin Does LIHTC . . . . . . . . . . . . . .......... 39
WHEDA Scoring and LIHTC Applications ..................... 41
Preparing for the WHEDA Application: Research . . . . . . . . . . . . . . . . 42
How Developers Can Use LIHTC in Practice ................... 42
Establishing Site Control . . ................................ 44
Beneﬁts of a Small Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Site Control and Zoning: Challenges for the Developer . . . . . . . . . . . . 48
References . . .......................................... 49
4 The Tax Increment Financing (TIF) Pro gram ................. 51
Introduction to TIF ...................................... 51
TIF in the United States . .................................. 52
Criticisms of the TIF Mechanism ............................ 53
ix

Creation of Tax Increment Districts . . . . . . . . . . . . . . . . . . . . . . . . . . 55
The Review Process . . . . ................................. 58
TIF from the Developer’s Perspective . ........................ 60
TIF from the Perspective of Policy Makers . . . . . . . . . . . . . . . . . . . . . 62
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
References . . .......................................... 64
5 Housing the Homeless ................................... 65
Porchlight: An Introduction ................................ 65
Porchlight’s Considerations Regarding Housing Location and Size .... 66
Porchlight’s Considerations Regarding Housing Services . .......... 68
Emergency Shelters ...................................... 69
Homeless Veterans . ..................................... 70
Chronic Homelessness . . . ................................. 70
Breakdown of Homeless Individuals By Household Type in Madison . . . 71
Free Mobility: Does Madison, WI, Attract Homeless
From Other States? ...................................... 71
Homeless as a Wo rking Class: Barriers to Access
Permanent Housing . . . . .................................. 73
Market Rents and Affordable Housing in Madison . . . . . . . . . . . . . . . 74
The Way to Pay for Services for the Homeless Is to Run
Affordable Housing Programs .............................. 77
Homeless Children . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
6 Financial Feasibility Analysis: Planning for the Possible ......... 81
Graaskamp’s Financial Feasibility Model . ..................... 81
References . . .......................................... 87
7 Location, Location, Location .............................. 89
Numerical Example ...................................... 91
Development Is Unlikely Without Subsidies . . . . . . . . . . . . . . . . . . . . 94
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
References . . .......................................... 97
8 The Critical Role of TIF, LIHTC, and City Grants ............. 99
Financial Feasibility With and Without Subsidies ................ 100
Tax Increment Financing Usually Does Not Make or Break a Project . . . 101
Low-Income Housing Tax Credit Can Make a Huge Difference ...... 104
A Financial Feasibility Model with TIF, LIHTC and City Subsidies . . . 108
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
References . . .......................................... 112
x Contents

9 Affordable Housing Development: Further Considerations

for Developers ......................................... 113

Why Non-proﬁt Lenders Are Needed . . . ...................... 113

An Example of a Non-proﬁt Lender . ......................... 114

Going Deeper: Cinnaire as an Example of a Lender . .............. 116

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

References . . .......................................... 120

10 Beyond Financing: The Process of Development ............... 121

Developer’s Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Madison and Local Need . ................................. 123

At the County Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

References . . .......................................... 128

References ............................................... 129

Contents xi

About the Authors

Jaime P. Luque is Associate Professor at ESCP Europe Business School and

afﬁliate of the Center of Financial Security at the University of Wisconsin-Madison.

He was previously an Assistant Professor of Real Estate and Urban Economics at the

University of Wisconsin-Madison School of Business, where this book was written.

Jaime’s current research interests are in affordable housing development,

non-prime mortgage lending, and real estate ﬁnance and economics in general. His

academic research has been published in journals such as the Journal of Economic

Theory, the Journal of Public Economics, the Journal of Housing Economics,

Economic Theory, Real Estate Economics, and Regional Science and Urb an Eco-

nomics. He has also published three books for business students: Urban Land

Economics (Springer), Rays of Research on Real Estate Development (Business

Experts Press), and The Subprime Crisis: Lessons for Business Students (World

Scientiﬁc Publishing).

Jaime’s teachi ng interests include real estate ﬁnance, affordable housing, and

urban economics. Jaime has teaching experience in both the MBA and BBA pro-

grams. Recently, his pedagogical efforts in his urban economics course have focused

on the topic of affordable housing development. This module culminated in a “Big

Event on Homelessness and Affordable Housing.” More than 300 community

members, legislators, students, and faculty convened to hear from guest speakers

about the state of affordable housing and how the recommendations of the students’

projects can make housing more affordable in Madison, Wisconsin.

Jaime has also been deeply involved with the adminis trative side of the Wisconsin

School of Business. He had severa l positions, including organizing a big conference

on the topic of affordable housing and homelessness and promoting a collaboration

between the City of Madison and the Wisconsin School of Business on topics such as

urban planning and development.

Jaime is the recipient of the 2017 Ideas Worth Teaching Award by the Aspen

Institute Business and Society Program for his educational innovations to address

affordable housing development.

xiii