The holy grail of successful neighborhood revitalization is a vibrant community in which lower income homeowners and renters of all races can enjoy the increased quality of life, better services and increased wealth of revitalization without being booted in the process.
Yes to positive change but No to displacement requires an intricate combination of investment resources, protections for homeowners and renters and the willingness to accept change in the community.
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| Investment without displacement. (Reinvestment Fund) |
The problem
Investment resources need to be large because in disinvested communities money coming in for small, scattered improvements can disappear like a drop in the bucket. Only strategically placed investment can leverage an increase of assessed values, a necessity in terms of making investments economically sustainable. Only if depressed real estate values increase will investment in the area make sense, even if the sources are public. It is not economically feasible to prop up real estate that remains "under water", i.e. where the assessed value in the end is lower than the cost of the improvement. An increase of assessed value is also desirable in terms of wealth creation for homeowners. Homeowners in disinvested or "redlined" areas have lived for decades with the artificially depressed value of their homes and thus been excluded from America's foremost instrument of wealth creation. But it is precisely this increase in assessed value which also causes displacement.
If the new property values rise at a rate that would price homeowners and renters out, it will effectively displace them. The conflict needs to be resolved with a set of regulations that manage tax and rent increases for existing residents. Protecting homeowners from being priced out is relatively easy through regulation which limits annual property increases. In Baltimore this is called a homestead tax credit for which owners have to initially apply. No doubt, even those lower increases can still burden homeowners,but at least the higher home value can leverage cash, provided fair lending rules are applied. Thus homeowners would get access to equity loans on their properties, allowing them to bring them into a state of good repair that they couldn't achieve when properties were so depressed that no loans could be obtained.
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| Disparities in median Hosuehold incomes in Baltimore (Census 2013) |
The matter is far more complicated for renters, a group that usually presents a high percentage in vulnerable communities and has lately grown nationally across all income levels. Rental property owners who hold their asset as an investment can't receive homesteading tax credits and will pass increased taxes straight through to renters, especially if properties don't fall under initial low income restrictions and operate with market-level rents. Beyond rent increases from an increase of assessments renters face an entire set of adverse conditions that could price them out.
For example, low income apartments may outlive the rent restrictions of their initial financing and become market rate rentals or even condominiums. This situation occurs much more often than new affordable units come online. Additionally, the number of municipal "public" housing units is shrinking drastically. Housing departments across the country divest themselves of their housing stock since ever shrinking funding from HUD has left them unable to keep the units in decent shape. HUD is actively supporting the sale of public housing to private developers, especially as part of the Rental Assistance Program (RAD). Proponents of RAD see the program as a magic way of improving public housing without public funds, critics see RAD as another tool that will allow rent increases, weaken affordability restrictions and reduce available affordable housing in 20-30 years time.
If your building or development is converted to [RAD], your rent contribution will most likely be the same as it was under public housing—generally no more than 30% of your household’s adjusted gross income. Since the project-based Section 8 programs also set resident rents at 30% of adjusted income, most residents will not have rent increases as a result of a RAD conversion. However, if you are paying a flat rent in public housing, you will most likely have to gradually pay slightly more in rent over time. In these limited cases, if your rent increases more than 10% and requires you to pay more than $25 per month in additional rent, your new rent will be phased in over the next 3 or 5 years depending on your PHA’s policy.Why isn't there enough new quality affordable housing? Usually, because it needs subsidies and there aren't enough funds. Low income housing is today created by for profit or not for profit organizations with the help of a complicated set of financing and tax credit options. The result is that in all major cities tens of thousands sit on waiting lists for affordable housing or vouchers to the point that there is a veritable national affordable housing crisis. In short, the supply pipeline of new affordable housing is far outstripped by demand from the loss of public housing and units that have lost their rent restrictions. Thus any increase in affordable market rate rents create a big problem.
This is how cities like Baltimore which see no growth and very little in terms of "gentrification" still have a housing crisis, or better, an affordability crisis. This is especially true if affordability isn't only expressed in dollars (i.e the area median income (AMI) but in % of a renter's income. It is obvious that communities with high levels of poverty have many renters who pay in excess of the 30% of their income on rent which HUD sees as the limit after which a household becomes "rent burdened".
To avoid displacement, rent and tax restrictions need to be combined with means to maintain or build more affordable housing. Before discussing the tools for how this can be done, a brief review of history is necessary.
The history
As the history of U.S. housing policies shows, homeowners and renters have not been treated equally and homeowner incentives were never applied simply on practical terms or in a socially responsible manner but instead were used as a method of executing power and control. In short, when it comes to U.S. housing policies the playing field has never been level. The policies have been, and in many cases still are, rife with systemic racism, discrimination and segregation by race and income, regulations and laws such as the Community Reinvestment Act notwithstanding. In fact, the recent financial crisis was, to a large extent, caused by banks foisting subprime loans on unsuspecting low income homeowners or buyers, especially those of color. The result is that in the foreclosure crisis tens of thousands of people already disadvantage from historic redlining and from living in areas of depressed home values now lost their homes. Today we still see largely race and income segregated neighborhoods, in large and small cities, in suburbs and even in rural areas. Through segregation, homeowners of color are still being deprived of the appreciation of value of their properties that has built much of the wealth of white Americans.
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| Baltimore's areas of concentrated poverty reflect the areas that used to be redlined (2009 map) |
Seen in this historic context the national housing crisis and the question of equitable reinvestment in poor communities is no longer just a question of how one can get market driven private investment into neighborhoods that have no market and don't promise a return on investment. Instead investment must encourage existing residents to stay so that they
are not deprived, once again, of the benefits of neighborhood investment.
Many ideas are being batted around for protection of existing residents and for finding additional funding sources. A related issue of debate is whether it makes sense to turn renters into homeowners, an old goal of US housing policy which assumes that somehow homeowners are more desirable community members, a questionable view which is frequently repeated by community associations as well. Through mortgage tax deductions, much more public subsidy is given to homeowners than through low income tax credits.
The U.S. shells out roughly $46 billion a year on affordable housing—$40 billion on means-tested programs and another $6 billion in tax expenditures through the Low Income Housing Tax Credit (LIHTC) program, which supports affordable housing investments for low-income Americans. Compare that to $195 billion in subsidies that flow largely to wealthy and middle class homeowners via tax deductions for mortgage interest.(CityLab 4/17/2015)
Renter and homeowner protections
Lets look at renter and homeowner protections first and additional funding second.
A report titled "Development without Displacement" by the San Francisco based group Causa Justa presents a pretty comprehensive list of what needs to be done to protect existing residents. Similar to the question in the beginning of this article the paper asks:
So as economic development is poised to enter a community, what can be done to capture the economic and human benefits of that development for the existing residents, and what models of development can be encouraged that maximize human development? Also, what models of development can be encouraged that do not take resources from one place and put them in another, but instead expand resources for all?The report emphasizes that protections against displacement must be as multi-faceted as the causes for displacement. The report chiefly lists six principles:
Causa Justa, Oakland
1. Baseline protections for vulnerable residentsBaseline protections include measures like a fairer rent court making it harder for landlords to evict tenants, a matter also debated in Baltimore and many other places. Under production of affordable housing the report suggests a "no net loss policy" requiring all affordable units lost through renovation, conversion, or demolition to be replaced within the same neighborhood or at least within the same city, rent control, and inclusionary zoning ordinances under which affordable units have to be part of any larger development.
2. Production and preservation of affordable housing
3. Stabilization of existing communities
4. Non-market based approaches to housing and community development
5. Displacement prevention as a regional priority
6. Planning as a participatory process
If offering an “in-lieu fee” option, set fees at a level high enough to incentivize onsite construction based on nexus study, and require that fees go into a city housing trust fund or relocation fund and be prioritized for use within the same neighborhood as the triggering development,Under stabilization the report suggests better oversight of rental units, for example by code enforcement, rental unit registration and licenses. In the category of non-market based production of housing the already discussed Community Land Trusts are suggested along with Limited Equity Housing Co-Ops and other cooperative land and housing arrangements. The regional collaboration to prevent displacement is a particularly difficult element of protection which overlaps with frequent suburban discrimination against displacement, the desire of central city not to lose residents and consent decrees like the one in Baltimore which forbid concentrations of poverty and could actually favor displacement. The final element, participatory planning should be standard practice, but is most of the time not the reality. Baltimore is currently using a community cabinet as a sounding board for suggested local policies. Citizens serving on the cabinet appreciate the better exchange of information between neighborhood groups.
Funding
Ample quality affordable housing integrated into diverse communities is a standard feature in Austrian cities such as Vienna, for example. In a functioning equitable system wages would also be high enough so that most people can pay the rents that are needed to cover the real cost of housing.
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| Funding types (Cutting Edge Capital) |
Given the current system, though, a frequently suggested response to the lack of affordable housing and community investment is the creation of community investment funds or social impact funds. Depending on their aim and origin they come in many different flavors and with different names.
There are huge amounts of capital sloshing around the globe looking for less obvious ("B-market") investment opportunities after the "A markets" show signs of overheating, can any of this money be leveraged to lift disinvested communities and create better equity? "Social impact funding" has become fashionable, i.e. investors looking to do well and to do good.Here a short description of what those funds can do: The Cutting Edge Capital group devoted to social impact funding as a business model describes on its blog Community Investment Funds (CIF) this way:
A real estate CIF can be a powerful tool for urban or rural revitalization. The concept is simple: The community invests in a fund that acquires, renovates and leases out properties that have become blighted. A portion of the profits may be reinvested in further revitalization, but any remaining profits are distributed to investors. As a result:other potential uses for a community real estate fund:
- New businesses are attracted to newly renovated properties;
- Property values rise as blight is eliminated;
- Safety improves, as more workers and customers generate more foot traffic;
- City tax revenues rise as all those people spend more money locally;
- Local investors share in the profits of the business and reinvest in the community.
- Affordable or workforce housing
- Agricultural land (perhaps in conjunction with a community land trust that acquires a conservation easement) (cutting edge capital)
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| Dr Brown, suggested racial equity impact bond (enumeration of needs) |
Community capital is about empowerment of communities. It is a set of strategies that allows ventures to raise capital from their ideal investors within their own community, allows anyone of virtually any economic class to invest in their community, and allows communities to build wealth though a cycle of investment, growth, profit, and reinvestment. [...] Community capital can be raised directly through direct public offerings (DPOs) and Title III exempt crowdfunding, or indirectly through community investment funds (CIFs). Of these, CIFs have several significant advantages: scalability, efficiency, diversification, and opportunity for liquidity.With this much going for them, one may wonder why CIFs are not far more common than they are. One would think that every community should have a least one CIF. Yet most do not – at least not yet. (cutting edge capital)Naturally, private profit-driven funds directed to poor neighborhoods look suspicious to those aiming for more equity, even if living conditions in those neighborhoods urgently need upgrade. Investing in housing and communities for profit and avoiding segregation, displacement and discrimination at the same time appears to be as elusive as socially responsible affordable health insurance offered by for profit insurers. The task is like squaring the circle, considering that for profit investors, developers, banks and builders are the same entities that created the mess in the first place.
Therefore, several models which don't rely on the usual sources of outside capital have been created, most commonly managed by community land trusts (CLT). Capital sources could be bonds, levies or outright reparations.
We envision a new model of housing and community development, where outside real estate developers and speculators are not in control, but where a vibrant non-speculative, permanently affordable, housing sector exists that consists of public housing, non-profit housing, shared-equity housing, and limited-equity housing controlled by residents & the communities in which they reside.
CLTs rely on a mix of monies. Fees from CLT residents, while minimal, can provide steady and substantial funding once the CLT achieves a significant portfolio of properties. Until them, CLTs rely on foundation grants, donations, low-cost private and public financing, and public funds. In Baltimore, the Housing Roundtable is calling upon the city to provide $20 million annually in public funds to support CLTs. (Baltimore Housing Roundtable)
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| Community Investment Trust illustrative graphic |
Mayor Catherine Pugh on Wednesday said she was taking steps to create an investment fund to help lure development to Baltimore’s most troubled neighborhoods. The Democratic mayor said she planned to raise $55 million by leasing several city-owned parking garages and use the money to establish what she calls the Neighborhood Impact Investment Fund. (Luke Broadwater, Baltimore SUN)A plan for an affordable housing fund is concurrently proffered by the Baltimore city council president who wants to levy a tax on the real estate transfer taxes for it. Even one of the candidates for governor of Maryland got recently into the act with a detailed housing plan for Baltimore. Equity advocates are skeptical. Even non-profits are not trusted since so many of them are not accountable (see my article about non-profits here) or are quasi governmental development agencies pretending to serve the public interest. Morgan State University professor Dr. Lawrence Brown, who manages the Facebook page BRACE (for Baltimore Redevelopment Action Coalition for Empowerment) judged Mayor Pugh's fund this way:
Mayor Pugh's approach is designed to make disinvested neighborhoods attractive to outside investors and create a nonprofit that would likely be run by the same type of people that run EBDI [The East Baltimore Development Initiative] and the BDC [Baltimore Development Corporation]. I want to make redlined neighborhoods livable for existing residents and give them ownership and decision-making voice in the destiny of their neighborhoods (Lawrence Brown)But maybe the assumption that agencies, banks, developers and contractors who benefited from past segregation will never turn around to promote equity doesn't account sufficiently for changing demographics, the changing function of cities and what makes investments profitable today.
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| Baltimore disnvested neighborhoods: Billions of need |
Time and again capitalism has proven more nimble than its critics have assumed and has adapted over its history to all kinds of conditions that are drastically different from the original period of the industrial revolution. Capitalism first profited from nationalism and imperialism and two world wars, only to then pivot to an international and eventually global playing field promoting open trade.
Similarly, the construction and development industry profited hand over fist from decades of suburban sprawl based on euclidean (use -separated) zoning. In recent years the industry pivoted smoothly to urban development, mixed use and multifamily housing, because it became clear that the two largest demographic cohorts, the young and the aging, opted increasingly for urban living. It seems reasonable that the development industry re-focuses on cities when urban living is the only viable option for most of the over 7 billion global population. It is precisely this shift that created gentrification in so many places.
At a time when developers had happily written cities off, gentrification wasn't much of an issue and even now, many former industrial legacy cities such as Detroit, Cleveland or Baltimore are so depopulated and disinvested that the lack of investment is a bigger problem than gentrification. Can one assume that urban investment capital will now also end racism and discrimination because an ever larger segment of the population isn't white any longer?
Given the difficulty of amassing the capital needed for bringing the many abandoned neighborhoods of industrial legacy cities back without tapping into private funds and without utilizing capitalistic principles, the answer to this question is critical. In his article Dr Brown calls suggestions that private capital could be successfully harnessed "neoliberal".
Dr. Brown himself, however, suggested a $3 billion Racial Equity Social Impact Bond that would fund neighborhood improvements which he carefully illustrated in a graph. But the question is, how such a billion dollar bond would be financed and who would invest this way. At this point, both the mayor's and the professor's fund are mere ideas without actual money in place.
PhilaImpactFund, a new place-based impact investment opportunity targeted to the Greater Philadelphia region. The Fund is believed to be a first-of-its-kind collaboration between a community foundation, The Philadelphia Foundation, and an asset manager that also originates community development loans, Reinvestment Fund. Each organization has committed $5 million toward PhilaImpact Fund’s $30 million goal (Reinvestment Fund)Many current models for development and investment straddle the line between private for profit or community based not for profit. Community Land Trusts, Community Investment Funds, Co-ops, Community Development Corporations and Equity Funds all can use a variety of capital sources and a variety of control and management mechanisms. No matter what the source of the money or what the administration of funds, short of fees, taxes or outright reparations funders will look for some type of return on the money they put in.
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| National data |
The private Reinvestment Fund funded two disinvested communities of color in Baltimore without displacing a single household. The effort is part of a larger Central Baltimore Partnership, a community and stakeholder based framework that ensures that investment is strategic and based on community goals. At times money can be almost like a reparation. Wells Fargo just provided a $500k grant to the partnership to assist with revitalization projects in the Baltimore communities of Charles North, Greenmount West, Barclay, Old Goucher, Remington, Charles Village and Harwood. In face of the grave injustices which WF inflicted on communities of color with their subprime lending programs, this seems like a drop in the bucket. Still, the concept of corporate restitution could be a powerful funding source.
The economic cost of segregation
Even if rent and tax controls were applied perfectly and large funds for reinvestment were assembled, what good would it do if a community would remain segregated by race or income? What good would it do if there are still large concentrations of poverty dysfunction in inner city neighborhoods? The goal of avoiding displacements and protecting existing residents cannot be blocking demographic change nor can the effort be limited to housing. While safe housing provides a sound basis for empowerment, it doesn't provide jobs, services or education, all aspects that need a growing tax base and a diverse population. Economically, ethnically and racially diverse communities function better than homogeneous ones, therefore, successful community revitalization would be about adding people -- not subtracting any.
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| Segregation in America |
Racial segregation and racism have become a hindrance because it makes no sense economically to take the majority of the players off the playing field. Penning people of color into desolate inner city neighborhoods is not only immoral and unethical, it also is also a problem for capitalism itself. (See this Chicago report, "the cost of segregation"). The report describes a costly vicious cycle:
The result is a self-reinforcing cycle, in which income inequality creates segregation and segregation furthers income inequality. These lowered incomes have a cost: research has shown that if the average incomes of people of color were raised even beyond the national median, up to the average incomes of whites, our gross national product would increase by $1.9 trillion.It isn't entirely cynical to observe that the current talk about equity is not caused by a moral epiphany but by growing populations of color and the insight that any system trying to ignore those majorities is destined to fail. But at the same time insistence on preserving existing cultural and ethnic conditions as they are is no answer either.
Klaus Philipsen, FAIA
The Nation: Baltimore Community Land Trust
Center for Community Progress: Preventing Involuntary Displacement of the Neighborhood's Lower-Income Residents
Development without Displacement
THE BUSINESS CASE FOR RACIAL EQUITY
Related on this blog:
Will a Neighborhood Impact Investment Fund turn Baltimore around?
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