Issue #137, September/October 2004


Renovation or Ruin

Activists in two states make a radical charge: that America’s biggest program to finance affordable housing is promoting segregation and blighting city neighborhoods.


The notion is counterintuitive, even subversive, and it’s dividing activists involved in building affordable housing: Could it be that the nation’s largest program to fund construction and renovation of housing for the poor – the low-income housing tax credit program – is racially biased and is blighting many of the neighborhoods where it is being put to use?

Community groups in Camden, NJ, and Hartford, CT, have made this assertion in dramatic fashion. They have gone to court to freeze tens of millions of dollars in federal tax credits that support the construction and renovation of low-income housing. The state agencies charged with administering the credits, the suits claim, are illegally promoting segregation and concentrating poverty in inner-city neighborhoods, and thus are violating federal and state fair housing laws. In New Jersey, the suit also alleges that the allocation of tax credits violates Mount Laurel, the landmark ruling that requires all municipalities, whether urban or rural, to provide realistic opportunities for the construction of affordable housing. To the plaintiffs, the pattern seems to be this: In urban areas, where the bulk of the federal tax credits are used, developers most often build family housing, which tends to be overwhelmingly occupied by poor black and Latino families, thus further concentrating poverty. In suburban or rural settings, developers tend to use credits to build elderly housing facilities, and the people who occupy the developments are more likely to be white.

So far, the court challenges have been unsuccessful. In New Jersey, a judge ruled that the state’s Housing Mortgage Finance Agency is making a reasonable attempt to balance the allocation of affordable housing credits to urban and suburban areas amid other social constraints, and that there is no absolute requirement for the state agency to stand up for integration. In Connecticut, a judge ruled that the community doesn’t have standing to bring a fair housing challenge to the tax credit program. Community groups in both states have filed appeals, which are still pending.

Despite the initial negative court decisions, this issue is now out in the open. The question for activists around the country is whether two social goods – the construction of new and improved low-income housing and the creation of racially and economically integrated communities – are mutually exclusive.

“Our case challenges the notion that more or new affordable housing in the cities is fundamentally helpful for revitalization,” says Kevin D. Walsh, associate director and staff attorney for New Jersey’s Fair Share Housing Center. “In fact, building affordable housing in the cities has no net revitalizing effect at all.” Decisions regarding which projects to fund with tax credits, Walsh charges, are being made “without regard to whether they perpetuate apartheid.”

To back up these claims, Walsh and his allies (his suit was joined by a number of nonprofits and university research centers, which filed friend-of-the-court briefs) cite statistics showing that, as Camden benefited from low-income housing tax credits, poverty and segregation in the city increased. Between 1987 and 2003, Camden created 1,198 apartments through the tax credit program, yet, from 1993 to 2001, Camden’s tax base declined 4 percent and the city lost 22 percent of its private sector jobs. In addition, Camden’s schools today are 96 percent black and Latino.
To be fair, racial and economic patterns are affected by many factors – the growth of malls, the lack of investment in small businesses and blue-collar industries, and high tax rates in the cities compared with nearby suburban communities. Housing programs may be just one cause among many when it comes to poverty rates and racial segregation.

Still, lawyers on the Connecticut case say the pattern exists across the nation. “In many parts of the country, the tax credit programs are producing the same kind of racism and economic discrimination that we saw in HUD programs 30 to 40 years ago,” says Philip Tegeler, former legal director of the Connecticut Civil Liberties Union (CCLU), the group that filed the suit in that state.

But for many who have made it their mission to build affordable housing in troubled urban communities, those are fighting words. For them, the mere mention of the issue is inflammatory. Jeremy Nowak, CEO of The Reinvestment Fund, a $213 million community development investment firm based in Philadelphia, which has used the federal tax credits to finance a number of its projects, accused a reporter of demonstrating bias simply by asking about the issue. Calling the data presented in court by Walsh and others “pitiful,” Nowak questioned the motivation of those who have initiated the suits, charging that they were condemning poor people to awful living conditions while claiming to fight on their behalf. “Rather than making these racially charged allegations,” he says, “people of good faith might want to figure out how to get something done.”

In Connecticut, the suit against tax credit financing “was not a popular argument with the other nonprofits working in Hartford,” says Patricia Spring, coordinator of a network of nonprofit builders under the umbrella of the Connecticut Housing Coalition. The private market is so shattered in many Hartford neighborhoods, she adds, that “tax credits are the only way something’s going to happen.”

On the surface, few areas would seem more in need of housing renovation – for people of any skin color and any economic status – than the two cities at the root of the lawsuits. Both are once-strong industrial and commercial centers that have, over several decades, fallen on hard times. Yet it is just these troubled cities that are having trouble with the use of tax credits to rebuild their dilapidated housing.

The issue is so paradoxical that the head of the Camden County branch of the NAACP, one of the plaintiffs in the New Jersey case, finds himself arguing against building more housing for black people and in favor of new housing for whites. Colandus “Kelly” Francis, a garrulous retired postal worker who has lived in Camden for better than half a century, sits in the group’s dusty storefront office on a scruffy block of Kaighn Avenue and explains: “I oppose tax credits because of the social impact of the potential – no, it’s not potential anymore, because it’s actually happening – of the segregation of the city. The only housing being provided here is affordable housing. And we know who’s not living there – white folks. White folks are not coming back into the city.”

Francis can remember when Camden was a thriving industrial giant and a multiethnic city, home to the massive factories of the Radio Corporation of America (RCA), Campbell Soup Company, Philco Electronics and the Esterbrook Pen Company. The decline began in the 1960s, he recalls, when most of Camden’s industries fled to cheap land in the suburbs, taking tens of thousands of jobs with them. Today, a walk through Camden’s neighborhoods is a reminder that some American cities are not all that different from Baghdad, except for the bombings. Boarded-up buildings and vacant lots predominate; in mid-July, the local paper was dominated by the news that a man going to a store had been shot dead by a stray round from an AK-47 assault rifle. Another article noted the civic joy over the news that a block of homes, long occupied by drug dealers, was going to be bulldozed. In this city of approximately 80,000 people, per capita income has sagged to $9,800, unemployment is an almost unbelievable 16 percent and 35.5 percent of the residents live in poverty. By almost any measure, Camden is one of the poorest cities in the nation. It is also one of the most segregated, with a population that is close to 97 percent minority – mostly black and Hispanic, with a few Asians as well. The few whites in Camden generally live in two areas – the waterfront, where the former RCA complex has been renovated into lofts, and a small north end neighborhood called Cramer Hill, which is currently the target of a controversial $1.2 billion redevelopment plan.

Francis insists that the suit against low-income housing tax credits falls within the historic mission of the NAACP. The association, he says, was formed almost a century ago with three overarching goals – to end lynching, establish full voting rights and create an integrated society. The first two tasks, thankfully, have mostly been achieved. It’s the last goal, he argues, that the tax credit lawsuit is promoting.

When asked what he hopes to accomplish with the suit, the Camden civic watchdog is clear: “Affordable housing in the suburbs.” But his argument is more complex than simply declaring that government programs should force all communities to be integrated. Francis believes that Camden will fail economically if new construction is limited to low-income housing financed through tax credits. He argues that much of the city’s improved housing is actually a drain on government finances.

“Housing is a negative ratable,” he says, meaning that it produces less in tax revenue than it costs in city services. “I don’t care where it is. Even in Cherry Hill [a well-heeled community adjacent to Camden], it costs more to provide services than a homeowner can pay in taxes.”

Tax credits are not evil, Francis continues. Indeed, several organizations in which he is active have used the credits to renovate residences in Camden. But, he argues, the government should be sponsoring different kinds of development – commercial projects that will produce jobs for Camden’s young people. “The something that should be done [with tax credits] is commercial or industrial development, because commerce and industry are positive ratables,” meaning that they are positive for the city treasury because they don’t eat more in city services than they contribute in taxes. In addition, he says, industrial and commercial development will provide jobs for residents.

Francis may be a pest to the politicians, but he’s also a major civic booster. In addition to his antidiscrimination work with the NAACP, he also heads the Camden City Taxpayers’ Association. “I’m still an optimist,” he says. “There’s no good reason for the city of Camden to be in the situation it’s in. Cities require three things: location, location and location. What better location is there in the U.S.A. than Camden, New Jersey? We have a major waterfront, shared with a major metropolis [Philadelphia is just across the Delaware River]. We are minutes away from two turnpikes, going north, south, east and west. We are 10 or 15 minutes from a major international airport. And we have a rail freight system right in town. The infrastructure’s here.”

Two states away up the eastern seaboard, Hartford is facing some of the same issues. The tax credit problem came to a head in 2000 and 2001 in Asylum Hill, a neighborhood that abuts the city’s business district, when the Connecticut Housing Finance Authority approved two deals costing a combined $700,000, which converted 66 market-rate apartments on a single block into low-income housing. For Bernie Michel, chairperson of the Asylum Hill Problem Solving Revitalization Association, a community group founded with a grant from the U.S. Department of Justice, it didn’t seem fair that these federal credits, which were supposed to be used all over the state, were being used almost exclusively in cities. “They keep putting these projects in the inner cities,” he says. “They never do any of these things in Avon or Simsbury” or other ritzy suburbs. What’s more, he feels, there is a market for non-subsidized housing in Asylum Hill, but that it is being stunted by the investment advantage offered by the low-income credits.

Like Camden, Hartford has had its ups and downs. The city’s many manufacturing businesses – Underwood Typewriters, Colt’s Manufacturing Co., Pratt & Whitney engines – closed or relocated decades ago. And insurance, long the dominant white-collar presence, has been wilting of late. Hartford is the state capital, but it is also the poorest city in Connecticut, with a per capita income hovering around $13,500 and unemployment above 8 percent. Almost one-third of the city’s 125,000 residents live below the poverty level. Asylum Hill, once a bedroom community for people starting in the insurance business, has reflected the changes. The neighborhood features scores of small apartment buildings – containing mostly studio and one-bedroom units – erected in the 1950s and 1960s, when the insurance industry was riding high. But there’s spotty demand for these units now, and many of the complexes are in decline or vacant. The community, which was one of Hartford’s nicest back in the 1980s, experienced an almost 50 percent increase in poverty in the 1990s, and Michel’s group is worried that continued use of tax credits will add to that woeful number.

Alarmed by the sudden influx of tax credits on that one block, the revitalization organization met with the CCLU, which had already investigated the racial impact of the state’s allocation formula for tax credits in other municipalities. Ultimately, the group decided to work with the CCLU to challenge the tax credit allocation on racial grounds. “I felt personally that the lawsuit made a very good point,” Michel recalls. “Diversity is very important to any neighborhood.” What’s more, he argues, shoehorning large low-income families into Asylum Hill’s small apartments is simply unfair.

Interestingly, the program at the center of these disputes – the federal Low-Income Housing Tax Credit – is not a housing program at all. Instead, it was written into law in 1986 as part of the tax code and is administered by the Internal Revenue Service (IRS). The tax credit program reverses the traditional conception of housing subsidies. Rather than providing a direct subsidy for construction of affordable housing, the program offers a subsidy on the other side of the equation, as an incentive to encourage wealthy investors to put their money into affordable housing. In exchange for investing in a project to construct or rehabilitate affordable rental housing, these investors – they can be corporations or individuals – get a direct reduction in their taxes. The government earmarks approximately $3 billion to low-income housing tax credits every year – which makes it the federal government’s largest affordable housing production program.

The IRS allots the credits to the states according to population, and most states allocate them to individual projects through local housing finance agencies. In most regions, there are more applications than there are tax credits available, so each state must create guidelines – called qualified allocation plans – to determine which projects win the credits. The lawsuits in Connecticut and New Jersey challenge these allocation formulas. The suits contend that results on the ground show that the tax credits reinforce segregated housing patterns. For instance, the Fair Share Housing Center pointed out that in 2003, under an allocation plan that had already been revamped to supposedly be more cognizant of racial issues in choosing tax credit deals, nine of 14 projects approved in New Jersey were in neighborhoods that were more than 85 percent black and Latino. The state countered that the plan attempted to promote affordable housing in the suburbs and rural areas as well as the cities but that all sorts of issues – from land cost and zoning restrictions to lack of mass transportation – made it difficult to successfully build family projects outside the cities.

Once the credits are allocated to a project, each developer sells them to individuals or corporations, often through brokers (called syndicators). If a tax credit is approved, the developer must guarantee that the housing will stay affordable – which generally means within the price range of people earning 60 percent of the area’s median income – for 15 years. Investors who purchase the credits get to use them to reduce their taxes for 10 years.

By law, the annual value of a specific tax credit can account for just 9 percent of the project’s construction costs plus certain soft costs. This means that a housing development must cost $1.1 million to generate a tax credit of $100,000 a year. (There is a parallel program offering tax credits that can be used to fund 4 percent of development costs.)

Despite the value to developers, tax-credit financing alone will seldom result in homes that are affordable to truly low-income people. That’s because the tax credits are discounted when they are sold. Builders who currently work with the tax credits suggest this rough rule of thumb: the credits are worth 70 cents on the dollar. So, investors who buy into a deal that generates a credit of $100,000 a year – or $1 million over ten years – only ante up approximately $700,000. This leaves a budget gap of $400,000. Most builders package tax-credit financing with other federal, state and local subsidies, in an attempt to make up the shortfall.

Sean Closkey, director of neighborhood investment strategies with The Reinvestment Fund, has been on the giving and receiving end of tax credits. He built housing with tax credits when he was at the St. Joseph Carpenter Society in Camden and he allocated tax credits statewide as head of New Jersey’s Housing Mortgage Finance Agency. Closkey believes that tax credits are a useful tool to seed a market, particularly when a city is in so much trouble that private developers simply won’t build. But after a few tax credit developments, he suggests, a city should try to build on its successes by weaning developers in the neighborhoods that have received the credits off the lucrative incentive.

“Tax credits in coordination with money have really done a great job of taking neighborhoods in Camden and Newark and making them among the best in those cities,” he says. But, he cautions, over-reliance on the credits can be bad for cities as well. “You’re rebuilding a market. And as it develops, it needs less subsidy.”

At the other end of the economic spectrum, Closkey continues, tax credits can come in handy when a neighborhood gets overheated as well, and can serve to bolster low-income housing in gentrifying areas. “You use the tax credits to shake up the market,” he says. “Then, as the market moves up, people have equity and the city benefits from that economic health. Later, you can come back in with tax credits to cool the market down.”

Camden’s Kelly Francis says Closkey is presenting an ideal sketch of how the credits could work. But he sees no evidence that Closkey’s claims are valid in Camden. As Francis sees it, the credits may be good for housing developers, but they’ve been bad for the city. “Sean’s in the housing business,” Francis says. “My focus is true economic development.”

Whatever the economic impact, research from around the country seems to bolster the case that states have seldom used low-income housing tax credits to reverse housing discrimination and segregation. In 1996, for instance, an independent audit showed that, in cities, half the apartments built through the tax credit program have been in minority neighborhoods. A more recent study by Greater Boston Legal Services, a public interest law firm, has shown that low-income housing tax credit projects in that city have concentrated blacks and Latinos in historically black and Latino neighborhoods, and particularly in the poorest communities. Activists in Boston, a city with long-standing disputes over integration, are alarmed about the data but have so far stopped short of going to court.

Nevertheless, as one lawyer who is working for the community groups suing against the allocation of tax credits admits, although it may do social good to create integrated neighborhoods, blocking construction of new affordable housing in black and Latino neighborhoods may not be the right remedy. Says the lawyer, “Try telling that to a low-income person who’s looking for better housing in the city.” And Kenneth Zimmerman, whose New Jersey Institute for Social Justice has added its weight to the case against that state’s allocation of the tax credits, also acknowledged the complications. Zimmerman says, “Anyone who suggests that building additional affordable housing in urban areas is bad and building additional affordable housing in the suburbs is good is being way too simplistic.”

In Hartford, Bernie Michel is unsentimental about the tax credit suit. “We don’t have a lot of emotion invested in it,” he admits. “If we don’t win, it’s certainly not going to be the end of the world. And if we do win, it will not change the tax credits that have already been allocated.” Tax credits or no tax credits, he adds, “nothing affects the quality of a street as much as the quality of the landlords and how they maintain their buildings. We can do all we want to scream at the police and at Licenses and Inspections [Hartford’s code enforcement agency], but if we can get good landlords to buy into the neighborhood, we get much more impact.” Michel hopes the lawsuit will simply make the state’s determination of who should get tax credits “a little bit more transparent.”

Still, Michel is ambivalent. At the moment, he feels, Asylum Hill is being dumped on. But he also knows that diversity is a delicate thing, and that too much market-rate or high-rent housing would also change the neighborhood. “At a certain point, I’m going to end up being concerned about the gentrification of Asylum Hill,” he muses. “Which is a funny thing, because we’ve spent all this time fighting to civilize it.”

Robert Neuwirth, who writes regularly on housing issues, spent much of the past three years living in squatter communities of Brazil, Turkey, Kenya and India. Shadow Cities, his book about life in these illegal neighborhoods, will be published by Routledge later this year.