LA desperately needs affordable housing funding – but the linkage fee isn’t the right way to do it

The rent in Los Angeles is forcing more and more families into dire financial situations and even out of their homes and onto the streets. We desperately need more funding for affordable housing to help those in need. But the proposed linkage fee will do harm as well as good. LA can do better. We’ve identified nine options which will generate better outcomes.

The proposed linkage fee would introduce a fee of $12 per square foot for all new residential construction in the City of Los Angeles, and dedicate that money to funding affordable housing. However, the current housing crisis is caused by two things – a shortage of market rate housing and a shortage of affordable housing, and we can’t solve the crisis without addressing both problems.

The $12 / SF fee would add about 5% to the cost of building housing, and reduce the amount of market rate housing built in LA. The planning department’s own linkage fee study concluded that no fee was feasible in parts of the city with lower incomes and more affordable rents. Small developers who construct small and medium scale buildings that are more naturally affordable would also be hardest hit. That means the vacancy rate will fall even further, giving more power to landlords to raise rents year after year.

As market rents rise, more and more families then need subsidized affordable housing to make ends meet. For this reason, we believe the linkage fee is the wrong way to fund affordable housing. It’s like being in a flood and throwing people life preservers while opening the floodgates even higher.

On June 6th, the Planning and Land Use Committee discussed the proposed linkage fee. At that meeting, some of the city council members expressed these same concerns. As a result, they delayed a vote on the linkage fee, requested that city staff examine other potential funding sources for the city’s Affordable Housing Trust Fund, and also encouraged staff to consider ways to reduce the costs of and barriers to building new homes and apartments.

This is the type of conversation – and urgent pro-housing agenda – that we have wanted to help advance since the defeat of Measure S. What is the best way to fund affordable housing? And how can LA change rules to encourage more new homes of all types.

We surveyed our members to identify those ideas, and here’s what we found.

First, there was a clear consensus around identifying funding sources which will create at least $100M of annual funding for affordable housing. $100M is the high end of estimates for funding created by the linkage fee. Let’s meet and exceed that bar.

Next, we identified the preferred funding sources to hit that target among AHLA members:

Affordable housing funding options

There is a lot of policy and politics that needs to happen to get these funding streams up and running, but here are some initial thoughts on the ‘top five.’

Funding option How it would work
Entitle and sell city-owned properties The city of LA owns more than 9,000 properties, many of which are unused for city services. Some of these sites are already being used in the public opportunity site program, which expedites permanent supportive, affordable and mixed-income housing. We wouldn’t want to undermine those important efforts, but additional unused sites could be entitled and sold to generate revenue for affordable housing. This would generate funding without requiring any new taxes or fees.
parking tax
By increasing the parking tax from 10 to 20%, the city could bring in $100M of annual funding for affordable housing. In addition to funding affordable housing, increasing the parking tax would reduce traffic, as well as promote walking, biking, and public transit usage. Increasing the parking tax would require a simple majority on a ballot measure, and earmarking the funds specifically for affordable housing would require a 2/3 vote.
real estate transfer tax
Real estate transfer taxes are assessed any time a property is sold. We propose applying a progressive system, with a higher rate of tax for larger real estate transactions (similarly to San Francisco). This would generate millions of dollars of funding for affordable housing without raising the tax rate for the vast majority of home sales. As with the parking tax, if the revenues were dedicated to affordable housing, the threshold to pass an increase would be a 2/3 vote.
Parcel tax A parcel tax is a tax which is calculated per square foot of land, rather than based on what is built on the land. Because of this, a piece of neglected, vacant land would pay the same annual tax as a similarly-sized property which is being used to benefit the community with housing or commercial space. This makes it a very good way to raise money for affordable housing, because it generates revenue and simultaneously encourages landowners to develop their property and stimulate further housing construction. Measure HHH created a parcel tax and was passed by LA city voters in March 2017. Would voters support another parcel tax to address the closely-connected challenge of affordable housing funding?
Short term rental (Airbnb) tax Dedicating most or all of the receipts from the tax on short term rentals / home sharing to affordable housing seems politically promising. The City has already started collecting the tax on many short term rentals, and this draft ordinance would dedicate 90% of the revenue to the affordable housing trust fund. LA’s current budget calculates that this tax will bring in $37 million per year total, so around $32 million for affordable housing. This would be a win-win for both legal, regulated home sharing in primary residences and affordable housing funding.

There were also a number of interesting write-in suggestions. A land value tax, a fee on vacant land, and a congestion fee were the most interesting. The first would probably require reform of Prop 13, the second an impact fee analysis, and the third a split in revenue between green mobility and housing needs, but we like this kind of big thinking.

If our goal is to identify a source or sources that add up to $100 million or more per year, then the short term rental tax plus either/or the parking tax increase and progressive real estate tax seem like good places to start. We should also look at models for selling public land in the context of LA’s inventory and public opportunity site program. And even though the modified linkage fee options were not popular with our members, we are open to a progressive linkage fee that exempts housing in medium and low income areas – if it were part of a broad package of funding sources and rule changes that would tackle LA’s housing crisis head on.

Please let us know if we missed any good funding ideas! You can find us on Facebook or twitter @abundanthousing

In our next post on this topic, we will finish looking at responses to our survey – this time at 18 potential pro-housing rule changes that cover everything from community planning to the development process to building codes.