The Simple but Mighty Property Tax Abatement

Over the past twenty years, a lot of time has been spent searching for silver bullets to fix our affordable housing crisis. Think tanks, consultants, and well-meaning panels have cranked out white papers full of big ideas, and countless headlines have proclaimed the next “game-changing” solution to make housing more affordable. Some of those ideas have made a difference. Others made headlines, burned through public dollars, and quietly disappeared when the math didn’t pencil out.

If you’ve ever actually tried to get an affordable deal over the finish line, you already know the truth: no single breakthrough is going to solve this. And what typically works isn’t all that flashy or revolutionary—it’s the boring stuff that makes housing more affordable.

And few tools are more boring, effective and overlooked than the good old-fashioned property tax abatement.

The Math Always Matters

Let’s start with the basics. Affordable housing developers operate in the same financial universe as everyone else. That means their projects need to generate enough revenue to cover their operating costs. There’s no magic “deal math” for affordability—if your revenue is capped because your rents are restricted, then you have to find ways to lower your expenses. Otherwise, the deal doesn’t work, the building doesn’t get built, and affordability remains a talking point.

Property taxes are often one of the largest fixed operating costs in a multifamily development. So when a city offers a tax abatement, it creates immediate room in the operating budget of the property. That room makes it possible to charge lower rents without destabilizing the property. It brings new developments within reach. It can even preserve affordability in older buildings that might otherwise convert to market-rate.

That’s why tax abatements are game changers. They make the math work.

The Small Business Community Will Thank You

One of the most common objections to tax abatements is that they “take money away” from cities by reducing property tax revenue. But that’s not how it plays out in the real world. Recent research has shown that for every $1 a city gives up through a tax abatement for affordable housing, it gains more than $1.83 in additional local tax revenue1. That’s a positive return.

Why? Because housing creates economic activity. When more people live in affordable housing, they have more money left over at the end of the month. And they are more likely to spend that money at local day care facilities, grocery stores, and restaurants. When more people have more cash in their pocket, it creates economic growth. It supports jobs. It attracts more people. It increases the value of the community. Tax abatements unlock all of that by making it easier for more affordable housing to get built.

Think about it this way: if a family is able to pay $250 less in rent every month because they live in an affordable unit supported by a tax abatement, that money stays in the local economy. It buys groceries. It pays for car repairs. It covers childcare. It supports the small businesses and working people in the community.

Now consider what happens when that same family pays $250 more in a building that can’t support affordable rents. They take fewer trips to the grocery store and waive goodbye when that $250 leaves town every month in their rent check. No local economic boost. No multiplier effect.

Less Subsidy = More Impact

Another advantage of tax abatements is that they reduce the need for more direct public subsidy. Instead of finding resources for a new grant program, city officials can just use an existing tax tool to attract more private capital investment.

This is a big deal. Because when city programs become less reliant on direct public subsidies, more resources can be directed to help the extremely low-income households that are most difficult for the private sector to serve.

It’s not a question of either/or. It’s about using the tools at your disposal to put private capital to work. When communities use tax abatements to bring in private investment and create more affordable housing, they free up their direct subsidies to go where they are needed the most.

Oh Yeah, It’s Already Working

Cities across the country are already proving that well-designed tax abatement programs can deliver big results.

• San Antonio’s Public Facility Corporation partners with private investors who commit to making most of the units in a property affordable to low-income households. In return, the property receives a 100% property and sales tax exemption. This model has created over 8,500 units of affordable housing and is a great example of how public/private partnerships can create affordable housing without a ton of bureaucracy.
• Buffalo’s tax incentive program reduces the property tax burden for property owners who agree to a 15-year regulatory agreement that keeps rents affordable for very low-income households in 60% of the property’s units. To date, the program has supported the creation or preservation of nearly 6,000 affordable units—about 17.4% of the city’s total rental stock.
• The Dallas Housing Finance Corporation recently created a tax abatement program to help private investors purchase and convert existing market rate properties into affordable mixed-income communities. Late last year, this program enabled Waterford Property Company and The Vistria Group to purchase a 299-unit Class A apartment building. In return for a 100% property tax abatement, the new owners agreed to a long-term regulatory agreement that will keep rents affordable to low-income households at more than half of the property for the next 99 years.

None of these communities reinvented the wheel. They simply used existing levers to get the job done.

HOW TO DO IT RIGHT

Tax abatements are great, but, like any tool, they need to be used properly to get the best results. Here are some simple rules to follow:

Reward Investors Who Commit to Long Term Relationships.

If a tax incentive is going to benefit a property owner, it is critical that the property owner is committed to making a long term investment that creates long term value in the community. No one should be allowed to take the money and run.

This is where the Multifamily Impact Framework comes in. Our industry standards establish impact principles, definitions and reporting guidelines that reward long-term investments in affordable and sustainable rental housing. Using this framework provides communities with a greater sense of comfort that the tax-incentives they give are equal to the affordable housing benefits they receive. They also help create a more consistent approach across the United States that will make it easier for private investors to deploy more capital at scale.

It is also free2 and available to everyone.

Use Rent Restrictions to Maintain Long Term Affordability

All successful property tax abatement programs have one thing in common: They require property owners to agree to regulatory agreements that restrict rent growth and keep housing affordable for low- and moderate-income households.

These regulatory agreements are legal contracts between a property owner and the local government. They are used to ensure that a certain number of units in a multifamily property remain affordable for low- and moderate-income households over a set period of time.

The actual rent restrictions are calculated using the area median income in a community and a standard definition of affordability where no more than 30% of a household’s gross income goes toward rent. The rent restrictions are updated annually to reflect income changes in the community and inflation.

Because rent growth is tied to income growth, renters are protected from steep rent hikes and unpredictable swings in the housing market. This approach also makes it easier for property owners to project future revenue and manage their operating budgets to achieve the consistent rates of return that long-term investors find attractive.

Understand the Difference Between Rent Restrictions and Rent Control.

While Rent Restrictions are contractual agreements that legally bind property owners to set rents based on household income. They allow for reasonable rent increases that are tied to income growth and inflation which enables property owners to support ongoing property maintenance and repairs.

Rent control, on the other hand, is an arbitrary government-imposed limit on how much a property owner can raise rent. Local elected officials set these limits usually on an annual basis without regard to inflation, rising taxes, or maintenance costs.

Rent control repels private capital, supports deteriorating property conditions, and creates a housing market conducive to investors who want to extract as much money out of a community as possible. It also helps a few housing advocates who don’t live in the community and have never spent time on an affordable housing waiting list feel good about themselves. If these are your policy goals, by all means go for it.

However, If your definition of success is creating more affordable housing, protecting more renters from steep rent increases, maintaining safe and healthy property conditions, and attracting more long-term investment in your community, then use rent restrictions instead.

Please Keep It Simple

Bureaucracy is expensive. If your program is so complicated that investors need a lawyer, consultant, and engineer just to fill out the application, then you’re wasting whatever benefit you are trying to gain. Keep the process lean, transparent, and predictable. A good affordable housing program should not come with its own technical assistance program. It should be as intuitive to use as the phone in your pocket.

It is also important to keep in mind that affordable housing programs that work don’t try to solve every problem. Simply creating more affordable housing will not stop climate change, cure poverty, or end inequality. But when we make housing more affordable—all those other problems become a little easier to solve.

So, don’t overthink it. Create affordable housing programs that do one thing and one thing well: They create more affordable housing.

Don’t Go Chasing Waterfalls

Everybody loves an innovative solution. Innovation is cool. Innovation is exciting. Innovation is filled with synergistic journeys on the bleeding-edge of multiple paradigm shifts. It also involves a lot of failure and the people who are living paycheck to paycheck today don’t have time for us to test and learn.

If your community is serious about creating more affordable housing, please resist the urge to innovate and turn your attention to a powerful tool that you already own: the humble property tax abatement. It is simple to understand and easy to implement. It makes deals work. It attracts long term private capital. It reduces the need for direct public subsidies. It makes housing more affordable for the nurses, teachers and construction workers who just want to live in your community, and it just so happens to generate positive returns for taxpayers and investors alike.

Tax abatements aren’t flashy. They don’t make headlines. They’re not going to win any awards. They do create affordable housing that would not otherwise get built. And they do make life better for families, neighborhoods, and the local business community.

In fact, all they really do, is work.