Source: HUD OFFICE OF POLICY DEVELOPMENT AND RESEARCH
Byline: HUD PD&R
Date: 6/2/2020

In recent years, Philadelphia has attempted to address the housing needs of families whose earnings fall between 80 and 120 percent of the area median income (AMI), a significant proportion of residents who are not low income but also not able to afford houses in the expensive Center City district. Increasing the supply of workforce housing is an objective of the city’s 2018 housing action plan, which calls for building 6,000 units over the next decade. Developing sufficient amounts of workforce housing is challenging, however, because housing values in the area are rapidly appreciating and limited government subsidies are available for developing housing affordable to residents in this income range. Rising average home values in Center City over the past few years have also increased demand for market-rate housing in nearby neighborhoods. With a poverty rate of nearly 26 percent, the city has devoted considerable funding to develop housing for households earning less than 80 percent of AMI, requiring creative approaches to incentivize the construction of workforce housing. In response to these issues, Philadelphia created the Workforce Housing Program (WHP) in 2014 to streamline procedures for developing workforce housing on city-owned land in rapidly appreciating neighborhoods. Since WHP began, the city has added new features to the initiative in order to adapt to market conditions, such as a credit enhancement component that helps developers obtain construction financing. WHP has produced more than 200 new units, including Francis Villas, 16 units of homeownership housing in the Francisville neighborhood less than 2 miles northwest of Center City.

Workforce Housing Realized in Francisville
Francis Villas consists of 16 two- and three-story rowhouses developed on parcels that were offered in a request for proposals through the city’s WHP. The units are clustered on intersecting streets in the neighborhood, with sets of two to four abutting units on 15th Street, Burns Street, and Parrish Street. With 3 bedrooms and at least 2 bathrooms, the 1,200-square-foot houses are affordable for households earning up to 120 percent of AMI and cost significantly less than the market-rate price in Francisville. Developer BMK Partners wanted these houses to have the feel of market-rate units, with high-quality features such as solid wood cabinets and granite countertops in the kitchen, nine-foot ceilings, hardwood floors, and tiled floors in the bathrooms. Francis Villas moved from initial construction to final sale in 6 months, and all the houses sold within 45 days.

The Francis Villas project demonstrates the core components of WHP. The program identifies and packages parcels of city-owned land in targeted neighborhoods where the average home price exceeds $300,000, beyond the reach of workforce households. A locational analysis, conducted by the Philadelphia Land Bank in coordination with the Philadelphia Redevelopment Authority, identifies vacant city properties in emerging neighborhood markets, such as Francisville, that have not yet gentrified. According to Gregory Heller, senior vice president of community investment for the Philadelphia Housing Development Corporation, the organization that manages the functions of the land bank and the redevelopment authority, the city selects parcels suitable for WHP based on characteristics such as median home sales price in the vicinity, lot size, zoning, and location within one to three blocks of each other.

Through an underwriting process negotiated with each awarded proposal, WHP offers parcels at a discounted price that generates revenue for the city and ensures that the developer can profitably deliver housing affordable to purchasers earning 120 percent of AMI or less. In the case of Francis Villas, the discounted land sale price of $228,609 for all the 16 parcels enabled BMK Partners to offer the houses for $229,990. According to Mo Rushdy, managing partner for BMK Partners, the reduced land cost is passed along to the buyer, who can afford a high-quality house with a sales price that is much lower than its appraised value. Restrictive covenants ensure that the units remain owner-occupied and affordable to workforce households for an initial 10-year period; the covenants continue for a total of 30 years if the first and subsequent owners sell the property within 10 years of their purchase. Developers and the city ensure that buyers are income-certified and referred, if necessary, to first-time homebuyer grant programs offered by banks. According to Rushdy, these grants further reduced downpayments for houses at Francis Villas.

WHP Evolves
The city, developers, and lenders have adjusted the program over time to ensure that WHP offers effective incentives. One major change to WHP has been the addition of a credit enhancement that partially guarantees construction loans. For construction loans that cover up to 85 percent of construction costs, the city guarantees 25 percent of loans up to $3 million. The guarantee, which also prohibits lenders from requiring developers to provide cash equity exceeding 15 percent of construction costs, came about in 2017 after developers expressed concern that lenders would require so much cash equity that sales prices would have to be increased. The credit enhancement also has the benefit of not requiring the city to contribute additional cash to WHP agreements unless a project defaults, and none has since the program began. The guarantee even generates revenue for the city through a fee charged to the lender. According to Heller, the credit enhancement reduces the risk for the lender while making workforce housing projects financially viable for small developers. Although Francis Villas did not use the credit enhancement, because BMK’s lender was so confident that the houses would sell, other developments containing 46 units have done so.

Another significant change in WHP was a requirement added shortly after the program began for community outreach and marketing. Developers are required to prepare a plan for marketing their units in the neighborhood before advertising the units on a public listing service. For Francis Villas, this outreach included public meetings with a range of organizations such as local unions and churches. According to Rushdy, this approach to community engagement increased transparency and confirmed that the new housing is attractive to and affordable for workforce households.

A Light Touch
WHP has encouraged the private sector to develop workforce housing through discounted sales of city-owned land and other incentives, such as construction loan guarantees. The program uses Philadelphia’s considerable supply of vacant property, especially in appreciating neighborhoods, and stewards the city’s limited supply of money to produce needed affordable housing. WHP earned a 2019 Urban Land Institute Robert C. Larson Housing Policy Leadership Award for its creative use of market incentives and its light touch on the municipal budget. Because of WHP’s success, the city’s housing action plan has called for an expansion of the program’s credit enhancement component to achieve the goal of 6,000 additional units of workforce housing.