ARPA Could Already Be Running Out Of Time To Bring 'Transformative' Change To The Affordable Housing Crisis

Since its passage in 2021, the $1.9T American Rescue Plan Act has loomed large for state and local governments as a historic opportunity to not just stabilize after the shock of the pandemic but also to expand what they could do for constituents.

Some $350B in State and Local Fiscal Recovery Funds were a godsend in filling budget revenue gaps to keep the proverbial lights on, and many were able to do so with plenty left over. Those states, counties and cities were encouraged by the Biden administration to allocate at least some leftover funds to addressing three key issues: workforce and wage development, public safety and affordable housing.

“SLFRF was designed not only to help families, small businesses and communities weather the pandemic — but also to support transformative investments that build a stronger and more equitable economy for the future,” Deputy Treasury Secretary Wally Adeyemo said in a May 16 letter to state, local and territorial leaders.

Most jurisdictions have begun rising to the Biden administration’s challenge to spend SLFRF on those three priority areas. But in the case of affordable housing, turning that spending into transformative investments that improve housing affordability and equity in the long term is a tall order.

As the next few years go by, it may prove unrealistic.

“Encouraging creativity is different from providing real solutions on how to deal with housing,” said FBT Project Finance Advisors Managing Director Frances Mennone, a Cincinnati-based real estate finance consultant who advises jurisdictions on how to apply for, obtain and spend capital from government programs.

“The people doing the work on this are underpaid, understaffed, underappreciated, etc. That’s not an incubator of solutions. … There’s a lack of creative thought on this issue. Everybody just looks at the next city over.”

Because of its conception as a pandemic recovery instrument, ARPA comes with a timeline that is quite tight compared to most federal spending programs. Jurisdictions must obligate their SLFRF dollars to specific projects and programs by the end of 2024 and spend them by the end of 2026, or else see the federal government claw them back. 

At the state level, over $10B in SLFRF money has been budgeted for housing programs, which includes everything from direct rental assistance and gap funding for new affordable housing developments to homebuying and homeownership assistance, according to survey data collected as of April 18 by the National Council of State Housing Agencies. 

Though it represents just over 5% of the $195B pool given to states and Washington, D.C., it marks an unprecedented amount of money to be allocated for housing affordability in such a short time, NCSHA Deputy Director of Tax Policy and Strategic Initiatives Jim Tassos told Bisnow.

“It’s a gigantic number compared to what we’re used to seeing in an allocated program,” Tassos said. “Unfortunately, it’s coming at a time when costs are higher than ever. It’s sort of masking the true benefit of $10B in new affordable housing money because everything is so much more expensive.”

Another $110B of SLFRF went to counties and cities. In those jurisdictions with populations over 250,000, about 75% of federal funds, or nearly $49B, had been budgeted by the end of last year, The Brookings Institution reports. Just over 10% of that pool has been slated for use on housing. 

Thanks For The Money. Now What?

Once jurisdictions were informed how much SLFRF funding they would receive, most were able to decide on how to divide it into broad categories like government operations, public health, infrastructure and housing after a few months, according to a Treasury Department fact sheet.

Expenditures categorized as filling coronavirus-induced revenue gaps in government budgets were straightforward. But with real estate being an industry that runs on debt, initial rules that seemed to bar jurisdictions from using SLFRF to give loans became a massive problem, Tassos said.

“We worked with Treasury and tried to clarify some things with Congress about how money could be spent, and Treasury [became] extremely flexible with how the funds could be used so they could work in a traditional affordable housing transaction,” Tassos said.

After the Treasury Department made a series of rule tweaks and clarifications in 2022, jurisdictions accelerated the process of allocating money to specific projects and programs, Tassos said, echoing research from The Brookings Institution.

Most jurisdictions didn't have the infrastructure to handle such an infusion of money, fairly assess where it would be needed most, then distribute it in a way that complies with the rules the federal government placed on it. Creating that apparatus in time to get money out the door on ARPA’s schedule was the focus of most cities, counties and states for the first year after the law’s passage, The Brookings Institution reports.

Creating the structure to receive and spend ARPA funds meant hiring staff or even creating new departments, Tassos and Mennone said. Plenty also spent months engaging with their constituencies to make sure their spending aligned with their needs and wants. 

“It wasn’t until [April 18] that officials were able to finally release an RFP for the Hamilton County portion of the ARPA dollars — $31M — for gap funding for affordable housing in the county,” Mennone said, referring to the Ohio county that contains Cincinnati. “That’s been a long time coming, but they need the allocations set by the end of 2024. Meanwhile, the affordable housing issue just gets worse by the day.”

Community engagement isn't exactly conducive to a nimble deployment of funds, but it is required by the Department of Housing and Urban Development in many cases, said Chenin Dow, senior manager of economic development and real estate for the city of Lancaster in Los Angeles County.

Lancaster didn’t wind up using any SLFRF funds on housing, partly due to how proactive its city government was in setting up pandemic emergency support programs, then using SLFRF as essentially a reimbursement for its initial outlay, Dow said. But it received $1.2M from ARPA’s $5B HOME program, which wound up being the city’s final use of ARPA funding.

“All of that funding helped shore up any general fund expenditures that had been made initially, and then to expand the programs we had begun,” Dow said. “The HOME funding came later enough to not be applicable for acute [needs].”

The Ticking Clock

Anyone with even a passing familiarity with commercial real estate development is aware of the long timelines that come with new housing projects. With all the challenges of the past three years, those timelines have lengthened further. 

“When you’re talking about commercial real estate development, going through all the different phases of design, permitting, financing and construction takes two to three years — and that’s in the case of well-defined programs,” said Mark Teden, vice president of multifamily for MassHousing, Massachusetts’ independent, quasi-public agency to improve affordable housing statewide.

“To build a new program, create a new pipeline and then try to get deals closed, we didn’t see that as appropriate. For the things that would take more time, we allocated state money as opposed to federal funds. Because on that timeline, it’s very difficult to develop something new.”

Housing affordability had been a building national crisis for years before the pandemic.

When Covid-19 hit, its impact on housing in the U.S. came in two waves: First, there was the public health component, which was the target of eviction moratoriums and other emergency measures to keep or put people in housing and out of congregate-care settings or the street. After that, the runaway inflation of housing prices that began in 2021 exacerbated the high cost of housing across income spectrums and worked against the Biden administration’s goal of using SLFRF to leave housing affordability in a better place than it had been in 2019.

The Biden administration’s goal was to use SLFRF and other spending bills from the first two years of his term to “close the housing supply gap by 2027,” Treasury Secretary Janet Yellen said at a national meeting of county officials in February. But the supply gap has persisted for so many years because of systemic issues that SLFRF can’t solve, Mennone said.

“Most of the affordable housing projects that are done in communities are either Low-Income Housing Tax Credit deals or other HUD funding, and there are limitations for how much you can do with that in a community,” she said. “So the federal funding gets caught in the pipeline of projects for that, and flooding the market with funding for housing is not the only solution.”

The most common use of SLFRF funds under the affordable housing umbrella has been to fill financing gaps in affordable housing projects subsidized by LIHTC and similar programs, specifically for projects that were either under construction or attempting to finalize their capital stacks, according to NCSHA’s survey and research by the Urban Institute.

Those gaps were created by spiking costs of labor and materials — and delays in obtaining either — then widened by the rapid rise in interest rates last year in response to runaway inflation.

“The story is what would have happened if these funds hadn’t been made available, and that is that a lot of these affordable housing projects would have stalled,” Tassos said. “Nobody expected what happened with inflation and interest rates, so deals that made sense financially two or three years ago fell apart. And the solution was this money.”  

Building A Money-Spending Machine From Scratch

MassHousing did manage to create a new program using SLFRF money, a down payment assistance program for first-time homebuyers called MassDREAMS, said MassHousing Director of Communications and Policy Paul McMorrow. State legislation made the program’s creation official in December 2021, a few months after Massachusetts learned its SLFRF allocation total.

“We couldn’t really design a program until we had that signed piece of legislation, and we didn’t launch the program until the late summer and early fall of 2022,” McMorrow said. “So that was a good six months of figuring out which agencies would administer which buckets of money, then understanding more fully, ‘How does the money work? If it’s going to be a grant, what does that mean? How do we design systems to internally convert the check that we get from the commonwealth into a grant from a homebuyer?’” 

Almost immediately, officials at MassHousing saw how impactful a new program could be as well as how much that program paled in comparison to the acuity of the affordable housing crisis.

“When we put that fund together [for MassDREAMS], we anticipated that it would last a couple of years, and it was gone in less than three months,” McMorrow said.

Massachusetts allocated $960M of SLFRF money to housing, the second-highest total of the 46 state housing authorities that responded to NCSHA’s survey. New York, which did not respond, allocated $183M for a statewide rental assistance grant program in fiscal year 2022. States without massive metros budgeted smaller percentages of SLFRF to housing, the NCSHA survey found. 

That may be a symptom of how the existing pathways for generating affordable housing are set up, considering how government involvement in the sector has been heavily weighted toward densely populated areas for as long as governments have been involved at all, Mennone said.

“The way we dole money out now does not recognize the fact that we’re not all New York City or California,” she said. “So it’s problematic as far as whether the money lands where it needs to go.”

Take the city of Lancaster: Its $1.2M in HOME funding through ARPA isn’t enough on its own to fund the local government’s plan for redeveloping local motels into supportive housing for those experiencing housing insecurity, Dow said. The city added money from California’s Homekey program to build an incentive package it is now marketing to developers in the form of a request for proposals.

“There’s a lack of understanding from communities themselves when they say, ‘We need an affordable housing developer. We need someone to come to our town,’” Mennone said. “But no one will come there because the subsidies they would use wouldn’t be able to make the math work on the transaction.”

Ultimately, the shortage of affordable housing in the U.S. is a systemic problem with systemic causes — and one that can only be solved with systemic changes. That was made clear in jurisdictions that lack the personnel or sophistication to navigate federal funding applications and regulations, Mennone said.

“I’m doing work in Appalachia right now, and those communities don’t have a LIHTC lawyer and accountant that know how to deal with all of that, nor would those communities score well in state [Qualified Application Plan] stuff,” she said. “They need affordable housing just like everybody else, and they’re never going to solve those problems in the existing structure.”

Even if it doesn’t deliver a housing revolution, an infusion of billions of dollars will be crucial to saving a lot of affordable developments in the pipeline from suffering the same fate as market-rate projects in this period of spiking capital costs.

Yet in order for even that benefit to be realized, jurisdictions have further to travel to get the billions of dollars in their plans obligated to specific projects or subrecipients by the end of next year — and spent by the end of 2026, Mennone and Tassos said. 

“Some funds are sitting there, ready to be used, but because of the development timeline, the money has not gone down to the project level yet,” Tassos said.

In the absence of systemic change, jurisdictions will need to fight to meet those key deadlines and deliver on their billions of dollars in promises.

“Most jurisdictions are just now starting to get resources out the door,” Mennone said. “They’ve been given the awards and the allocations, but [the money] has yet to arrive because of the need for subrecipient agreements. The money is not arriving as fast as it needs to, which is just making the problem worse.”

CORRECTION, MAY 3, 2:40 P.M. ET: A previous version of this article misstated Mennone's occupation. This article has been updated.