Local Government Support for Privately Owned Affordable Housing

Community and Economic Development – Blog by UNC School of Government

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Local Government Support for Privately Owned Affordable Housing

By Tyler Mulligan

Published May 16, 2022

By most accounts, the need for affordable housing across North Carolina is massive. According to 2019 census data, over a million North Carolina households are “cost burdened,” meaning they spend more than 30% of their income on housing. Almost half of those are “severely cost burdened,” meaning they spend more than 50% of their income on housing. What can local governments do to address the need for more affordable housing?

One thing is certain: government alone does not have the resources to construct and operate the needed housing units. There is no near-term publicly-owned housing solution. Private sector capital and private sector expertise will be necessary to achieve the scale required. However, public-private partnerships of any kind are legally fraught—the constitutional order in North Carolina, and in almost every state across the nation, was designed to prevent state and local governments from aiding or interfering with the private sector. Elected officials and attorneys, who took oaths to uphold the state constitution, understandably wish to tread carefully.

This blog post outlines the framework through which local governments can lawfully support privately owned affordable workforce housing. The legal analysis in this post, along with a listing of tools commonly used by local governments, is summarized in a chart: Local Government Tools for Private Affordable Housing.

Setting the Table for Affordable Housing

Before delving into the legal authority of local governments to support privately owned affordable housing, a threshold matter should be addressed. Constitutional case law examines (1) the necessity of a local government’s proposed affordable housing activity and (2) whether the private sector is “unable to meet the need.” Accordingly, a preliminary step for a local government is to conduct an assessment of the local housing need. A thorough needs assessment will not only determine how many households are “cost burdened” (spending more than 30% of their income on housing), but it will also evaluate zoning requirements, identify optimal sites for residential multifamily and single family development, and analyze the financial feasibility of development after leveraging financial tools such as federal tax credits. What is meant by “affordable housing” in a specific community’s context? How might the private sector help address the need on its own, without subsidy? How can limited local government funds be leveraged to maximum effect? The affordable housing specialists in the School’s Development Finance Initiative (DFI) regularly assist local governments with these preliminary steps.

Constitutional Considerations for Subsidy

Any time a local government proposes to partner with the private sector, it is necessary to review the boundaries imposed by the North Carolina Constitution. Local governments are not permitted to give public property or money away—not even to charitable nonprofits. As Frayda Bluestein explains in a blog post, Article 1, Section 32 of the state constitution prohibits governments from granting exclusive emoluments (benefits or gifts) “but in consideration of public services.” In other words, a local government must receive valuable public service in exchange for any cash or property it transfers to a private entity. Further, local governments may expend funds “for public purposes only.” Every expenditure must therefore serve a constitutional public purpose, and the North Carolina Supreme Court is the ultimate arbiter of what does or does not serve a public purpose. If an expenditure serves a public purpose, then is satisfies the constitution’s emoluments clause as well.

With respect to affordable housing, the North Carolina Supreme Court long ago determined that providing affordable housing to persons of low income serves a constitutional public purpose. After all, the state constitution declares that it is “one of the first duties of a civilized and a Christian state” to aid “the poor, the unfortunate, and the orphan.” Most of the cases pertain to the expansive Housing Authorities Law, North Carolina General Statutes Chapter 157, which was enacted in 1935 to authorize the creation of “dwelling accommodations for persons of low income.” See, for example, Wells v. Hous. Auth. of City of Wilmington, 213 N.C. 744 (1938) (holding that the Housing Authorities Law serves a constitutional public purpose); Mallard v. E. Carolina Reg’l Hous. Auth., 221 N.C. 334 (1942) (holding that the Housing Authorities Law serves a public purpose in rural as well as urban areas); In re Hous. Auth. of City of Charlotte, 233 N.C. 649 (1951) (holding that eminent domain may be exercised for the purpose of constructing “low-rent dwellings” despite the fact that area to be condemned may not be a “slum area”).

Government action in this arena must be necessary and cannot supplant private activity. Housing activities serve a public purpose “only when the planning, construction, and financing of decent residential housing is not otherwise available” to “persons and families of low income” because “private enterprise is unable to meet the need.” Martin v. N.C. Hous. Corp., 277 N.C. 29 (1970).

What about moderate income persons, earning as high as 80% of area median income (AMI)? Case law has not addressed local government support for housing of moderate income persons, but a statewide program was tested back in the 1980s when interest rates were in the high double digits. The supreme court approved low-interest loans (with an interest rate of 14.5%) not only for low income persons, but also for moderate income persons, because the General Assembly was “acting with the same public purpose in mind” as when assisting persons of low income, with the goal “to make available decent, safe and sanitary housing” to another group “who cannot otherwise obtain such housing accommodations.” In re Denial of Approval to Issue $30,000,000.00 of Single Family Hous. Bonds & $30,000,000.00 of Multi-Family Hous. Bonds for Persons of Moderate Income, 307 N.C. 52 (1982).

Thus, so long as local governments limit their activities to support for persons with lower incomes, and private enterprise is unable to meet the housing need, then a public purpose is served when government provides (i) housing for low income persons and (ii) low interest loans for housing for low and moderate income persons.

Statutory Authority for Affordable Housing Activities

A local government must identify statutory authority for any activities it seeks to undertake. North Carolina Constitution, Article VII, Section 1. The primary source of statutory authority for the provision of affordable housing by local governments is the Housing Authorities Law (G.S. Chapter 157). Local governments may also act outside of the Housing Authorities Law through other statutes, and those will be discussed separately.

Housing Authorities Law

Formation of housing authorities. G.S. Chapter 157 provides for the creation of “housing authorities” to undertake “housing projects.” Municipal and county governing boards may create independent housing authorities to operate under the direction of appointed commissioners, or a governing board can appoint itself to govern its housing authority (rather than appointing commissioners), or a governing board may exercise the powers of a housing authority directly (even if a separate housing authority already exists in the jurisdiction). The process for a governing board to designate itself to exercise housing authority powers is set forth in G.S. 157-4.1 (cities) and G.S. 157-33 (counties). Regardless of the housing authority structure, the powers are vast.

Powers of housing authorities. In what may set the record for the longest single paragraph in the statute books, G.S. 157-9(a) sets forth the extensive powers of a housing authority, to include:

• to prepare, carry out and operate housing projects, both rental and homeownership
• to acquire property or interests therein, including by eminent domain
• to own, hold, clear, and improve property
• to sell, exchange, lease, or assign property
• to provide for the construction, reconstruction, improvement, alteration or repair of any housing project or any part thereof

Property conveyance procedures. G.S. 157-9 provides: “No provisions with respect to the acquisition, operation or disposition of property by other public bodies shall be applicable to an authority unless the legislature shall specifically so state.” Thus, a housing authority, or a local government that has designated itself to exercise the powers of a housing authority, is exempt from following standard property disposition procedures. However, this statutory exemption from procedures does not override the state constitution’s prohibition against making donations to private entities.

As Frayda Bluestein explains in her blog post on the topic, the North Carolina Supreme Court expounded on the exclusive emoluments clause in Brumley v. Baxter, 251 N.C. 691 (1945), with two important conclusions. First, if a conveyance of property occurs without full monetary consideration (meaning, payment is less than fair market value), then there must be consideration in the form of an enforceable promise to provide public services for the jurisdiction. Second, if the consideration is in the form of public service, the conveyance must be conditioned on the continued use for that purpose by the recipient, and the property must revert back to the local government in the event the recipient ceases to use it for that purpose. In the context of affordable housing, this means that any conveyance of property to a private provider of affordable housing, for less than fair market value, must be subject to covenants and conditions to ensure the property is used for affordable housing for LMI persons in perpetuity (or sold to LMI persons). Once the property is no longer used by the recipient for that purpose, it reverts back to the government. (Most federal programs impose a similar requirement per 2 CFR 200.311.)

These vast powers are only provided for the purpose of completing housing projects. A housing project is broadly defined in G.S. 157-3(12) as a “single plan or undertaking” to provide housing for persons of low income and/or moderate income (LMI), to include:

• direct provision of housing
• payment of rent subsidies (for persons of low income only, G.S. 157-3(12)(c))
• provision of grants and loans to LMI persons to enable them to own a home
• provision of grants and loans and other financial assistance to public or private developers of affordable housing for LMI persons.

Which households may be aided by local governments? The Housing Authorities Law, G.S. 157-3, defines low income households as those earning 60% of the “local area median family income” (AMI) as defined by the “most recent figures published by the U.S. Department of Housing and Urban Development.” The definition of moderate income lists several factors to be considered, such as total income, family size, and cost of housing. However, the determining factor for moderate income is the final one—eligibility for “federal housing assistance of any type”—because federal housing programs typically serve households at or below 60% AMI. The National Housing Trust serves those earning 30% AMI, and the federal HOME Investment Partnerships Program (HOME) requires almost all funding to be used for households earning no more than 60% AMI. However, a small amount (no more than 10%) of HOME funding may be used for those earning up to 80% AMI, so an argument can be made that moderate income can be defined under the Housing Authorities Law to be as high as 80% AMI. Other factors may be considered “without limitation,” in order to better define the beneficiaries of a housing program, but other factors won’t increase the income threshold set by today’s federal housing programs.

Minimum 20% of units set aside for low income persons. The Housing Authorities Law remains tethered to the constitutional mandate to aid the “poor” and to case law authorizing housing programs only for lower income persons. If the statute is used to support a mixed-income housing project, such that “persons of other than low or moderate income” are served, even if no subsidy or financial assistance is provided to the private owner, then G.S. 157-3 requires 20% of the units to be set aside for the “exclusive use” of persons of low income. An unsubsidized project, for example, might involve a negotiated sale of government property to a developer, with affordability conditions, at fair market value. If a multifamily rental project is aided, then G.S. 157-9.4 requires 20% of the units to be set aside for the “exclusive use” of low-income persons for at least 15 years. Note that bond issuances for affordable housing pursuant to G.S. 159-48 also require a percentage of units to be reserved for households at certain income levels.

Rents set to “lowest possible rates.” Housing authorities (and local governments exercising the powers of an authority) must “fix the cost of dwelling accommodations for persons of low income at the lowest possible rates consistent with … providing decent, safe, and sanitary dwelling accommodations.” G.S. 157-29(a). No specific affordability metric is imposed in state law—such as the widely-used cost burden threshold, which proposes that rents should not exceed 30% of household income—but rents should be “within the financial reach of such persons.” G.S. 157-29(b)(2). No further definition is provided, so the 30% threshold may suffice.

Public subsidy must flow to the eligible households, not developers.  “No housing authority may construct or operate its housing projects so as to provide revenues for other activities of the city [or, by extension, developers or other entities].” G.S. 157-29. A local government therefore must exercise oversight of the budgets for construction and operation of the housing project to ensure that the public subsidy is going to LMI persons and not toward other activities of the third party. A simple approach is to ensure that financial support for a housing project does not exceed the total rent subsidy or down payment assistance provided to low income residents over the life of the project. Most federal housing programs impose a similar requirement and require financial underwriting. See, for example, 24 CFR 92.250.

No fee waivers. A local government generally cannot “waive” fees of any kind. In the context of utilities, there must be a utility-based business reason for any difference in rate classifications. As Kara Millonzi writes in a post on this topic:

“Under the common law, different rate classifications may reflect differences in the costs of providing services to certain customer groups. Additionally, rate classifications may be “based upon such factors as . . .the purpose for which the service or the product is received, the quantity or the amount received, the different character of the service furnished, the time of its use or any other matter which presents a substantial ground of distinction”. In other words, courts have upheld classifications for purposes of assessing different utility rates when there is a utility-based reason for the differentiation. However, classifications based on the type—or status—of the customer, or customer group, that do not relate to one of the above-listed purposes are not valid. For example, a local unit may assess a different rate for water used for irrigation purposes than for household or other commercial purposes (classification based on the purpose for which the water is used), but it cannot charge a different rate to all farmers (classification based on status). A unit may vary its utility rates based on the size of the house or the number of bathrooms (proxies for different costs or capacity demands), but it may not charge a different rate based on customer income levels (classification based on status).”

In the context of building permit fees, there is specific authority for reduced fees for sustainable design buildings (G.S. 160D-704), but not for affordable housing. Generally, a local government has authority to set its fees, but those fees would apply unit-wide, rather than through project-by-project waivers, which are arbitrary and therefore legally suspect. Rather than approving problematic waivers, a local government could instead rely upon the Housing Authorities Law to approve subsidies to offset certain fees for affordable housing projects. As noted above, such subsidies should be traceable to direct financial benefit for low income households, not private owners, in order to satisfy constitutional prohibitions against making gifts to private entities and to meet statutory requirements that ensure public subsidy does not “provide revenues for other activities.” Other requirements associated with subsidies, such as the 20% set-aside for low-income persons discussed above, would also apply.

Rent subsidies are authorized only for low-income persons. G.S. 157-3(12)(c). Aid for the “poor” is a constitutional duty, not an emolument. Assistance for moderate-income persons is a grey area. The statute promotes a modified homeownership approach (rent subsidies for moderate-income persons authorized “in furtherance of a program of homeownership”). As noted earlier, the North Carolina Supreme Court approved a state program for the benefit of moderate-income persons, but it involved low-interest loans, not rent subsidies.

Statutory Authority without Relying on Housing Authorities Law

G.S. 160D-1316 (formerly G.S. 153A-378) allows a local government to operate outside of the Housing Authorities Law but grants a narrower scope of authority. In essence, G.S. 160D-1316 authorizes a local government to:

• acquire property;
• construct affordable housing;
• convey property by private sale directly to LMI persons;
• convey property by private sale to be “developed” into LMI housing.

It does not authorize subsidies for developers, nor subsidized financing for housing projects, nor does it contain authority to operate housing projects; such authority is still found only in the Housing Authorities Law.

G.S. 160D-1316 explicitly authorizes the use of private sale for conveyance of property, but this does not mean that property may be given away for less than its market value. Although no direct subsidy is authorized, this provision can still be very helpful to a private developer of affordable housing. The statute requires the local government to impose “covenants or conditions” on the conveyance to ensure the property will be developed for sale or lease only to LMI persons. A requirement to use the property only for LMI persons in perpetuity could reduce the revenue potential of the property, which would inherently lower the fair market value of the property under the income approach of property appraisal. The resultant (lower) fair market value, pursuant to an appraisal that accounts for the covenants and conditions, may be used as the fair market price for conveyance to any buyer, whether for-profit or nonprofit.

Should a local government wish to convey the property for less than the restriction-adjusted market value, such a transaction would involve direct subsidy and the local government must utilize either the Housing Authorities Law or G.S. 160A-279 for the conveyance. Under G.S. 160A-279, a conveyance for less than fair market value is permitted “in lieu of” an appropriation, but only when the buyer is a nonprofit entity carrying out a public purpose, and the property must revert back to the local government when it is no longer used by the nonprofit for that purpose. See Frayda Bluestein’s blog post. Federal programs may impose similar rules. See 2 CFR 200.311.

Arguably, the power to acquire property, construct housing, and convey property by private sale for fair market value consideration includes the lesser included power of making a market-rate loan to achieve the same end; provided that the loan from the local government to the borrower is conditioned on the borrower’s promise to (i) construct and manage affordable housing, (2) repay the loan with a market rate of interest (no subsidy), and (3) grant a property interest in the property (usually in the form of a subordinated lien). The counter-argument to this point would be two-fold. First, financing affordable housing is a different matter from constructing and conveying affordable housing. Second, the General Assembly could have granted explicit authority to provide loans and other financial assistance in G.S. 160D-1316, as it did for housing authorities in G.S. 157-3, but the General Assembly did not do so. Reading all of these affordable housing statutes together in pari materia, and giving meaning to the presence of explicit language about financing in one statute but not the other, the stronger argument is probably that G.S. 160D-1316 does not include the power to provide loans or other financial assistance to private providers of affordable housing.

What about subsidized conveyances to for-profit developers of affordable housing? For-profit entities are explicitly excluded from conveyances under G.S. 160A-279. There is only one way for a local government to convey property for affordable housing to a for-profit entity for less than fair market value: the governing board must exercise the powers of a housing authority and comply with the Housing Authorities Law. Property conveyed for less than fair market value, whether to a for-profit or nonprofit enterprise, should revert back to the local government once it is no longer used by the recipient for the authorized public purpose.

Special note for counties: This statute’s predecessor, G.S. 153A-378, applied only to counties. The statute was significant in part due to subsection (e) of former G.S. 153A-376, which was the predecessor to G.S. 160D-1311 and authorized counties to engage in community development and act as housing authorities. Subsection (e) read, in its entirety, “No state or local taxes shall be appropriated or expended by a county pursuant to this section for any purpose not expressly authorized by G.S. 153A-149, unless the same is first submitted to a vote of the people as therein provided.” This sentence was incorporated verbatim into subsection (d) of the successor statute, G.S. 160D-1311, and its effect remains the same: counties must look to G.S. 153A-149 when using state and local funds. In G.S. 153A-149, there are two subsections pertaining to housing activities. Subsection (15a) of G.S. 153A-149 authorizes qualifying counties to engage in housing rehabilitation. Subsection (15b) authorizes counties to engage in housing programs for LMI persons only as provided in G.S. 160D-1316. Thus, counties seeking to use state or local tax revenue to support affordable housing are confined to the more limited scope of activities found in G.S. 160D-1316 unless approved by referendum. See also S.L. 1999-366 and G.S. 159-48(c)(6).

Statutory Authority to Lease Local Government Property for Affordable Housing

There is separate statutory authority for leasing local government property for affordable housing. G.S. 160A-278 authorizes municipalities (and counties through the operation of G.S. 153A-176) to lease property by private negotiation to any entity that will use the property to construct affordable housing for LMI persons. This statutory authority may be employed without requiring the county or municipality to exercise the powers of a housing authority. The statute imposes a 20% set aside for persons of low income when the property contains housing for “persons of other than low or moderate income.”

Conveyance authority is summarized in a chart located at this web page: Local Government Tools for Private Affordable Housing.

Securing Public Benefits: Conditions to Impose on Affordable Housing Projects

When providing subsidy or conveying property for affordable housing, local governments must secure public benefits in return. This final section explains in broad terms how to secure these interests in appropriate legal instruments. Public benefits to be provided by the private sector, in the area of affordable housing, fall into two broad categories: affordable housing development and affordable housing services.

Affordable Housing Development

Affordable housing development typically involves the construction and operation of housing units for the benefit of LMI persons. The key elements to define for any affordable housing development include the following:

• Set-aside of affordable units: How many units will be set aside for LMI persons? This can be expressed as a percentage (“20% of the units in the project”) or as a fixed number of units. Examples can be found starting on page 40 of the affordable housing and inclusionary zoning guide.
• Qualifying households: Who is eligible to rent or purchase the set-aside units? Qualifying households are usually expressed in terms of a percentage of area median income, as defined in G.S. 157-3(15a)-(15b). See page 43 of the affordable housing and inclusionary zoning guide for examples.
• Affordability level: How much will be charged to LMI persons for each unit sold or rented? Often the unit cost is expressed as a percentage of the household’s median income. The generally accepted definition of “affordable” is that the household spends no more than 30% of its gross income on housing-related costs; however, the legal standard in North Carolina is merely for rents to be set “within financial reach.”
• Timing and phasing: When will the affordable units be constructed and made available for purchase or rent? If affordable units will be developed concurrently with market-rate units, then it is advisable to impose phasing requirements so that affordable units are constructed and made available concurrently with market-rate units. See pages 81 to 88 of the affordable housing and inclusionary zoning guide for examples and additional detail.
• Eligibility and transfer controls: When a LMI household moves out of an affordable unit, will the unit be made available to another LMI household? What entity is responsible for marketing the units and determining whether a household is eligible to purchase or rent an affordable unit? How will those processes be managed? See pages 97 to 108 and page 121 of the affordable housing and inclusionary zoning guide for examples and additional detail.
• Control period: For how long must the units remain affordable to eligible households? Perpetual affordability on public property can be achieved through the use of ground leases for both rental and homeownership developments.

Once agreement has been reached on the affordability terms for the housing project, those terms should be memorialized in appropriate legal instruments to secure the public interests.  The most common mechanisms for protecting the public’s investment include deed restrictions (or covenants running with the land), deeds of trust, and ground leases. There is evidence that deed restrictions can be ignored over time; deeds of trust and ground leases are considerably more effective at securing ongoing affordability requirements.

Affordable Housing Services

There is an array of services associated with providing affordable housing. Some of those services are closely associated with housing development and were already mentioned above, such as marketing available units, determining eligibility of households, and monitoring units over time. Other services may include housing and credit counseling for eligible households. Both cities and counties possess statutory authority to engage in these services directly or to contract with private entities for their provision, pursuant to the Housing Authorities Law and G.S. 160D-1311(a)(2). Any payments made in exchange for these services should be in amounts that are appropriate for the public services to be rendered. Any payment in excess of the fair value of the service provided would amount to an unconstitutional gift. Public services are typically secured through a binding written contract.

Topics Discussed Elsewhere

Inclusionary Zoning

The topic of inclusionary zoning is covered exhaustively in the affordable housing and inclusionary zoning guide. A basic primer on inclusionary zoning is provided in a prior blog post.

Rent Control

Affordable housing projects are generally exempt from North Carolina’s rent control provisions found in G.S. 42-14.1. This topic is explored in detail on pages 151-53 of the affordable housing and inclusionary zoning guide.

Tax Relief for Lower Income Homeowners

Options for offering tax relief to lower income homeowners are explored in a blog post by Chris McLaughlin here.