Memo for fiscal year 2022, updated 2021-03-09

[Archived] Question # 30: What is the background of the 0.6 cent real estate tax dedication for Affordable Housing?


What is the background of the 0.6 cent real estate tax dedication for Affordable Housing? (Councilman Chapman)


Creation of a dedicated revenue fund for affordable housing was approved by City Council in FY 2006. For the first four years (FY 2006-2009), one penny of the real estate tax rate (valued from $3.2 million to $3.5 million during this period) was dedicated to affordable housing. The impact of Alexandria’s “penny for housing” fund, the first penny program to be adopted in the Northern Virginia region, was amplified by the City’s initial use of the dedicated revenue as a source to service one-time general obligation bonds issued for affordable housing purposes. Since rental revenues at affordable properties are capped, the ability for affordable housing providers to borrow and use debt financing for projects is limited. The City fills the gap that cannot be financed or covered by low-income housing tax credit equity and third-party first trust debt by providing a subordinate loan. City loans are usually repaid from project cash flow remaining after first trust debt, operating expenses and other priority fees are paid, including deferred developer fees.  This remaining cash flow is referred to as residual receipts.  At the time of the penny fund’s adoption in 2006, it was estimated that nearly $23 million of general obligation bond debt could be serviced from each penny. The City’s debt ratios also were very low in 2006 and have risen substantially since then. 

While it was not well understood at the time, City gap funding does not operate as an immediate revolving fund – for many projects it may take 10 or more years after the project is stabilized for cash flow to be sufficient to make payments on the City loan.  Housing has an Asset Manager who works with project owners – many nonprofit developers – to physically inspect properties in which the City has invested and to review each property’s annual audited financial statements to identify concerns, ensure the projects are performing well, and are positioned to make repayments to the City as soon as possible. Most City loans have a 40-year repayment schedule (typically matching the affordability term in the loan), however, the anticipated “Year 15” refinancing of most tax credit projects provides a possible opportunity for repayment or for the City loan to be restructured entirely.   

With the economic downturn, in the City’s FY 2010 budget the dedication for affordable housing was reduced to 7/10 of a penny ($2.2 million) and was further reduced in FY 2011 to 6/10 of a penny ($1.9 million). These reductions were set at amounts of revenue needed to meet existing debt service obligations only (around $15 million), and not service any new general obligation bond debt. The 6/10 of a penny continues to be the rate proposed in the City’s FY 2022 budget. However, as the City has paid down a portion of bond debt and refinanced its general obligation portfolio to more advantageous terms and interest rates over time, a portion of the funds provided within the 6/10 of a penny has become available for some other affordable housing purposes. In recent years, excess dedicated revenue dollars have been used directly as part of the City’s overall funding support for various affordable housing developments; during the Beauregard Small Area Plan, these dollars were identified as the source to fund a Relocation Coordinator position (now the Housing Program Manager position which coordinates all relocation activities, in addition to other tasks; approximately $123,000 in the FY 2022 budget).  It has also been proposed and planned as a source to replace some City General Fund dollars in FY 2022 to cover portions of the Director and Deputy Director salaries allocated to affordable housing development. 

From FY 2006-2018 the penny or part thereof fund generated over $32.0 million in dedicated revenue and has leveraged $18.1 in bonds. General obligation bonds and dedicated revenue have helped develop, preserve and/or renovate nearly 600 units of affordable housing and to fund the Beauregard Relocation Coordinator position.

Among the projects funded or partially funded through these sources are: 

Project Name Organization Use Units Small Area Status
Arbelo AHDC preservation 34 Northeast complete
Lacy Court AHDC preservation 44 Potomac West complete
ParcView Wesley Housing preservation 149 Landmark/Van Dorn complete
Quaker Hill ARHA preservation 60 Taylor Run/Duke Street complete
Longview Terrance AHDC preservation 41 Taylor Run/Duke Street complete
Miller Homes ARHA preservation 16 Citywide complete
Jackson Crossing AHC Inc new construction 78 Potomac West complete
St James Plaza AHC Inc new construction 93 Beauregard complete
The Spire AHC Inc new construction 113 Beauregard Leasing
The Nexus AHDC new construction 74 Alexandria West complete
The Bloom AHDC new construction 97 Braddock complete

Since the City’s support for affordable housing projects is provided as a loan, repayments that occur over the long term will supplement CIP, Housing Trust Fund and federal funds to develop future housing. Some of the first loans made with penny funds have begun making annual payments from cash flow and some will reach Year 15, providing opportunities for City debt to be structured to create additional opportunities to accelerate City loan repayment, when that is possible.  It is noted that City Council will be considering short term waivers for some repayments to provide resources to help nonprofits respond to pandemic related operating shortfalls.

In FY 2019, Council approved an additional dedicated revenue in the form of a 1% increase in the restaurant meals tax from 4% to 5%. These funds are for affordable housing initiatives and are transferred from the General Fund into the Affordable Housing Fund, and then into the Capital Improvement Program budget. In addition, the City has committed an additional $1M in General Fund dollars each year (since 2018) to enhance affordable housing production and preservation in response to National Landing’s selection for Amazon HQ2. These resources, along with other Housing Opportunity Funds (Housing Trust Fund, federal CDBG and HOME funds) and leveraged third party monies have been used for the following projects: 

Project Name Organization Use Units Small Area Status
Parkstone (Avana) AHDC preservation 326 Alexandria West complete
Ellsworth AHDC preservation 20 Taylor Run/Duke Street complete
Landmark Towers Private rehabilitation 157 Landmark/Van Dorn in progress
Parcview II Predevelopment Wesley Housing predevelopment tbd Landmark/Van Dorn in progress
Arlandria Predevelopment AHDC predevelopment tbd Arlandria in progress
Seminary Road Predevelopment AHDC predevelopment tbd Seminary Hill in progress

In conclusion, Housing’s FY 2022 proposed budget includes the $2.6 million (0.6 of a penny) that is dedicated to affordable housing be used for the following: $1.7 million for debt service on previously issued bonds, $123,000 for one Housing Program Manager FTE, and $176,723 to temporarily reduce General Fund expenses by supporting the salaries and benefits for the Director and Deputy Director, and $587,838 for direct support of affordable housing projects. Additionally, a total of $7.2 million is budgeted for affordable housing in the Capital Improvement Program (CIP). Approximately $3.6 million is meals tax revenue, and $3.6 million is cash capital. The City Manager has proposed restaurant meals tax monies be supplemented on a one time basis by General Fund revenue totaling $2.6 million in FY 2022 to keep affordable housing funding in the CIP stable in the face of declining meals tax revenues in FY 21 and FY 22. This, with the $1 million provided in response to Amazon’s HQ2, provides a total of $3.6 million in Cash Capital for affordable housing in the CIP in FY 2022.

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