ANN ARBOR, MI - Ann Arbor is struggling to make progress on its goal of significantly expanding the supply of affordable housing, which has local officials discussing whether more funding is needed.

Leaders from the Ann Arbor Housing Commission and Washtenaw County's Office of Community and Economic Development are recommending a new property tax to help pay for the creation of more subsidized apartments for low-income people in Ann Arbor.

They floated the idea of a dedicated millage for affordable housing during a City Council work session Monday night, May 14.

"Currently we have the mental health millage," said Housing Commission Executive Director Jennifer Hall, referring to the nearly $900,000 per year the city is planning to put toward affordable housing starting in 2019 using a portion of the city's rebate money from a new countywide tax for mental health and public safety.

"We think we need to adopt a millage for affordable housing prior to the mental health millage expiring in eight years."

Hall said having a significant pool of money is really important if the city wants to get more serious about addressing affordability.

She suggested millions of dollars per year are needed to meet the city's goal of creating 140 new affordable rental units per year.

"If you had a $5-$10 million pool, you could go to a Realtor and say, 'Here's my $3 million I'm putting down, or my $4 million I'm putting down,' to acquire a property, and then work toward pulling together the renovation funds if you need them," she said. "You cannot do that right now, so having a large amount of money is super important."

Hall was joined by Teresa Gillotti, the OCED's housing and infrastructure manager.

They highlighted some of the progress made and challenges faced since the city adopted affordable housing goals in 2015.

A little over three years ago, the city vowed to work with other partners toward creating nearly 2,800 new affordably priced rental units in the city by 2035. That's part of a larger goal of adding 3,137 non-student affordable rental units between Ann Arbor and Pittsfield Township over 20 years, while growing demand for market-rate housing in the Ypsilanti area by 4,187 units.

Gillotti said there have been four dozen new dedicated affordable housing units added in Ann Arbor over the last three years, counting Avalon Housing and Housing Commission projects.

She said the recommendations coming forward now aim to accelerate the pace.

Hall said money and property are the two best tools the city has right now, as other options such as rent control and inclusionary zoning to require developers to include affordable housing in new residential developments aren't legal under state law.

The presentation Hall and Gillotti gave Monday night recommends a new millage dedicated to affordable housing and supportive services, though they didn't specify an amount.

The title of their presentation was "Ensuring an Inclusive Community: Equity and Affordable Housing."

They indicated the goal is to increase the supply of rental units for people earning up to 60 percent of the area median income. That means housing with income-based rents for people with annual incomes up to $39,050 for a single person, $44,600 for a two-person household, $50,150 for a three-person household, $55,750 for a four-person household and $61,300 for a five-person household.

Hall and Gillotti recommended the City Council should direct staff to conduct an analysis of the best uses for all publicly owned properties to determine which ones might be suitable for low-income housing, mixed-income housing, senior housing, mixed-use development, or selling and contributing proceeds to affordable housing.

They suggested looking at any public property that might be underutilized, whether it's a vacant city-owned lot downtown or a county property with a single-story building on it. Their presentation also mentioned university and school properties as possibilities.

Gillotti said the goal would be to complete the analysis by the end of this year, with possible action following in 2019.

Mayor Christopher Taylor expressed support for the idea of having staff take a close look at which public properties might be suitable for affordable housing. He said it would be outstanding to use underutilized properties to provide housing for people who aren't currently able to live in Ann Arbor.

Council Member Jack Eaton, D-4th Ward, said funding is really the fundamental question.

"And we've set a goal of trying to develop 140 units per year, which is a pretty big goal really," he said.

Eaton asked what it would cost per year to meet that goal. Hall suggested local costs could range from $25,000 to $50,000 per unit, not counting other funds leveraged, which works out to between $3.5 million and $7 million per year.

"We've been coming in at less than $25,000 a unit, but when we start all competing with each other, we probably should at least be conservative and say $50,000," Hall said.

"That's kind of take-your-breath-away money," Eaton responded. "So, the money that we're diverting from the mental health millage is about $900,000 a year, so we're really going to fall short even in the eight years that that's available."

Hall said that's right and that's why she thinks there needs to be a dedicated affordable housing millage.

Eaton said it's ironic that anyone would propose a new tax for affordability in a city such as Ann Arbor where some residents are struggling to afford the city's taxes.

"My first inclination for funding affordable housing is not to raise taxes," he said, noting the city's tax revenues are growing by millions of dollars due to new development. "I would prefer allocating those new revenues to our affordability efforts or seek another revenue stream that does not add to the overall tax burden."

Gillotti said there's hope that the $10 million sale of the Library Lot to Chicago-based developer Core Spaces still happens, providing millions in additional revenue for affordable housing.

Council Member Chuck Warpehoski, D-5th Ward, responded to Eaton's remarks about the county tax, arguing the money the city is planning to put toward affordable housing is not being diverted from mental health and is within the allowable uses of the rebate.

Warpehoski said over the last 10 years the city has welcomed about 12,000 new jobs and 6,000 new UM students, and between the year 2000 and 2015 about 5,000 more people ages 65 and up. He said that adds up to a significant housing crunch.

He said the focus has been on providing housing for people earning up to 60 percent of the area median income, but he asked what should be done for people who make more than that, middle-income people struggling to afford living in Ann Arbor.

Hall said she doesn't think that can be addressed without increasing housing supply and welcoming more density.

"Because it's very market-driven," she said.

Even with all of the new market-rate housing that has been added in the last several years, she said, Ann Arbor hasn't really seen the full impact of what happens with rent when housing supply increases because more and more people are moving here.

Council Member Kirk Westphal, D-2nd Ward, observed that much of the new housing built in Ann Arbor in recent years has consisted of high-rent apartment towers geared toward UM students. He asked Hall how that helps with rent levels.

"I'll answer that in a backwards way," Hall responded, going on to argue UM needs to provide more housing for its students and staff, as that has a big impact on the marketplace.

"They keep adding more students, and that's what the market is responding to," she said. "And if it was people moving from one place into these high-rises, they'd be making way for someone else. But if you're adding more students and they're filling what's there, you're not making way for other people to have housing, so that is a huge problem. We need to get U of M to build more housing for their staff and students. They have a lot of land, too. They need to do it."

Westphal said the city's financial people might be interested in having student housing on private land, as private property generates tax revenue that UM doesn't pay. But he said he guesses that'll be another conversation to have with UM.

At the start of Monday night's presentation, Hall and Gillotti showed a video documentary on what they described as explicitly racist housing policies of decades past, arguing federal policies contributed to racial and socioeconomic segregation in America.

Hall said similar things happened at the local and state level. She showed one example of a Washtenaw County property record dictating only whites were allowed in a particular subdivision.

"Obviously it's not enforced, but they're still out there if you ever want to look up deeds," Hall said of racist housing restrictions.

"There were many tools that were used over time that really limited the housing options of people of color, despite having fair housing laws, despite having civil rights laws," Hall said.

"And now it's kind of changed from more explicit policies often to unintentional ones, or they might be intentional but we're not aware of it. But the impact is disparate on people of color."

Hall said most people think the biggest source of funding for new affordable housing is the U.S. Department of Housing and Urban Development, but she said there's been a serious decline in HUD funding since the 1960s, dropping from about $80 billion to $42.7 billion, not adjusting for inflation. She said most of the money still available is to maintain existing housing.

Hall said the biggest federal housing program at this point is the Internal Revenue Service's mortgage interest deduction that homeowners get when they do their annual taxes.

"The amount that was written off in 2017 -- and homeowners are primarily white people, not people of color -- was $146 billion," she said. "So, the amount that was written off for those of us who own our homes was three times or more higher than the amount of funding in the HUD program. I think that's really important for us to understand, because I wasn't aware of that until the last couple years and I've been doing this for 25 years. So, I think it's important to keep in mind some of the programs that help people who are homeowners."

Hall said low-income housing tax credits through the IRS are the biggest source of funding for new affordable housing now. She said those are competitively awarded and amount to $9 billion per year.

When the Housing Commission is awarded tax credits, she said, they then must be sold to a private investor or bank.

"They give us cash for our tax credits, so that they can write those tax credits off on their taxes," she said.

"And so rather than having money dedicated to a housing program, we now have a program that is at the whims of the marketplace. When the federal tax rate was reduced from 35 percent to 22 percent for places that are usually our investors, like banks, the tax credit market fell precipitously. It fell about 10 cents on the dollar.

"Our current project that we're working on, one penny offered for the size of the project we have is equal to $140,000 cash. And so that's $1.4 million less funding we have for a project."

Gillotti showed a set of maps showing how black residents in Ann Arbor were concentrated in the Kerrytown area and what's now known as the Water Hill neighborhood in the 1960s, as well as two distinct geographic parts of the Ypsilanti area, and how the black population has thinned out since then, now mainly concentrated in the Ypsilanti area east of U.S. 23.

Gillotti said the trends have played out based on past racist practices, now with market pressures exacerbating the problem.

"In 2015, the Martin Prosperity Institute did a study nationally of the most segregated cities in the country and Ann Arbor was the eighth most segregated," she noted, adding it's segregated along both racial and economic lines.

Gillotti said almost half of the committed affordable housing units in Washtenaw County are in Ypsilanti and Ypsilanti Township, so more is needed in Ann Arbor, Pittsfield, Scio and other areas.

Hall said the Housing Commission has 412 affordable apartments at 16 locations, and Avalon Housing has 288 at 20 locations. She said Habitat for Humanity currently has four properties it's developing in Ann Arbor, not counting properties already developed and sold.



She said the Housing Commission also administers 226 supportive housing vouchers for homeless vets, 100 vouchers for non-elderly disabled people, and 1,233 housing choice vouchers.

Hall said only about 35 percent of the Housing Commission's housing vouchers are used for apartments in Ann Arbor because of the market pressures, high competition, high rents and landlords not accepting them. She said two-thirds end up being used in the Ypsilanti area.

Hall said Housing Commission has put $66 million into redeveloping or renovating 412 affordable apartments in Ann Arbor, which was mostly funded with tax credits, with $4 million in local funds.

She said a lot more accessible apartments are needed for people with disabilities. She said probably about 70 or 80 percent of tenants have some kind of disability. She noted the Housing Commission's mission is to serve special-needs tenants, so more than 25 percent of redeveloped apartments are set aside for homeless people.

Hall said the Housing Commission is still primarily HUD funded to the tune of about $20 million per year, though the commission is asking for $68,000 in city general fund support in next year's budget.

As the city aims to address the shortage of affordable housing, Hall suggested the city should focus on working with three not-for-profit local developers -- Avalon Housing, the Housing Commission and Habitat for Humanity -- that have a history of developing low-income housing in the city, and the city should either donate or lease for $1 per year public land that is feasible for low-income housing.

For properties where low-income housing isn't feasible, she said, the city can either sell or lease them to another developer with no strings attached and with no low-income housing required, and put half the proceeds into the city's affordable housing fund.

Amanda Carlisle, Washtenaw Housing Alliance executive director, said having affordable housing in the hands of local nonprofits is important because they're committed to the cause longterm, whereas some for-profit developers will use low-income housing tax credits to finance a project and then let the units become market-rate once the required affordability period expires after 15 years.

"We have a lot of low-income housing tax-credit projects that are now coming out of their affordability periods," she said. "We're seeing just in the next couple of years about 350 units coming out of affordability, and it's likely they will ... then go market-rate, and so we're going to end up seeing sort of like a loss in our affordable housing units as a result of not having committed, mission-based nonprofits doing this work and developing affordable housing units."

Hall said she wouldn't throw out the option of having income-targeted housing in the downtown. She said the markets constantly change and so do funders, but right now the biggest source of funding is tax credits, and projects are more likely to be funded if they're near a downtown, jobs and transportation.

"If we don't include any income-restricted housing in the downtown, any affordable housing, we are just going to become more racially inequitable," she said. "We're going to become more segregated."

Hall said the city has to figure out how to add affordable housing throughout the community, especially in the 2nd Ward, which includes northeast Ann Arbor, where there isn't much now.

Hall said the Housing Commission is exploring revenue-bond financing, which offers a lower interest rate than borrowing from a private bank, to make its money go farther on projects.

There's also talk of using brownfield tax incentives to convince more private developers to include affordable housing in projects.

For instance, city officials agreed to include $2.8 million for parking garage construction in the brownfield plan for a new housing development at 1140 Broadway St. in exchange for the developer agreeing to dedicate 15 of the new apartments as affordable housing for people with incomes at or below 60 percent of AMI.

The deal calls for ensuring those apartments remain affordable housing for at least 99 years.

Gillotti said that was the first time tax-increment financing revenue was used to guarantee affordable housing in a local development.

Hall said Ann Arbor already has the best PILOT or "payment in lieu of taxes" policy for affordable housing developments, allowing them to pay $1 per year for each housing unit.

"I don't know anyone else that does that," Hall said. "That has a huge impact on our operating costs and our ability to have lower rents."

Hall said other funding sources for affordable housing include money the community receives via Community Development Block Grants and HOME Investment Partnerships Program funds through HUD, as well as funding from the city's Downtown Development Authority.

Taylor asked about housing cooperatives as an option. Hall said she doesn't think the way existing housing co-ops were built with HUD mortgage financing is still available for new co-ops, but she's happy to explore that. Council Member Sumi Kailasapathy, D-1st Ward, said the mayor asked a good question.

"Because I have many friends at Arrowwood, which is in Ward 1, and they keep raising the same issue -- can we have like a Phase 2?" she said, asking if there may be another funding option to create more affordable co-op housing like the Arrowwood Hills Cooperative off Pontiac Trail, which she called a shining model for housing.

"We will definitely explore financing mechanisms," Hall said.

Kailasapathy also asked why there hasn't been a single accessory dwelling unit built in Ann Arbor since the city approved ordinance changes in August 2016 to allow people who live in single-family homes to create separate apartments on their properties that they could rent out to non-relatives. That was intended to be one way to create more affordable housing, but it hasn't panned out.

Gillotti said she believes there has been at least one ADU application, but there are some hurdles.

She said most people interested want to create an ADU as a detached unit, such as above their garage, but currently the city requires a separate sewer line for that, which can be costly.

She said there's been some talk of an ordinance change to not require a separate sewer line.

Gillotti said the requirement that the property owner must live in one of the units on the property, either the ADU or the main house, is another hindrance possibly preventing more ADUs from happening.

She mentioned that local officials are tracking Senate Bill 110 in the Michigan Legislature. She described it as the first step in a series of steps that could allow for inclusionary zoning.