Maybe it’s a combination: tax credits for the builder and the state shares in equity for the homes with a loan program to purchase the homes built with those tax credits. Maybe the equity sharing can help subsidize the tax credit program long term.
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It doesn’t make sense to subsidize demand or deed restrict them because the state would just be throwing money away, but if this program created new homes that were at least temporarily affordable for moderate income, and shared equity when they were sold at market rate, that seems fine to me.
If the state shared in equity for the property, then the deed restrictions would limit the potential return on that equity sharing. It just means the tax credit program would probably result in less overall production since it would be more expensive to run without those returns.
Why would the tax credit result in less overall production if the units were deed restricted? We'd be paying developers with tax credits to produce Moderate Income housing. They get the same money, and thus have the same incentive, whether the unit is deed restricted or not. +
The problem, if you don't deed restrict, is the second sale. If you equity share, how do you determine what the state's equity is? Some of the increased price of the property is appreciation, but some is the difference between the market price and the sale price at the first sale. +
So suppose we have a new house for sale, at the Moderate Price of $500K. But we subsidized this house with tax credits; the market price was $700K. The buyer buys it, and immediately flips it. The buyer shouldn't get a penny of that $200K increased price; that's not appreciation, it's arbitraging. +
The solution then is to require a holding period, and/or allow the state to be the beneficiary of the majority of the appreciation. The first buyer benefits from having affordable housing, but the state should get most of any windfall if it’s sold at a market price, not that first buyer.
The size of the tax credit program could be limited by its funding. If there’s enough demand for it that tax credits become “awarded” in a competitive bidding process like other tax credits are in CA, then allowing the program to be funded via equity sharing could help it to build more housing.
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