Developers are spending billions of taxpayer dollars on affordable housing projects with little attention being paid to those properties’ susceptibility to flooding and storm surges, according to a Clemson University adjunct professor in the College of Business.
Lynn Hammett, a real estate appraiser and instructor in the college’s Department of Finance, conducted research on Low Income Housing Tax Credits (LIHTC) that were spent on affordable multi-family housing developments in the state of Florida between 2005-10. What she found was many of these federally subsidized projects, which provide income tax breaks and construction equity, are being built in coastal areas prone to hurricanes and subsequent flooding.
“Beyond the displacement of the inhabitants, billions of dollars in tax credits are going into these developments, yet little consideration is given to their placement. Many of them are located in coastal areas that are vulnerable to storm surges from hurricanes and flooding tied to climate change,” Hammett said. “It’s surprising more thought isn’t put into where the LIHTC developments are placed. There could be more oversight, because resources exist that identify flood-prone areas.”
LIHTCs are a function of the IRS where developers can turn the mortgage model upside down by using equity provided by tax credits purchased by investors to build the projects. In turn, investors can often get a dollar-for-dollar tax deduction on regular income once the project is complete. LIHTCs are intended for affordable housing needed by lower wage earners.
Though her research focused on Florida, Hammett’s pilot study was done in South Carolina, which has similar issues with the multi-family developments being located in flood-prone areas.
“The rise of these affordable housing developments boils down to need. For instance, as Charleston’s population has grown, so have these tax credit-funded developments. A number of the projects in the Charleston area are constructed in areas of potential risk.”
Hammett said in 2003 and 2004, 70 percent of new LIHTC projects were located in Florida’s coastal counties. In 2004, Florida was hit by four major hurricanes – Charley, Frances, Ivan and Jeanne. Damages resulting from the storms amounted to more than $213 billion.
“With that kind of damage it seems obvious the development community and local housing authorities would consider areas vulnerable to storm surges before placing a project. GIS technology and models developed by the National Weather Service are readily available to determine at-risk areas during the pre-construction phase of development. Impediments can also be built to mitigate flooding in at risk locations,” she said.
Unfortunately, few changes resulted in the LIHTC location process following the devastation of the 2004 hurricane season, according to Hammett. “Developers continued to bring LIHTC developments on line in high-risk areas at a similar levels before and after the events of 2004,” she said.
Hammett said cheap property drives property selection for many of the LIHTC developments. But even in areas vulnerable to flooding, barriers, grading and landscaping measures can be taken to mitigate flooding incidents.
“GIS (geographic information systems) models can be created to determine building placement and even the suitability of land, but it’s typically not part of the system,” she said. “Unfortunately, when the flooding occurs, replacing the properties falls on state and county taxpayers because the developer often files for rehabilitation tax credits for repairs.”
Her Florida study showed potential damages can be extensive with as many as 18 percent of LIHTC units being in potential storm-surge areas assuming a Category 3 hurricane. In a worst-case scenario of a Category 5 storm, the number of units affected increases to 33 percent statewide. At the county level, Miami-Dade has the highest costs associated with storm-surge damages — at $485 million in the event of a Category 5 storm.
As many as 83 percent of Broward County LIHTC units are in storm-surge areas for a Category 5 storm. All of Charlotte County’s LIHTCs are in storm-surge areas subject to 14.5 feet to 32 feet of flooding in a Category 5 storm.
“These estimates don’t improve much when analyzing the data for an average Category 3 storm. Florida’s Charlotte County could still lose up to 94 percent of its LIHTC units at a cost of $52 million, not an insignificant amount of money for a small county,” Hammett said.
At the Category 3 level, Miami-Dade is at risk for damages as high as $307 million, the highest in the state.
“Miami-Dade’s LIHTC risk is not surprising since it has been identified as one of the most vulnerable locations in the country, according to the 2014 report of the Intergovernmental Panel on Climate Change,” she said.
Hammett’s study, “The Devastating Impact of Storm Surge on Coastal Communities,” was recently published in Real Estate Issues, a peer-reviewed publication of The Counselors of Real Estate, an organization of high-profile property professionals.
Co-researchers on the project were Elaine Worzala, director of the Carter Real Estate Center, at the College of Charleston and Tom Springer, professor of real estate and finance at Clemson University.
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