Continuing Impact of Disparate Impact

6 min read

“The disparate impact decision,” says Josh Cohen, Development Director of Beacon Communities based in Boston, Massachusetts, “bolsters the notion that creating affordable housing in areas of opportunity can be a business opportunity for affordable housing developers. This business opportunity comes with risks – for example, permitting challenges and NIMBYism [not-in-my-backyard] that can be involved – but the decision reinforces that these risks are worth taking and suggests that state agencies may be even more interested in supporting these developments because of Fair Housing requirements to provide housing in areas of opportunity.”

As an example of NIMBYism, Cohen cites his company’s work on “several suburban affordable housing developments that were tangled in years of litigation because of local opposition to affordable housing.” In one case, he explains, “this opposition took the form of litigation related to a development’s permit under the state wetlands law – legal proceedings not related to the affordable housing in and of itself but clearly intended to block it.” Other firms, he explains, “have faced the same challenges, and these challenges are one reason many affordable housing developers have focused on distressed neighborhoods, where they typically do not face the same sort of opposition.”

The new investment environment reflects a normal flow of change and unknowns that follow any major decision by the U.S. Supreme Court.

Events to-date: On June 25, 2015, the Supreme Court ruled in Texas Department of Housing and Community Affairs (DHCA) v. Inclusive Communities Project, Inc that allegations of Fair Housing Act (FHA) violations can be supported by evidence of disparate impact.

In the six months since then, three developments have been bringing the post-decision reality into clearer—but still fuzzy—focus.

First, the U.S. Department of Housing and Urban Development on July 16, 2015, issued what it calls “a final rule to equip communities that receive HUD funding with the data and the tools that will help them meet long-standing obligations….” Under the program title “Affirmatively Furthering Fair Housing” (an alliterative mouthful for which HUD officials informally apologize), HUD sets high goals: “No child’s zip code should determine her opportunity to achieve.” To help all those involved achieve these goals, HUD has created and made available geospatial mapping tools that reveal housing patterns and enable interested parties to investigate what drives such patterns; other new tools now provided by HUD facilitate standard and transparent neighborhood assessments to, among other things, foster cooperation among everyone involved in housing decisions.

Second, state housing agencies are adjusting their Qualified Allocation Plans (QAP), the criteria according to which they award tax credits. By federal law, each state must publicly promulgate a QAP, and update it every year in an open process. Among the mandatory preferences for projects in QAPs are location in “qualified census tracts,” so state-by-state interpretation of the Supreme Court decision this next year will be crucial. “Many are concerned,” says one developer, “that disparate impact and HUD’s affordable fair housing directive may be forcing states to encourage building in better neighborhoods, and taking funds away from poorer areas where is it most needed.” Adds another developer, “Every state is looking at Judge Kennedy’s decision and trying hard to devise plans that will not trigger any lawsuits.”

And third, as the above indicates, many developers of affordable housing seem to be finding themselves—or anticipate finding themselves—being pulled to two conflicting directions: the new markets and new business opportunities that can come with fair housing goals that break segregated housing patterns, and maximizing the availability of affordable housing, which means not investing in the high cost of land in wealthier communities. Justice Anthony Kennedy, in writing the majority’s Texas Department of Housing and Community Affairs (DHCA) v. Inclusive Communities Project, Inc decision, anticipated this dilemma when he warned, “If the specter of disparate-impact litigation causes private developers to no longer construct or renovate housing units for low-income individuals, then the FHA [Fair Housing Act] would have undermined its own purpose as well as the free-market system.”

Although such post-Supreme Court decision realities unfold slowly, developers, who cannot wait as they face real-world business decisions, are making adjustments.

“We’ve begun to focus in on neighborhoods of choice after the ‘disparate impact’ case ruling was made,” says Milton Pratt, Jr., Senior Vice President of the Michaels Development Company based in Marlton, New Jersey. “As we move forward with business in most markets, we are more focused on doing business with towns that have high-rating school districts, more retail, and favorable infrastructure. The ruling provides us an opportunity to put our footprint on towns we haven’t traditionally been in yet and we are excited to see how that proceeds. We are charting a direction as an organization to be less focused on public housing deals and more focused on workforce housing, adaptive reuse, and preservation of existing housing.

“HUD’s ‘affirmatively furthering fair housing’ approach is extremely significant in this regard because it allows us the opportunity to step into new towns that were uninterested in affordable housing in the past. We have refocused our efforts towards suburban deals and workforce housing markets and putting less of a focus on PHA transactions.

Adds Pratt, “One of our main concerns with going into suburban neighborhoods is land cost. The land cost will definitely be increasing, which will mean the project cost will also increase and could potentially raise issues. This will be a challenge in many markets as the states are trying to find ways to lower project costs. We are, furthermore, still unclear on two main aspects of the Supreme Court decision, which are how we compete for the land/buildings for affordable projects against Class A apartment builders and how can we get the zoning approved without long, protracted fights with communities that still don’t want affordable housing. We hope that these both will be answered quickly and clearly. In the meantime, there are no specific court cases we are currently following, but we are certain there will be more cases arising within the next few months dealing with various state housing finance agencies as a ripple effect of the Supreme Court decision.”