Los Angeles’ Pause on Section 8 Applications Creates Uncertainty for Affordable Developers

Uncertainty about federal cuts to housing programs is spreading through affordable housing markets nationwide as developers struggle to pencil out deals with the threat of federal cuts looming.

Los Angeles is a salient case after the Housing Authority City of Los Angeles (HACLA) paused the processing of Section 8 applications in March, leaving developers with projects in the pipeline struggling to make them pencil out. Other developers are rethinking plans to build affordable projects in the city, and the future of Section 8 and other housing programs is unclear.

“Uncertainty is obviously the overused word of the day,” explains Dudley Benoit, senior managing director and head of Affordable Equity Investor Relations for Walker & Dunlop. “It’s hard to operate without understanding what the rules are going to be and how things are going to move forward. Los Angeles pausing Section 8 grants is really going to put a pall over new opportunities.”

HACLA Pause Impacts Thousands of Applicants and Would-Be Applicants
In March, HACLA paused processing Section 8 housing applications for 3,300 families, citing federal program funding reductions. According to a statement, HACLA officials are working to ensure that families already receiving housing through the program “remain housed regardless of uncertainties in federal funding. “

Carlos Van Natter, director of the Section 8 program at HACLA, says leaders at HACLA decided to pause the program before Congress passed its continuing budget resolution on March 14. At that juncture, officials at HACLA realized they may not have enough funding in the Section 8 program to pay for all its current participants. The shortfall persisted even after Congress passed the continuing resolution to maintain funding at 2024 levels while Congress debates the Trump budget bill.

“The money that we will be short is now less than what it was in March, but it still puts us in the red,” adds Van Natter. “About half the housing authorities in the country are in a similar situation where they don’t have enough funding to maintain all of the contracts that they have through the end of the year.”

Van Natter explains that the decision to pause Section 8 was made in consultation with the Department of Housing and Urban Development.

“They (HUD) have a shortfall committee that looks at housing authorities who are getting close to using up all of their funds…,” he says. “So, in effect, we’ve stopped new people from coming into the program because we want to make sure we have enough funding for people already in the program, which is over 50,000 folks.”

HACLA also has approximately 23,000 individuals on the Section 8 waiting list affected by the pause since they cannot apply for vouchers while it is in effect. Those on the waiting list are in addition to the 3,300 individuals with applications pending that have been paused.

HUD has made $200 million available to housing authorities nationwide facing shortfalls. The housing authorities must apply for a portion of the money. HACLA has applied for some of the funds.

HACLA continues to lease to veterans through the Veterans Affairs Supportive Housing (VASH) program.

Impact on Developers
Van Natter says HACLA has also reached the cap on the number of project-based voucher units it can fund. This cap and the pause in processing Section 8 applications have affected affordable housing developers.

“We’re not bringing on new developers to build new buildings in our project-based voucher program, but those in the pipeline can continue with funding,” he says.

Jackson Loop, policy director at the Southern California Association of Nonprofit Housing (SCANPH), says that many of its nonprofit developer members are currently anxious about the federal budget and how it will impact project development.

“They are all really anxious right now about the temperamental nature of what’s happening with the federal budget,” says Loop. “Many of them rely on federal funds in one way or another. Some of them even have direct funding from the federal government.”

Loop explains that while typical affordable housing developments rely more on project-based vouchers than tenant-based vouchers, the reduction in tenant-based vouchers will reduce the number of people who can receive help from these vouchers and apply for affordable housing.

Loop stresses that the federal budget’s unpredictability regarding all housing programs, not just Section 8, has created significant uncertainty in the affordable housing developer space.

“Disruptions like this can create a lot of turmoil and make it really hard to build,” he says.

Loop adds that the Trump administration’s current budget proposal, dubbed the Skinny Budget, proposes a “really, really, big slashing of the HUD budget.”

Loop says the budget proposal introduces both a means of testing tenants’ access to rental subsidies and a proposed two-year cap on the duration of those subsidies.

“That would be a really massive disruption if that were to happen,” he explains, “and would be catastrophic for all types of affordable housing.”

Benoit, from Walker & Dunlop, believes many developers are adopting a “wait and see” approach to determine where the federal budget lands and whether they can still make deals work.

“Developers, I assume, are going back and getting their pencils out, trying to figure out how to make these deals work if they are not going to have the Section 8 subsidy involved,” he says.

Benoit says that developers who are currently putting deals together and have not yet applied for a program are the most impacted since they are weighing whether the number will work out and whether they can attract investors.

Alternative Funding Sources
It is challenging to replace Section 8 funding since it is foundational to tenants and developers of project-based voucher communities. Some local efforts to increase funding for affordable housing in California are being considered to help bolster programs.

In April, a half-cent sales tax increase took effect in Los Angeles County. Approved by voters through Measure A, the increase aims to generate revenue for addressing homelessness, developing affordable housing, and supporting homelessness prevention programs. These funds can help fill gaps in existing programs.

In 2022, voters in Los Angeles approved United to House LA, known as the Mansion Tax. This tax imposes a higher tax rate on properties sold or transferred for over $5 million. The additional funds generated by this tax are intended to support affordable housing projects and homelessness prevention.

Benoit says many developers are increasingly looking to state tax credits to help make affordable deals pencil out.

Loop says local governments are “generally risk-averse to creating a rental subsidy program,” and some philanthropic dollars have been raised to help finance rental subsidies, “but not at the scale we need.”

“It’s challenging to create other rental subsidy programs that don’t rely on the federal government,” he says.

As for the future of federal funding of affordable housing, Benoit says, “None of us, unfortunately, has a crystal ball…we’re all just waiting to see…”