Marilyn Gustin’s room is filled with sunlight. A colorful, half-finished quilt covers the table in the center of the room.
Before moving to St. Luke’s Home, an assisted-living facility for low-income seniors, Gustin did “some unusual things,” she said, her bright blue eyes twinkling. She ran a hospitality center for German merchant sailors, managed a house for people recovering from mental illnesses, and most recently, was a life coach.
“And I went back to school in my 40s and got a PhD in comparative spiritualities,” Gustin said with a laugh.
Her many jobs, although fulfilling, did not leave her with much of an income or retirement savings. So when she was looking for a place to live after retirement, St. Luke’s was the only option she could afford.
The nonprofit, which is near the University of Arizona at 615 E. Adams St., is one of the few places in Tucson that provides housing for low-income seniors, who now make up the largest proportion of people who are homeless in Arizona according to Terri Waldman, St. Luke’s executive director.
St. Luke’s became low-income housing in 2000 after entering a federal program that provides tax credits to developers of affordable housing in exchange for a guarantee that a property will provide below-market rents for 30 or more years.
However, St. Luke’s recently used what housing experts describe as a loophole to exit the program early, making it one of seven apartment complexes in Tucson to do so. The law allows properties to apply to leave after 15 years.
Although Waldman said that St. Luke’s plans to continue to stay affordable for its residents, this is not the case with many properties that leave the tax credit program. Once they leave, after a three-year buffer period, property owners are free to raise rents to market-rate, displacing people who thought they were guaranteed low-income housing for an extended period of time.
Boulder Terrace, a small five-unit apartment complex near A Mountain, is an example of what can happen when a property leaves the housing program. Since the property was freed from restrictions in 2014, rent has more than doubled according to tenants who provided documentation to Arizona Luminaria.
From 2010 until now, Tucson has already lost 402 units of affordable housing through the loophole, and it has the potential to lose 1,884 more, according to a document presented at a May 23 study session with Tucson’s mayor and city council.
Although it is difficult to tell how many people would be impacted by this, since multiple people could live in each housing unit, it would exacerbate the shortage of affordable housing in Tucson. In January 2023, when the Section 8 voucher program, which helps low-income families pay their rent, opened its waitlist for the first time in five years, the city expected over 20,000 people to apply.
Although this is a national problem, it is of particular concern in states like Arizona, where rising rents make leaving the housing program tempting.
In Arizona, 70 properties have gone through the process to leave the program since 2010, resulting in a loss of over 5,700 affordable housing units, The Arizona Republic reported.
Ann Chanecka, interim director of the city of Tucson’s Housing and Community Development department, said that the city is concerned about the potential of losing hundreds or thousands of affordable housing units.
“We will absolutely be trying to prevent that from happening,” Chanecka said at the May 23 city council meeting where she first presented this issue.
Chanecka told Arizona Luminaria that her department has been talking with the Arizona Department of Housing to figure out how to incentivize current property owners to keep their units affordable.
Although this is a federal program, Arizona has implemented policies before to strengthen it. In 2010, the state housing agency made it nearly impossible to receive the tax credits if developers didn’t voluntarily give up their right to leave the program early, the Republic reported.
The properties built before that policy face no such restriction. Although Tucson is limited in what it can do to address the potential loss of these units, the city is not completely powerless.
Chanecka said that Tucson is considering two potential fixes: providing funding to help rehabilitate aging properties and raising the income limits allowed under the program so that property owners could charge slightly higher rent, while still remaining low-income.
Running out of money
Kirk McClure, a professor of urban planning at the University of Kansas, has been studying the affordable housing program since the day it was created.
The program allocates federal tax credits to developers to build affordable housing. However, most developers are too small to make use of the credits, so they sell the tax credits to an investor who provides them with the money to actually build the properties.
As McClure was crunching numbers for the program, he and the other economists realized that the government couldn’t just give out all of the tax credits in a year because then the housing might only stay affordable for that year.
The federal government structured the program so that investors were paid the tax credits over a 10-year period, but housing had to stay low-income for 15 years, McClure said.
In 1990, the federal affordability term increased to 30 years, but investors get all of their tax credits by Year 15, McClure said.
One of the biggest challenges that low-income housing property owners face is finding the funds to renovate their properties at the 15-year mark. Because investors no longer receive money, neither do the developers of the affordable housing projects.
This creates a problem, since this is right around the time that properties start requiring more money to update their facilities.
“Entry doors, asphalt on parking lots, you name it, all of these things wear out,” McClure said. “No building lasts long enough that it can go for more than about 20 years without having to go back to the bank.”
This was the exact problem that St. Luke’s Home faced when its board decided to undergo the process to leave the program in 2022.
Built in 1917, St. Luke’s has served as a tuberculosis sanitarium and a home for women, among other things, according to Waldman, St. Luke’s Executive Director.
In 2000, St. Luke’s became low-income housing by entering into a tax credit agreement, she said.
The money allowed St. Luke’s to pay an architect and construction company to expand its housing to 64 people, all of whom would make below 30%, 50%, or 60% of the area median income, Waldman said.
Area median income is a measure used to calculate housing affordability that represents the midpoint of an area’s income range. As of 2023, someone making 50% of the area median income in Tucson would earn about $28,500 a year. Under the 2023 rent limits in the housing program, that person could only be charged $711 a month for a studio apartment.
Gustin has lived at St. Luke’s for years. She lives in her own room but shares a bathroom with another resident.
“My monthly income is Social Security and that’s all the monthly income I have,” Gustin said. “I’m here because I need a low-income place to live. And it couldn’t be better.”
St. Luke’s charges its residents based on their monthly income. Since March 2023, the facility leaves each person $200 dollars a month and takes the rest for expenses — a recent increase for each person of $100 due to inflation.
With that money, St. Luke’s covers food, utilities, most transportation and provides activities and entertainment for its residents. Bingo is a crowd favorite, Gustin said.
Waldman said it costs about $3,000 a month to support a resident at St. Luke’s, but all the residents pay half of that or less, between $600 and $1500 a month. The difference is made up of grants and private donations.
“For many years, it was good,” Waldman said. “However, a place is not sustainable like that. St. Luke’s was never going to be able to make enough money to stay alive.”
Once 15 years had passed, all of the benefits from the tax credits had been used up and St. Luke’s no longer received any money from investors.
“[The program] was a really good thing for a long time,” Waldman said. “But in today’s market, in today’s nonprofit world, we couldn’t survive it.”
Leaving the program
In January 2022, St. Luke’s board of directors filed an application to leave the program through the qualified contract process, which allows developers to exit the program early.
During the qualified contract process, St. Luke’s went up for sale for a year, and the state looked for a buyer.
However, the formula at which the state prices the property is based on the assumption of a very strong real estate market, McClure said. This makes it very difficult to find a buyer. To date, no properties that have gone through the qualified contract process in Arizona have been bought during that one-year period.
St. Luke’s was no exception. No one made an offer to buy the property and in 2023, St. Luke’s was released from the housing program. It has three years before it is legally allowed to raise the rents of current residents.
Today, St. Luke’s is among the minority of developers that receive these tax credits that are nonprofit. According to a review of affordable housing development, 78% of low-income properties are built by for-profit developers.
Because St. Luke’s is a nonprofit, Waldman said that it does not plan to raise rents for current residents and are still admitting new occupants using the same financial calculations for how much they are able to pay.
Waldman said that the only difference is that St. Luke’s will now serve people who make up to 80% of the area median income, which is the legal threshold for people defined as low-income.
St. Luke’s has a limited number of private rooms, which “will go to the 80 percenters because that’s where we’re really going to get our money,” Waldman said.
Although it is too late to keep St. Luke’s in the tax credit program, this strategy — of allowing the properties to house people who make slightly more money but are still considered low-income — is also being considered by Tucson and the Arizona Department of Housing.
How this would work is unclear. IRS guidelines currently allow low-income properties receiving tax credits to rent some units to people who make up to 80% of the area median income as long as the average income of the tenants in the building doesn’t exceed 60% of the area median income.
City could fund rehabilitation
At the May 23 city council meeting, Chanecka said that one of the major incentives the city is considering is providing money for rehabilitation at the half-way mark of the housing program.
“So trying to say ‘We will help you fix up your properties,’ but in return requiring that they stay affordable,” Chanecka said at the meeting.
As an example, Chanecka pointed to a program in Phoenix that provides low-interest loans to developers who need to rehabilitate housing that serves low-income households.
In addition, in 2022, federal COVID-19 relief funds allowed the Arizona Department of Housing to earmark $10 million for the preservation of affordable housing; however, that money is not a recurring source of funds. A spokesperson said that all of the funding has already been allocated.
Waldman said that the city or state housing authorities could only have helped St. Luke’s if they committed to giving the nonprofit a consistent source of funds.
“If they’re going to give me one lump sum, that’s not going to do me any good,” Waldman said. “If you said you were going to give me a million dollars a year for 100 years — sure, that would work because that’s what I have to raise to stay alive.”
What happens after leaving
As properties leave the program, it is rare that they stay low-income.
Cabo Del Sol, 5600 S. Midvale Park Road, and La Posada, 6300 S. Headley Road, are two of the largest properties on the list of apartments that have left the housing program, resulting in the combined loss of 204 affordable housing units. Both are now owned by Element Property Company, a real-estate investment firm that did not respond to a request for comment through its website.
Rent for a one-bedroom apartment starts at $1,005, according to the websites for the apartments. Based on 2023 rent limits, if the properties had remained in the program, they would be allowed to charge between $304 and $914 a month, depending on the income of the tenant.
Boulder Terrace Apartments, which sits in the hills near the base of A-Mountain, left the program in 2010.
The rents at Boulder Terrace, 202 N. Boulder Terrace, have more than doubled in the past five years, according to tenants who provided documentation to Luminaria. A 3-4 bedroom apartment is currently listed at $2,000 a month on the website of the company that now manages Boulder Terrace, AZ 1st Realty Management.
No longer a low-income property, the rents at Boulder Terrace are strictly a function of the market according to Jesus Briones, the president of Del Bac Building Contractor. Del Bac developed and built Boulder Terrace Apartments using tax credits awarded in 1994.
When Briones decided to build the property, he felt that the project had what he called “a component of compassion.”
“I felt that going into the project, I could actually be of service to the low-income tenant,” Briones said.
However, in 2010, Briones decided to leave the program for a combination of reasons. After 15 years, the tax credits no longer provided any benefits, and the nation had just been hit with the 2008 recession which made it difficult to find funding to update the property.
So he sold Boulder Terrace in what he described as a “fire sale.” Briones said that even if there hadn’t been a recession, he would have wanted to leave the program anyway because he was required to screen and certify every prospective tenant’s eligibility to live at the apartment complex.
“It was tons and tons of paperwork,” he said. “Any little thing could trigger the tax credits to be invalid.”
He said that receiving the tax credits was not worth it for him in the end.
“A project like [Boulder Terrace] that is very small — the expense and the stress of administration of projects like that — from every aspect is not worth it,” Briones said.
After Briones sold the project to a private individual in 2011, it was sold multiple times before the current owners, Boulder Terrace Partners LLC, bought the property in 2022.
The Los Angeles-based real estate investment firm AndMark Management Co. is behind the LLC. AndMark did not respond to multiple requests for comment by phone.
What Tucson can learn from New York City
As Tucson and Arizona scramble for ways to prevent developers from leaving the program early, nationally, they are not alone.
Moody’s real estate analysts listed Tucson as one of 10 cities in the U.S. most at risk for losing affordable housing units built under this program. Other cities on the list include Las Vegas; Birmingham, Alabama; and Albany, New York.
The ranking is based on a projected loss of affordable housing due to 30-year tax credit terms expiring, rather than developers leaving them early. These issues, although different, are closely related.
New York City is one of the few places proactively addressing the potential crisis in affordable housing as low-income properties reach the 15-year mark and owners must decide whether or not to stay in the program.
In 2008, New York City implemented a program to help these properties in Year 15 according to a January 2023 paper on the subject by Euna Kim, a doctoral student at Cornell University in the Department of City and Regional Planning.
The program offers owners several options for making the property viable for another 30 years, such as providing new government loans or restructuring the debt on properties to decrease the amount that owners need to pay, according to the study.
New York City’s program has been relatively successful — 60% of properties extended the length of their tax credit terms after the 15th year between 2020 and 2022 according to the paper.
There are many differences between New York City and Tucson that make the direct application of this program challenging — one of the biggest being that New York City is large enough that it doesn’t need to work with New York state to allocate tax credits.
Despite these differences, New York provides an example to Tucson of how local government can help preserve affordable housing by working with owners to refinance the properties according to McClure, the housing expert.
McClure said that Tucson could combine new tax credits, loans from city-issued bonds and housing vouchers to provide funds to low-income housing properties.
The city could apply for federal money to finance all of those strategies, although Tucson would have to compete against other entities in Arizona, McClure said.
“Ideally, Tucson does it without spending one local dollar,” McClure said.
Uncertainty about the future
As city and state staff work to prevent the potential loss of thousands of affordable housing units, much uncertainty remains about the future of low-income housing in Arizona.
However, for a nonprofit like St. Luke’s that is not the typical developer of affordable housing, long-term residents like Gustin can breathe a sigh of relief. St. Luke’s is one of the few affordable living options for seniors in Tucson — and it appears to plan to stay that way.
St. Luke’s is one of the only places Gustin could find a home in Tucson. Sitting on the two-person couch in her first-floor room, Gustin talked about the sense of mutual care among the seniors in the small community and how they look out for each other and their families.
“I thank God for St. Luke’s all the time because if I didn’t have St. Luke’s, I don’t know what I’d be doing,” Gustin said. “I might be on the street.”
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