Can a luxury tax potentially solve Florida’s affordable housing crisis?

GISELLE SARDIÑAS—On October 11, 2018, Tony Prado, Developer in Residence for University of Miami School of Law’s Robert Traurig-Greenberg Traurig LL.M. in Real Property Development, presented during the program’s Affordable Housing class. Prado, who has extensive experience in the affordable housing sector in South Florida, expressed his frustration with the management of subsidies by government-run agencies. Prado articulated that when it comes to the development of affordable housing, the non-profit sector is not well-equipped to compete with the financial and managerial expertise of the private “for-profit” sector.

According to Prado, many of the real solutions to the nation’s affordable housing crisis will take a long time to pay off, and, as a result, finding support for such solutions is difficult because politicians typically only back initiatives that yield immediate results—i.e., while they are in office. It nevertheless came as a surprise when Prado, who deems himself a “private-sector” guy, proposed one possible solution: a graduated property tax on luxury real estate units (hereinafter referred to as the “Prado Fair Housing Act” or “Prado FHA” for short).

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Current Affordable Housing Climate
Florida is one of the largest contributors to the nation’s affordable housing crisis. Miami-Dade County, for example, ranks among the top three metropolitan areas in the nation where residents are severely cost-burdened, spending more than half of their salaries on rent and utilities. The city’s popularity among investors has driven up real estate prices, which has consequently increased the demand for affordable housing.

Miami-Dade County’s penchant for investors does not explain the shortage of affordable rental homes for extremely low income households. Further, The Miami-Fort Lauderdale-West Palm Beach, FL, metropolitan area is ranked #10 on the top ten list of metropolitan areas in the nation with the most severe shortage of available, affordable housing for “extremely low income” households; the Orlando-Kissimmee-Sanford, FL metropolitan area lands at #3.

Ben Carson, Secretary of Housing and Urban Development, has said that the nation’s shortage of affordable housing, while regrettable, is a local problem. In response, the City of Miami Mayor, Francis Suarez, asserts that initiatives and policies are necessary to make it easier for the private sector to build affordable housing. One initiative that will do just that is the Prado FHA.

Luxury Tax Implementation
The Prado FHA would be assessed to high-end real estate properties under a graduated tax system, for which optimal rate thresholds will need to be developed.

Proceeds from the luxury tax would subsidize affordable housing developments across Florida. This strategy focuses on increasing the supply of affordable housing through market forces, rather than regulation (i.e., engaging the private sector by improving the profitability of affordable housing production).

Prado’s program would be similar to affordable housing programs established under Florida’s Sadowski Act, with the exception of one key difference—monies collected under the Prado FHA would be managed entirely by an Independent Trust Fund. Sadowski funds and other affordable housing subsidies, including the LIHTC, are typically managed by government agencies which are prone to abuse and result in costly low-income housing.

The efficient management of the Independent Trust Fund would be crucial to the success of Prado’s proposal. For there to be a successful allocation of funds for affordable housing projects, the Independent Trust Fund would need to employ personnel with the financial and managerial expertise required to execute a successful real estate development project. Such expertise is necessary to ensure that the private sector is presenting viable business plans and to identify bad faith efforts that would game the system.

Potential Hurdles
The main hurdle is identifying where luxury begins. In places like Miami-Dade County, where the median price for a single-family home is approximately 6 times the average salary, the Prado FHA would need to be assessed on properties valued well above that threshold to avoid exacerbating the severe housing costs already plaguing the county’s residents. One possible solution is to apply the tax to properties valued at 10% or above of the given market, using the Institute of Luxury Home Marketing’s definition of luxury. A simpler metric would be to tax dwellings with market valuations in excess of $1 million.

The Prado FHA also risks disrupting the supply and demand of luxury real estate properties on the market. However, Prado is convinced that a luxury tax will not materially affect the demand for luxury real estate properties in Florida, and he is probably correct. Industry experts say property taxes typically do not influence a buyer’s decision to purchase a real estate property. On the supply side, currently Sarasota County and Collier County, FL are ranked among the top 10 fastest growing luxury markets in the nation. Meanwhile, South Florida is expected to continue seeing luxury real estate developments, given that international investors view the U.S. as the safest place to invest their capital. Further, South Florida is regarded by foreign investors as a market where high-quality properties will continue to appreciate.

Finally, what is to stop the Independent Trust Fund from engaging in self-dealing and misappropriating funds? One such solution, proposed by Prado, is to create a Public-Private Partnership with an Independent CEO to oversee the activities of the Independent Trust Fund, along with mandatory routine audits.

Final thoughts
Given the shortage of affordable housing and severe cost-burdening faced by many Florida residents, it is clear that the affordable housing programs available today are insufficient. The Prado FHA provides a real solution to the affordable housing crisis by taxing an already existing and growing revenue stream, providing a profit incentive for the private sector, and eliminating government interference in the hopes that the process becomes less cumbersome for developers. Florida’s policymakers need to consider Prado’s initiative.

I want to express my sincere gratitude to Tony Prado for his contributions to this piece. Tony, thank you for allowing me to share your idea with a larger audience, and for guiding and supporting me through the entire process. Without your immense knowledge and expertise, this piece would not be possible.