In Japan, there are an estimated 1.3 million government owned housing units that are over 30 years old, and most of these homes need significant repairs. However, with the large government deficits, other priorities prevent the needed renovation of these aging homes. The current government approach is simply to maintain basic services and make minor repairs as needed.

Based upon experience with renovation and replacement of public housing in other countries, there is a model that the Japanese government can consider to upgrade or replace existing public housing. That model is Public Private Partnership (PPP), a concept that brings together the resources of the government with the talent and experience of the entrepreneurial private sector to develop and manage renovated or replacement public housing. The magnitude of the aging public housing problem in Japan is approaching a crisis, and PPP is one way to bring in the financial resources and management efficiency of the private sector to help government effectively address the problem.

Meanwhile, in the United States, PPPs are quickly becoming an option for major and minor government projects, and government is becoming creative in the land and tax incentives offered to the private sector to create partnerships meeting both the government goal of improving the quality of life for its citizens and the private sector goal of a reasonable economic return for its efforts.

Picking a Project to Examine

When seeking a good example to show the Japanese how a PPP can work for redevelopment of public housing, many PPP experts were consulted, and the recommendation was to visit and analyze the Northwest Gardens apartment complex of the United States City of Fort Lauderdale, in the State of Florida.

Northwest Gardens is a 150-acre public housing apartment complex operated by the City of Fort Lauderdale Housing Authority. Northwest Gardens is located at the northwest edge of the central business district. Poverty, environmental contamination, substandard roads and crime were major problems in this area, with flourishing drug-dealing and frequent shootings. However, because of the PPP, during the past 10 years over $270 million has been invested in new infrastructure, environmental clean-up and over 500 new residential units. The area is now a model community that many housing and redevelopment professionals visit to study this success story.

So, it was not the government housing authority alone that accomplished this substantial redevelopment and improvement in the quality of life. Just like Japan, the City of Fort Lauderdale Housing Authority was suffering from a lack of financial resources for such a redevelopment project, and sought ways to prevent the affordable housing from slowly turning into slums.

Since adopting the PPP strategy 10 years ago, the Housing Authority used the land it owned and tax incentives to attract a private partner that brought additional financial resources and construction and operational management skills to the partnership to create a model affordable housing community with a 50% decrease in crime, less school drop outs, and a re-invigorated sense of community.

Tam English, the Executive Director of the Housing Authority, and the one responsible for public housing in Fort Lauderdale says, “Thanks to the PPP, we have been able engage in more projects than other similar housing authorities.”

Tax Reduction For Flourishing Social Benefits

Thirteen years ago when Tam English began the redevelopment of the Housing Authority’s units, the Federal Government’s Department of Housing and Urban Development (HUD) had been cutting funding for operation and maintenance of public housing. Fort Lauderdale was feeling the reductions and could not maintain nor provide new affordable housing.

In 1986, the administration of President Ronald Reagan created the Low-Income Housing Tax Credit (LIHTC), which the Housing Authority was able to use to attract a private sector partner. The LIHTC is a program that allows taxpayers (individuals and organizations) engaged in affordable housing investments to deduct a certain amount from taxes owed to the Federal Government. The tax credits are eventually used by investors, and this credit can provide the majority of all affordable housing construction costs, funds provided by investors who then deduct the investment from their tax liability. In Japan the government uses the tax it collects to pay construction companies to build affordable housing. In the United States, the LIHTC funds the projects through minimizing taxes the affordable housing investor pays to the Federal Government because they provided funding for affordable housing.

In other words, the investors in affordable housing can reduce their taxes, and the low-income earners get affordable housing. In effect, the private investor directly finances affordable housing, through tax incentives. The government does not provide general tax revenue to finance these affordable housing projects. This United States program can also be used to fund repair of damages done by natural disasters such as hurricanes.

“The private developer and the City’s Housing Authority project team created a PPP,” says private developer partner Lindsay Lecour of Atlantic Pacific Communities. “Atlantic Pacific sent the project proposal to the Florida State Government, and when the State said “yes” we can get investment tax credit, then the private partner promoted the investment to high-income earners and groups explaining the benefits of government tax credit to encourage investments. For example, investors can buy $1 dollar of tax credit for 85 cents. Sometimes they even buy it for $1.50. How much they buy depends on the market price.

“In other words, investors have an incentive to invest in affordable housing because their deduction is more attractive than other investment opportunities. Atlantic Pacific gets 50%-80% of our project financing through LIHTC. The balance we borrow from banks.”

Scott Strawbridge, Director of Development and Facilities for the Housing Authority, comments that if it were not for the LIHTC, the PPP would not be able to provide affordable housing. “Without this financing system all we would get is available government subsidies, and that is not enough” he says.

Japanese society seems to still think that the government should tax high-income earners to provide social programs for low-income earners. The United States has been doing the opposite: thinking of ways to use reducing taxes on the rich as an incentive to fund social programs. The affordable housing tax credit program becomes an important financial resource for PPPs, and it also has been responsible for the expanding use of PPPs to redevelop existing and create new affordable housing.

In Japan, citizens pay taxes and cannot tell how their money is being used. With tax credit programs, the high-income investor gets to see exactly how their money is being invested.

Public and Private Partners Can Share The Same Goals

Another condition for receiving LIHTC tax credit is to provide lower rents to make it easier for low-income earners to have decent housing. This is made possible because the partners in many affordable PPPs share the same goals.

“Atlantic Pacific Communities joined with the Housing Authority on the Northwest Gardens project because we wanted to make an impact on the community of people marginalized in society, while still participating in a profitable development” Lindsay Locour commented. “Our private company shares the same social mission with the public sector: to do something for the public good. We are able to overcome obstacles that arise in advancing our PPP because the government and private sectors share the same public good goals.”

Supporting The Residents So They Become Independent

In the United States, public sectors agencies such as Community Redevelopment Agencies and Housing Authorities not only provide affordable housing but also provide services to enrich the quality of life for the entire community. This is also the case with Northwest Gardens. The Housing Authority is engaged in many resident-improvement projects, one of which is the long-running vocational training Step-Up Apprenticeship Program. Scott Strawbridge explains how it works:

In our community there are many people who drop out of school or have a criminal record, and the young people in their 20s are finding it hard to find jobs. Furthermore, the longer they are unemployed the harder it is for them to find employment. That’s why we help them gain job experience. Step-Up is a vocational training program that includes classes and even a diploma upon graduation.

The young people in the Step-Up Program built most of the Northwest Gardens apartment kitchens and bath vanities. Others handle all of the grounds maintenance. Around 20% of full-time Housing Authority employees are Step-Up graduates. These people are now earning a living, and have health insurance and a pension plan.

 
A young crane operator was working just outside Northwest Gardens office. He was a Step-Up graduate, he said. “My experience was just as Mr. Strawbridge has explained.”

For those who don’t know Northwest Fort Lauderdale’s former days of crime, slums and blight, it is difficult to grasp just how much this area of the City has changed. Anyone who goes there now sees a thriving area with a true sense of “community.”

And, when other cities send representatives to tour Northwest Gardens, they are impressed with what the PPP has been able to accomplish, the value created for the residents, and the quality of life contribution to the City of Fort Lauderdale.

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The Japanese government is trying to popularize PPPs in Japan to compensate for decreasing government financial resources. But the Japanese government may be academically exploring tax cuts to encourage socially beneficial private sector investments, but none have yet been enacted. There is a deeply ingrained prejudice in Japan that public services must be provided with public money.

As an example, after the Great East Japan Earthquake in 2011 the Japanese Government raised taxes to pay for the restoration from the damages. In the United States., on the other hand, the Congress passes Urban Enterprise Zone and Opportunity Zone legislation for areas needing restoration, providing tax incentives to attract private investment and redevelop the slum, blighted, or damaged areas.

Is it time in Japan to take a different approach? Is it time in Japan for government to incentivize the private sector and the wealthy to invest in affordable housing and other socially beneficial programs? Or will Japan continue to raise taxes to pay for such programs? Will the Japanese Government continue to use tax dollars for all programs, or will “PPP demonstration projects” be allowed so that local government can experiment in cooperation with the private sector? Perhaps declining government revenue will foster PPP sooner than we think possible!