I propose a novel but straightforward application of some obscure, but still clear and unambiguous agricultural tax provisions to affordable housing development.
This model uses tax provisions that apply to Tenant Farming and Sharecropping to create a new approach to affordable housing.
This admittedly strange combination yields some pretty astounding potential benefits for community residents and developer/investors. I am calling it the Urban Farm/Affordable Housing model.
You may be thinking – Tenant Farming & Sharecropping! Affordable Housing? Now hold on there for just a minute!
OK, I know that the history around this part of American life is so bad that it is counter-intuitive and counter-history to imagine that the Tenant Farming/Sharecropper model could be used in new, positive ways – but that is exactly what I think can be done in the areas of affordable urban and rural housing.
In fact, the terrible reputation of this area of American life is probably why nobody seems to have looked closely at the tax laws that support it.
I’ve taken the model as far as I can at this point – I’ve germinated the idea, done the research, and given it a lot of thought. I’ve gone as far as I can go without the critical appraisal of other people, so I am putting it in front of the community to see whether others feel that it has value and want to help make it happen.
The Urban Farm/Affordable Housing Model
What if it were possible to build an affordable fully-accessible housing community where the residents paid no rent, had good jobs if they wanted them, and received utilities, insurance, day care, and other basic living needs at little or no cost to residents?
What if it were also possible for the developers & investors of this community to make more money than they could with an equivalent investment in upscale, market-rate residential development? And what if the tax advantages this model offered were on top of, not instead of all the LIHTC and other incentives developers/investors already enjoy?
I think that these things are possible by:
- applying a couple of relatively obscure but very clear and unambiguous IRS tax laws that govern Tenant Farming & Sharecropping to high-value urban farming technology, and then
- integrating that technology with an affordable housing community and an operational and governance model based on best practices.
For a look at the technology being proposed see footnote (1).
The Relevant IRS Provisions
The Tenant Farming & Sharecropping laws define a relationship between employer and employee that is unique – under these laws, the landowner is able to deduct the fair market value of the housing, utilities, insurance and other benefits they provide to a tenant farmer/sharecropper, but that employee doesn’t have to report the value of that free housing etc. as income. It really is free. There is no other employer/employee relationship with this configuration under IRS law. Under any other circumstances, if an employee is given free housing they owe tax as if it were salary or wages paid in cash, and the same is true of all other employer-provided benefits like meals, insurance, utilities, or transportation. Tenant Farmer/Sharecroppers are the only group exempt from owing income taxes on these employer-provided benefits.
Here is the exact language from IRS Publication 225:
“You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. These costs include repairs, utilities, insurance, and depreciation. The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement isn’t taxable income to the tenant.”
“The cost of boarding farm labor is a deductible labor cost. Other deductible costs you incur for farm labor include health insurance, workers’ compensation insurance, and other benefits.”
There are a number of related provisions, easily browsed in Pub. 225. All are equally clear. After careful reading of the entire set of tax provisions affecting this relationship here are what I believe are the main benefits of the Urban Farm/Affordable Housing model.
- Affordable (or free) long-term quality housing
- Affordable (or free) utilities, insurance, adult/child day care, other benefits
- Stable, desirable, long-term, accessible employment
- Possible path to home ownership
- Community involvement in oversight of housing, benefits & employment
For Developers, Investors
- Farm management can be subcontracted; ag operation is turnkey
- New tax benefits on top of existing benefits
- New tax-advantaged revenue streams
- New kinds of tax credits potentially available (example: Work Opportunity Tax Credit; Farm Fuel Tax Credit).
- Improved amortization schedules
- Reduced maintenance
- Multiple revenue streams supporting debt service
- Resident’s path to ownership increases stability
- New high-quality affordable housing with good, co-located jobs
- Improved community-wide social & financial metrics
- Reduced community-wide social & financial costs
- Increased leverage for existing AH investment in tax benefits & incentives
- Flexible model allows high or low-density, urban/suburban/rural development
A Few Hypothetical Scenarios
Applying Tenant Farming & Sharecropping tax provisions to indoor high-value food-crop production under lights by employing a community of affordable housing residents as the workforce might seem like a stretch, but when you read the IRS language their applicability is pretty clear.
I am simply talking about taking this model out of the bleak cotton fields of Alabama and applying it to a new affordable housing-high-value agriculture model in cities and towns.
Here are a couple of brief descriptions of how the affordable housing/urban farm model might work.
- Envision a rehabilitated 10-story building near downtown. The top 5 floors are apartments, and the bottom 5 floors are food production. The residents pay no rent or utilities, and at least one resident in every apartment is employed by the food production operation downstairs. Even if they are elderly or physically challenged there are jobs that they can do. The building is 50,000 SF of residence and 50,000 SF of food production. Revenues from the food production are $60/SF/year or $3 million. There is no rental revenue. Fair market value of the residential space & utilities is $40/SF/Year or $2 Million. Developer/Investors receive that $2 Million as farm expense deductions. Developers/Investors, resident sharecroppers, and technology providers/managers all divide the $3 Million revenue pie in appropriate shares that incentivize everyone.
- Envision a 50 pad trailer park on the edge of town with low-income residents in substandard housing. Now see a developer/investor buy the park and an adjacent 3 acres, and install 50 units of high-standard modular housing and the supporting infrastructure – sewer, water, electricity, communications, accessibility, parking, community garden space, etc. Also see the developer/investor build 100,000 SF of indoor growing warehouse-style space, and contract with a high-value food production company to install and operate the farm with the residents as Tenant Farmer/Sharecroppers. If each of the 50 modular units has a fair market-rate rental value of $2500/month or $30,000/year, then that generates $1.5 Million in tax deductions for the “Landowner”; other benefits to the residents bring additional tax benefits to the Landowner. Meanwhile, the 100,000 SF of high-value farm space is generating $60/SF/Year, or $6 Million/year in net revenues. In contrast, a high-end 50 unit garden apartment affordable housing development might bring in rents of $1000/month or $12,000/year per unit, or $600,000/year. Of course the developer/investor of the affordable housing project would get a lot of Low Income Housing Tax Credits and other incentives but nothing, in my opinion, that would pencil out like the Urban Farm/Affordable Housing model.
These are only two possible scenarios. I can see the Urban Farm/Affordable Housing model applied to retirement communities, disaster recovery re-building, rehabilitation centers, nursing homes, college campuses, abandoned or decaying small towns, abandoned military bases, and other scenarios involving existing, under-utilized or unused resources.
I am investigating whether or not the relevant tax and labor laws would permit a worker cooperative to be the ‘landowner’ of the high-value agricultural enterprise and if the cooperative members could be its employees as tenant farmer/sharecroppers. If this can be legitimately structured, then a Coop could be formed as the investment vehicle for funding an affordable housing/high-value farming project development, subcontracting the agricultural technology operations and management to the vertical farming technology provider while managing the overall worker-owned community development process.
Sharecroppers, Tenant Farmers, Racism, Exploitation And Poverty
As I said earlier, Tenant Farming & Sharecropping both have horrible connotations of poverty, racism, and exploitation. Both Tenant Farming & Sharecropping have been embedded in some form in agricultural tax & property ownership laws since the American colonies. As an exploitative agricultural model both have been around at least as far back as Medieval European peasants living in cottages and working on the King’s lands for a share.
This awful reputation for inhumanity is well-deserved, and is undoubtedly what has kept the positive potential of the Tenant Farming/Sharecropping tax laws hidden so well for so long, in spite of intensive searches in every field and profession for every possible usable tax provision.
There is no question that the Urban Farm/Affordable Housing model could be abused, virtually enslaving people attracted by free rent and a job, but as long as governments have a regulatory and financial hold on affordable housing developers and investors, and as long as the residents of the affordable housing communities themselves and the advocacy groups that represent them have a solid role in governance, such abuse can be mitigated if not completely avoided.
- To see one example of a high-value farming business model that would integrate well with affordable housing in both urban and rural environments, look at Plenty, a California-based intensive food production company.
- While Cannabis is the highest-value indoor crop @ $112/SF annual yield, Cannabis production doesn’t qualify for Federal tax breaks – directly. although I do see a few ways that Cannabis growers might be able to structure their operations to benefit from the tenant/sharecrop model. Still, for the most part, this model will work great with lettuce spring mix or basil or strawberries but Cannabis production is probably off the table for now.
- Also, if you dig through the internet business chatter, you’ll find that Plenty, and other intensive indoor food production companies, consider the lack of skilled, dedicated workers and the costs of labor when it can be found to be their major vulnerability. This is a huge incentive for vertical farming technology companies like Plenty to look into integrating affordable housing into their production model.