Financing affordable housing without subsidies is almost impossible for developers to build homes that are affordable for low- or extremely low-income families, according to a report from Redfin [1] in conjunction with the Urban Institute [2]. This is attributed to the fact that lenders loan money for housing development based on the property’s expected income.
The Urban Institute says that when rents are set to what are deemed affordable levels, there becomes a gap between the cost needed to build these properties and the money allotted to the project from lenders and investors.
Redfin reports that a new interactive tool from the Urban Institute and the National Housing Conference demonstrated just how complex creating affordable housing can be.
They state that in order for new, affordable apartment buildings to be built, developers must be creative with their financing and how they work.
The Urban Institute cites the Low-Income Housing Tax, a federal tax credit administered by state agencies, as the primary source of funding and most of the affordable housing that gets built receives tax credits. In the interactive tool, users can view how tax credits are the default for buildings with 100 or more units.
In order to be eligible for tax credits, the report says a development must dedicate at least a fifth of its units to those who earn less than half of the area median income or they can allot 40 percent of apartments to those earning less than 60 percent of the area median income. This also means that in order to be considered affordable, rent for those apartments may not exceed 30 percent of the designated income level. In addition to these stipulations, developers must also compete to receive the limited supply of credits, and according to the Urban Institute, that competition can be fierce.
Aside from the tax credit allocation, the report states that is rarely enough to successful continue development. They say that most affordable housing financing deals involve a mortgage loan, tax credits as well as two or three additional monetary resources.
These resources could include federal block grants, foundation assistance, local trust funds, or state housing trust funds. Additionally, certain states or localities will give developers a property tax break, such as tax credits for clean energy and historic building preservation. Likewise, in rural areas, the U.S. Department of Agriculture can sometimes subsidize affordable housing.
The report notes that the promise of federal aid to tenants is also key to drawing lenders and investors to a project because it assures them the new building will have renters and those renters will pay. This federal aid, of rental assistance, allows developers to serve lower income households while ensuring that there’s enough rental revenue to operate the property and pay down the debt.
According to the Urban Institute though, only about one in four people who qualify for housing assistance actually receive it.
Finally, the report says that the major problem with this multitude of funding sources is that there is a lack of standardization meaning most tax credits and subsidies are awarded through a bidding process, each with its own timelines and applications. Delays in the receiving of these grants can be problematic to some of these projects. It has been seen thought that some states, such as Massachusetts and Minnesota, have coordinated their grant and tax credit programs in order to mitigate this problem.
The report notes that more states should consider better ways to coordinate the variety of grants and tax relief opportunities available to affordable housing because they feel it is important for all levels of government to ensure there’s enough funding to meet the need.