While most of the attention in affordable housing remains focused on rent collection and resident stability, Anand Kannan, president of Community Preservation Partners, says COVID-19 has significantly affected how affordable housing deals are financed. “Typically, affordable housing deals are financed through debt and equity through the sale of tax credits,” Kannan says “Both have seen big changes as it relates to demand, underwriting and social responsibility.” Tax credit equity is posing one of the biggest challenges in the market. "As more banks are experiencing record losses and dealing with PPP loans and other priorities, it has reduced the urgency and increased demand for any sort of tax credits, “ Kannan says. “Banks were the largest investor in Low Income Housing Tax Credits, and they essentially drive the market as their needs or return parameters change. With bigger banks putting a pause on tax credit investing, Kannan says it strains development finances and makes it a real challenge for everything to pencil out. Much like leaders, developers also have to consider different options. “As developers make choices on how to balance deals, they must weigh what the impact of financial changes are on the residents’ lives versus what hits the bottom line of the company income statement,” Kannan says. "There are tradeoffs that developers might have to make to ensure that deals pencil without sacrificing the quality of renovations and services for residents.” Investors invest in affordable housing to achieve high rates of return. With the demand for tax credits and the number of investors in the market decreasing, requirements for a higher internal rate of return will increase, according to Kannan. “Hoping for pre-COVID pricing from an equity investor is a pipe dream,” he says. ‘We are pricing new deals at about 100 bps [basis points] higher than what we had pre-COVID.” To adapt to the new reality, Kannan says groups need to realize that not every deal will be a home run. “It is our belief that if a deal can be done quickly, it is worth it to take a hit on the bottom line to ensure that you are able to actually close,” he says. To complete deals, it may be necessary to price in higher reserves and renovation costs and potentially lower rent collections during construction. “Pushing the envelope in all areas will mean that a deal will not have the capability to sustain any further changes to the market,” Kannan says. Still, it is important not to stretch deals too thin. “The problem with certain developers is that they have too much hope,” Kannan says. “Hoping for low-interest rates, high tax credit demand, reduced renovation costs, and higher rents to make a deal pencil is not a good strategy in this environment. Being aggressive and hopeful is one thing, but not being realistic can really cause significant damage to making a deal work. "Ultimately, being too aggressive can be harmful to more than just a company’s bottom line.“At the end of the day, the goal is to create a safe, healthy, affordable place for residents to call home, and stretching every element too thin can only harm the benefit that you are striving to bring to the resident,” Kannan says.
In California, the cost of housing is among the highest in the country, making affordable housing essential for many working families. The Area Median Income (AMI) is used to determine eligibility for many publicly-funded affordable housing programs, particularly through the Low-Income Housing Tax Credit (LIHTC).
According to the Department of Housing and Urban Development (HUD), AMI is the midpoint of a region's income distribution, meaning that half of the households in that area earn more than the median and half earn less. AMI is calculated each year by HUD for metropolitan areas and regions in the United States. So, the demographics and AMI qualifications vary across the country.
Below is a breakdown and overview of AMI qualification levels in California.
Understanding who qualifies for affordable housing helps tailor developments to meet the needs of local communities, ensuring a range of affordable housing options that reflect income diversity across the state. The diverse workforce in California, combined with the high cost of living, makes affordable housing at various AMI levels critical. As a result of these cost burdens, the need for housing support extends beyond traditional low-income families and into individuals and families that work in professions such as government, service and entry-level professionals. Expanding access to affordable units ensures that the entirety of the state’s workforce has the stability needed to thrive in the high-cost environment of California.
By: Belinda Lee, Director - Development
The Low-Income Housing Tax Credit (LIHTC) program has been an essential component of affordable housing finance since it was enacted as a part of the Tax Reform Act of 1986. Originally created as a tool to encourage public-private partnerships to increase the low-income housing stock, it has been modified several times. Since inception, it has supported the generation of more than 3.5 million affordable housing units nationwide.
Through the LIHTC program, state and local LIHTC-allocating agencies have the authority to allocate approximately $10 billion in federal funds each year to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. Generally, the state and local agencies award LIHTC credits to private affordable housing developers through a competitive process. Then, developers typically sell the credits to private investors to obtain funding.
Only rental properties (e.g., apartment buildings, single-family homes, smaller multi-unit buildings) qualify for LIHTC. To qualify, the owners or developers of the affordable housing project must meet certain income tests for tenants and rent. Projects must pass one of the income tests below and agree to comply with these parameters for a minimum of 15 years (though some state agencies may require compliance for 30 years):
LIHTC offers investors a dollar-for-dollar reduction in their federal tax liability in return for providing capital to support the development of affordable rental housing. This investment helps subsidize the construction of low-income housing, enabling the units to be rented at rates below the market value.
Investors can claim LIHTC credits, which are calculated by multiplying a credit percentage by the project's qualified basis, over a 10-year period once the affordable housing project is available for tenants. The tax credit is distributed pro rata over this period and can be applied to the construction of new rental buildings or the renovation of existing ones. LIHTC is designed to cover 30 percent or 70 percent of the costs for low-income units in a project. The 30 percent subsidy, known as the automatic 4 percent tax credit, applies to new construction with additional subsidies or the acquisition of existing buildings. The 70 percent subsidy, or 9 percent tax credit, supports new construction without any extra federal subsidies.
LIHTC is essential for the funding of affordable housing projects for several reasons:
By making housing more accessible, LIHTC contributes to improved health and educational outcomes for residents, ultimately promoting social stability and enhancing quality of life. Its ongoing significance in combating housing insecurity makes LIHTC a vital tool for policymakers, developers and communities alike.
Affordable housing refers to housing that is reasonably priced, allowing low- and moderate-income individuals or families to live comfortably without spending an excessive portion of their income on housing. Typically, the standard guideline is that housing costs, including rent and/or mortgage payments and utilities, should not exceed 30% of a household's gross income.
Affordable housing can come in various forms, including government-subsidized housing, public housing projects, and private developments that offer reduced rents or prices. The goal is to ensure that everyone has access to safe and decent living conditions regardless of their financial situation.
Market Rate vs. Affordable Housing
While housing affordability is currently an issue across the United States, there are several key differences between housing categorized as “affordable” versus “market-rate”. Understanding these differences is essential for addressing housing needs and creating policies that promote inclusivity and accessibility in housing markets.
Importance of Affordable Housing
According to the Pew Research Center, in 2020, 46% of American renters spent 30% or more of their income on housing, including 23% who spent at least 50% of their income this way. The same study indicated that about half of Americans (49%) see the availability of affordable housing as a major problem in their local community. Affordable housing is a cornerstone of a healthy society, contributing to individual well-being and broader economic and social stability. Key benefits of affordable housing include:
In California, the cost of housing is among the highest in the country, making affordable housing essential for many working families. The Area Median Income (AMI) is used to determine eligibility for many publicly-funded affordable housing programs, particularly through the Low-Income Housing Tax Credit (LIHTC).
According to the Department of Housing and Urban Development (HUD), AMI is the midpoint of a region's income distribution, meaning that half of the households in that area earn more than the median and half earn less. AMI is calculated each year by HUD for metropolitan areas and regions in the United States. So, the demographics and AMI qualifications vary across the country.
Below is a breakdown and overview of AMI qualification levels in California.
Understanding who qualifies for affordable housing helps tailor developments to meet the needs of local communities, ensuring a range of affordable housing options that reflect income diversity across the state. The diverse workforce in California, combined with the high cost of living, makes affordable housing at various AMI levels critical. As a result of these cost burdens, the need for housing support extends beyond traditional low-income families and into individuals and families that work in professions such as government, service and entry-level professionals. Expanding access to affordable units ensures that the entirety of the state’s workforce has the stability needed to thrive in the high-cost environment of California.
By: Belinda Lee, Director - Development
The Low-Income Housing Tax Credit (LIHTC) program has been an essential component of affordable housing finance since it was enacted as a part of the Tax Reform Act of 1986. Originally created as a tool to encourage public-private partnerships to increase the low-income housing stock, it has been modified several times. Since inception, it has supported the generation of more than 3.5 million affordable housing units nationwide.
Through the LIHTC program, state and local LIHTC-allocating agencies have the authority to allocate approximately $10 billion in federal funds each year to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. Generally, the state and local agencies award LIHTC credits to private affordable housing developers through a competitive process. Then, developers typically sell the credits to private investors to obtain funding.
Only rental properties (e.g., apartment buildings, single-family homes, smaller multi-unit buildings) qualify for LIHTC. To qualify, the owners or developers of the affordable housing project must meet certain income tests for tenants and rent. Projects must pass one of the income tests below and agree to comply with these parameters for a minimum of 15 years (though some state agencies may require compliance for 30 years):
LIHTC offers investors a dollar-for-dollar reduction in their federal tax liability in return for providing capital to support the development of affordable rental housing. This investment helps subsidize the construction of low-income housing, enabling the units to be rented at rates below the market value.
Investors can claim LIHTC credits, which are calculated by multiplying a credit percentage by the project's qualified basis, over a 10-year period once the affordable housing project is available for tenants. The tax credit is distributed pro rata over this period and can be applied to the construction of new rental buildings or the renovation of existing ones. LIHTC is designed to cover 30 percent or 70 percent of the costs for low-income units in a project. The 30 percent subsidy, known as the automatic 4 percent tax credit, applies to new construction with additional subsidies or the acquisition of existing buildings. The 70 percent subsidy, or 9 percent tax credit, supports new construction without any extra federal subsidies.
LIHTC is essential for the funding of affordable housing projects for several reasons:
By making housing more accessible, LIHTC contributes to improved health and educational outcomes for residents, ultimately promoting social stability and enhancing quality of life. Its ongoing significance in combating housing insecurity makes LIHTC a vital tool for policymakers, developers and communities alike.