Originally published on Forbes Business Councils by Seth Gellis, President of CPP.
It’s no secret that there is a nationwide housing crisis. According to the National Low Income Housing Council, "there is a shortage of more than 7 million affordable homes for our nation's 10.8 million plus extremely low-income families." And that’s just one of many sobering statistics. It’s clear that there is a need to develop affordable housing across the nation. While there isn’t a silver bullet to solve the crisis, I believe a solution that supports reducing per unit cost while also increasing generation of affordable units is a step in the right direction.
Affordable housing tax credits, issued through the Low-Income Housing Tax Credit (LIHTC) program, are instrumental for developers and partners looking to develop and preserve affordable housing nationwide. Qualified Action Plans (QAPs) outline housing priorities of the state and create the rules by which LIHTC applications are scored and credits are awarded. Examples of set-asides include geographic preferences, local housing market conditions, building characteristics (e.g., unit size) and type of project (e.g., new construction, rehabilitation), among others.
LITHC remains an essential part of the housing crisis solution in the U.S. Since 1987, it has helped to place 3.55 million affordable housing units in service. However, the guidelines and scoring mechanisms used to award tax credits for affordable housing projects have remained largely unchanged for decades—meaning that we are consistently evaluating (and funding) today’s affordable housing projects by 1986 standards.
At a high level, the goal of these guidelines is to promote the development of suitable, community-based affordable housing properties. But many of the guidelines are based on antiquated schemas and use cases that don’t factor in how people work, live, and interact with their community today. As a result, the scoring guidelines in the QAPs have the unfortunate and unintended consequence of discouraging affordable development—usually by increasing the cost of the development until it becomes unattainable, even with LITHC.
So, how do we increase affordable housing development while also maintaining a reasonable per unit cost? One key may be for affordable housing developers to take a critical and collaborative look at QAP scoring mechanisms to ensure that LITHC is operating effectively and efficiently. Based on my experience working in this sector, here are three scoring areas ripe for re-examination and collaboration among affordable housing stakeholders.
Many current state QAPs require affordable housing units to be a certain size, with California’s most recent QAP requiring one-bedroom LITHC units to be at least 450 square feet. At the same time, we’re seeing the emergence of market rate micro-units (apartments between 140 and 350 square feet) in urban cores as a solution to the need for more rental units in densely populated areas. Cities like Seattle have incorporated thousands of micro-units in their downtown core housing supply, resulting in high occupancy and more affordable rent.
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Downsizing the square footage requirement for affordable units to reflect trends in market rate units could enable developers to increase the density of affordable units within a property—making the property more affordable to develop and enabling the property to serve more people. In today’s world, where common property amenities and greenspaces may take precedence over primary living spaces, we must ask ourselves if unit square footage matters as much as it did previously.
Today’s tenants are looking for spaces that allow them to live, work, play and thrive in a seamless and convenient environment. Currently, many QAPs provide higher scores to affordable housing developments that are within certain distances of parks, libraries and other community cornerstones. However, many proposed affordable housing developments are looking to create those cornerstones within property lines—making the address’ location relative to existing cornerstones less important.
One example being explored involves including on-property parks, gathering spots, community rooms and social services. By providing your residents with free or subsidized high-speed internet access, they can access library materials online. There is also an opportunity for developers and property managers to subsidize subscription services (like Amazon Prime) for residents, which would allow for access to books and other entertainment media that would otherwise be accessible via library services. Through collaboration and implementation of creative on-site and technological solutions, you can create access to amenities and build community cornerstones within your own developments.
When LITHC scoring was first developed, there were no such things as Uber, Lyft, work-from-home or Amazon. Everyone was required to go to their place of work to get a paycheck—either via personal vehicle, public transportation or walking—and they’d have to visit a brick-and-mortar store to get their goods. Today’s mobile and gig economy enables residents to reap the benefits of a downtown core location while living further out from a city’s epicenter, where land costs for development are cheaper. For example, people can use rideshare services as transportation to work and can order groceries and medications to be delivered directly to their doorstep.
Looking forward, there is an opportunity to come up with flexible and innovative solutions that account for these types of amenities. One solution could be to work directly with cities to expand bus stops and routes further outside of the downtown core. However, there are other creative solutions to the issue to consider. If a property is not on a direct public transportation route, you may be able to work with rideshare companies to provide ride credits or reduced rates for their services to create affordable transportation options for your residents. Similarly, credits or partnerships with major retailers like Amazon, Target and Walmart could be explored for groceries and medications.
I believe looking at the affordable issue from a modernized lens will be an important first step in beginning to solve the nation’s affordable housing crisis, and that exploring creative options that allow developers to increase densification and unit creation will be foundational to the solution. Developers, businesses and public entities can (and should) work together to determine how QAPs can both better reflect the needs of modern-day residents and reduce per unit costs.
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.