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.
The video player is currently playing an ad.
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.
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:
Originally published on Forbes Business Councils by Seth Gellis, President of CPP.
With the continued urgent need for more affordable housing across the country, industry experts and academics are looking for solutions, whether they involve preserving existing communities nationwide or creating additional units where they are needed most.
According to a recent study by the National Low Income Housing Coalition, there is a shortage of 7.3 million available affordable rental homes for the lowest-income renters in the U.S. While it’s a complex issue, one overlooked path to financing is the option to increase the use of private activity bonds (PABs), which pair with 4% low-income housing tax credits (LIHTCs).
Volume cap, a “use it or lose it” resource provided by the federal government to the states based on a per capita formula, allows tax-exempt financing to be issued for affordable housing at a lower interest rate. The lower interest rates offset the lower net operating income that debt is sized from as a tool to help keep project sources and uses in balance. This ensures a greater level of capitalization, reducing the need for other sources and increasing the funding available for construction activity.
This important resource is allocated and awarded by state finance agencies, some of which unfortunately do not use all the resources made available to them. This means that if a state agency has unused volume cap and a deal is unable to make it through the funding cycle for that state in a timely manner, the resource and accompanying economic and social benefits are lost for good.
So, what can affordable housing professionals and organizations do to ensure the volume cap does not go to waste or to use it in the most efficient manner possible?
One solution is to work with local bond issuers and agencies that support them.
Local bond issuers play a major role in identifying the projects most impactful for their community and often can reduce the overburdened load that housing agency staff must deal with.
At my company, we find that an average deal may take nine months to close, plus an additional year to complete the development or preservation of the property (with a few more months of time tagged on for an IRS Form 8609 to be issued). We consider that a quick turnaround. But when entities do not use a local issuer for the deal, the acquisition or renovation timeline can extend for an additional one and a half to two years—sometimes making the deal untenable.
Across the U.S., many affordable properties are in immediate need of preservation; and many of these deals use LIHTC as a part of their financing. Completing these deals as quickly as possible is integral to reducing the loss of affordable units and preserving options for communities.
According to a 2024 report from Harvard’s Joint Center for Housing Studies (JCHS), there was a loss of 2.1 million units with rents below the maximum amount affordable for the lowest income group since 2012. While creating new affordable housing units is a part of the solution, new construction alone won't be able to keep up with the need, especially if communities are losing more units than are being created.
I've found that when local leaders, community advocates, developers, lenders and agencies can work together, it creates efficiencies and the strongest outcomes in affordable housing development and preservation. Communities should have a say in their local housing choices. Local leaders and community advocates have the best understanding of residents’ needs and where and how to invest, and good developers will listen.
Working with local issuers increases the ability for local jurisdictions to control the terms and circumstances that preservation or new development must follow in addition to minimum state provided standards. When deals and terms are localized, it creates the largest impact for the community. Specific benefits may include:
• The community is empowered to decide the priorities they wish to address. Developers should foster dialogue with local housing advocates and community leaders to discuss and outline their wish list. Unsurprisingly, the goals are often the same.
• Related improvement projects (e.g., street, sewer, LEED), social service requirements, crime prevention programs, prevailing wage, are benefits that are, by and large, staying within their community (should they choose). This autonomy also relieves pressure on developers by having an equal partner in the myriad decisions.
• Locals control within the development what is done, where it’s done and who does it within the community. For example, they may have checklists or requirements (e.g., Section 3 that requires a local workforce) that directly benefit the local community and economy.
Affordable housing developers looking to finance their deals may have the opportunity to work with a local issuer to get the deal done. I recommend you keep these best practices in mind:
Just like when working with any financial partner, organization is paramount. As a developer, that means having the deal structure solidified, financial documents in place and a single point of contact for the local issuer identified. The more streamlined you can make the process, the better.
Developers likely understand that one of the key benefits of working with a local issuer is the ability to help impact the local community in specific ways. But, for that impact to be felt in the biggest way, developers must take the time to truly understand the local community and its needs.
Developers need to reach out early in the process to understand if the issuer has sufficient volume cap, and what their processes may be. Creating a relationship early makes the processing, organization and understanding of their needs much easier.
Ultimately, the ability to work with local agencies carries many benefits and can make developers and investors nimbler in their work solving the nation’s affordable housing crisis.
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: