What Is Affordable Housing and Why Does It Matter?

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):

• At least 20 percent of the project’s units are occupied by tenants with an income of 50 percent or less of area median income (AMI) adjusted for family size.

• At least 40 percent of the units are occupied by tenants with an income of 60 percent or less of AMI.

• At least 40 percent of the units are occupied by tenants with income averaging no more than 60 percent of AMI, and no units are occupied by tenants with income greater than 80 percent of AMI.

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:

• Incentive: By incentivizing private developers to invest in low-income housing projects, LIHTC helps to create and preserve affordable rental units for millions of families. The LIHTC program helps meet the growing need for affordable housing while also offering: Community Reinvestment Act (CRA) benefits to financial institutions, economic advantages for investors, tax revenue for state and local governments, and both construction and permanent job opportunities.
  

• Financial feasibility: Without LIHTC subsidies, most affordable housing projects would be financially infeasible. Rental properties eligible for LIHTC often have lower debt service payments and vacancies compared to market-rate housing. These properties usually experience a faster lease-up process.
  

• Housing supply: LIHTC-financed projects increase the housing supply in markets where development would otherwise be challenging.
  

• Rent burdens: The LIHTC program supports low-income families by lowering their rent burdens, allowing them to allocate more income toward other essentials or savings.

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.

1. Cost: One of the key differences between affordable and market-rate housing is the cost. Affordable housing is designed to be affordable for low- to moderate-income individuals and families and is often subsidized or regulated by government programs to keep rents or purchase prices below market rates. On the other hand, market-rate housing prices are determined by the open market, reflecting demand and supply without subsidies. These units can be priced at a level that many people, especially those with lower incomes, may find unaffordable.
   

2. Income Eligibility: In affordable housing, there are typically income restrictions for residents, which means that applicants must meet specific income criteria (e.g., earning below a certain percentage of the area median income) to qualify. With market-rate housing, because there are no income restrictions, anyone can rent or purchase the housing regardless of their income level.  

3. Regulations and Controls: While affordable housing is often subject to government regulations regarding pricing, tenant rights, and length of time units must remain affordable, market-rate housing is generally subject to fewer regulations, which allows landlords and developers more flexibility in pricing and terms. ‍

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‍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:  

1. Economic Stability: It allows individuals and families to allocate more of their income to other necessities like food, healthcare, and education, promoting overall financial health.
   

2. Social Equity: Accessible housing helps reduce inequality by providing opportunities for low- and middle-income families to live in safer neighborhoods with better access to resources and services and potentially save enough for down payments to participate in the American dream.
   

3. Community Development: Affordable housing fosters diverse communities, encouraging social interaction and cohesion, which can lead to stronger, more resilient neighborhoods.
   

4. Public Health: Stable housing is linked to better physical and mental health outcomes. When people have secure homes, they are less likely to experience stress and related health issues.
   

5. Economic Growth: Affordable housing can stimulate local economies by creating jobs in construction, maintenance, and related services, while also attracting businesses that benefit from a stable workforce.
   

6. Preventing Homelessness: Access to affordable housing is essential in preventing homelessness, which has far-reaching implications for individuals, families, and communities.

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).

Private Activity Bonds And Volume Cap

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.

Benefits Of Working With A Local Issuer

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.

1. Efficiency And Speed Of Execution

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.

2. Accelerated Capital Investment Into Communities—When and Where They Need It

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.

3. Autonomy And Control

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.

Best Practices For Working With Local Issuers

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:

1. Prioritizing Organization

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.

2. Taking Time To Understand The Local Community

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.

3. Having Early Conversations

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.

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