Bridging the Funding Gap for Affordable Housing in the U.S.

May 26, 2020
Written by: Crista Swan, CREW San Diego

COVID-19 has made the housing challenges that the United States is facing more apparent as record high unemployment takes hold and we learn to work together—while staying apart. Affordable housing is essential in making sure our communities are healthy and vibrant and should be a priority in the aftermath of a pandemic. The question is: How do we accomplish this?

On May 6, James Carras, adjunct lecturer in public policy at Harvard University’s JFK School of Government and principal of Carras Community Investment, Inc., led a CREW Network webinar discussing the most innovative and successful approaches to delivering affordable housing.

Why the push for affordable housing?

In the United States, 40 percent of people with low income are either homeless or spend over half of their monthly income on rent1. In cities experiencing housing inflation, such as Seattle, New York or San Francisco, these numbers are even more prominent. According to Carras, affordability is the single greatest housing challenge facing the nation. Households earning less than 30 percent of the median income experience the greatest financial challenges, but affordability is an issue affecting all but the highest income groups. Shrinking rental supply and lack of new housing developments are a major cause of the shortage. Why can’t developers keep up with demand? The return on investment (ROI) for developers is often not acceptable compared to the costs, which are driven up by local zoning and subdivision regulations. High costs coupled with insufficient federal subsidy and lack of secondary sources of financing results in limited incentives to produce necessary affordable housing options.

The key to a successful affordable housing project

According to Carras, filling the gap in funding to increase the developer’s ROI will result in a successful project taking flight. Although there are several approaches to filling this gap, two options include Low Income Housing Tax Credits (LIHTC) and Opportunity Zones (OZs).

Low Income Housing Tax Credits (LIHTC) are state-based tax credits provided to developers who commit to building rental housing for low-income tenants. For example, a non-profit affordable housing developer might need $20M for a project. This developer can only make the project work financially if they can find a funding source to cover $5M of the $20M needed. The developer would then apply for LIHTC funds and would be awarded $5M of tax credits. This means a business can reduce their tax obligations by $5M over the next 10 years. However, if the developer is a non-profit entity, their business cannot benefit from this tax credit. With this tax credit, the developer is then able to partner with a for-profit investor who can benefit from the tax credit program, and thus invests the $5M needed to make the development financially viable.

The Tax Cuts and Jobs Act of 2017 established the Opportunity Zone (OZ) provision, a new tool for community development that provides tax incentives for investment in designated census tracts. According to the U.S. Economic Development Administration, there are 8,760 designated qualified OZs in the U.S.2 In general, OZs allow developers to defer any capital gains on the sale of their development if they hold the property for a designated number of years. In California, capital gains tax on a property in an OZ is forgiven upon sale if you hold the property for at least 10 years. This benefit can make up for the low internal rate of return (IRR) prior to the sale. Carras noted The Tappan in Tremont, a mixed-use development project in Cleveland, Ohio that took advantage of OZ incentives. The developer of The Tappan leveraged OZ funding to subsidize a workforce housing project where 60 percent of the residential units are for households earning $46,000 or less.

As our economic climate becomes more uncertain and unstable, affordable housing is likely to be at the forefront of the challenges that we will face. LIHTC and OZs are two strategies to help developers deliver affordable housing, but local, state and federal agencies will need to continue to expand their financial toolkits to help developers bridge the financing gap.




Crista Swan

Crista Swan is a project manager for Project Management Advisors, Inc. (PMA), a real estate consulting firm that provides project management, development management and investment representative services to commercial, institutional, residential, educational, municipal and private sector clients. While at PMA, Crista has managed over 471K SF re-positioning, common area, and tenant improvements and worked with teams on four high-rise new developments totaling 1.5M SF. Crista has been licensed as a real estate broker since 2000.

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