Today’s housing affordability crisis stems largely from a lack of adequate housing supply. This is happening for a variety of reasons, from fallout from the 2008 Great Recession, restrictive local zoning policies and high land costs to labor and supply shortages. Housing supply simply has not kept pace with population growth, new household formation, and rising demand.
Multiplicity of funding creates complexity
In addition, the U.S. has dramatically under built housing by millions of homes over the past 20 years. Every state in the nation is impacted by this demand-supply imbalance.
To help the lowest-income families, who increasingly can’t find affordable housing in today’s market, federal, state, and local governments devote considerable resources to subsidize the development of affordable housing with below market rents. Unfortunately, the rising cost of construction forces developers to find more funding sources to complete these projects.
The multiplicity of funding streams increases complexity, resulting in higher development costs and longer project timelines. Today, more than 160 programs administered by 20 different entities at the federal, state, and local level are involved in affordable housing development.
This creates a disjointed system where policies overlap and can be redundant. To help developers build affordable homes, agencies providing funding must reduce fragmentation, better align disparate funding streams, and invest in the infrastructure and staff capacity needed to sustain intergovernmental coordination.
Layering complexities lead to increasing costs
To build market-rate housing, project financing is relatively straightforward, typically requiring a mix of private equity and debt. The debt load is determined by the rate of return-on-investment. However, affordable housing projects, with some or all units planned for low-income households at affordable rents, face the challenge of a lower return on investment than market-rate housing.
Developers need to obtain low-cost financing and other subsidies to fill the gap between the market-rate rents that would make the project economically feasible and the smaller amount of rental income that affordable housing generates.
Financing affordable housing projects requires developers to put together a mix of funding from local, state, and federal sources, private equity, and philanthropy, in the form of tax credits, loans, and grants. The more a developer brings into the capital stack, the more complex it can become and the more it can shape the cost of the project and who is being served.
The financing framework for affordable housing is often designed around the Low-Income Housing Tax Credit (LITHC). However, subsidies provided through the LITHC have less impact today because the cost of developing affordable housing has increased and building a capital stack for a LITHC-funded project has become so complex that the process itself adds increased costs to the project.
From 2016 to 2019, the cost to build a new affordable housing property under the LITHC program increased from $425,000 to more than $480,000 per unit, 14% in just four years.
As a result of rising construction costs, the Terner Center for Housing Innovation estimates that the average number of loans per project on top of tax credits has doubled in the past two decades from two to four. LITHC projects built between 2000-2018 needed to layer an average of 3.5 permanent sources, with one in four projects layering at least five sources (and some as many as 11).
Navigating and securing these resources is often expensive and time-consuming, adding to the overall cost of construction. Each additional source brings with it its own applications, restrictions, requirements, and award cycles.
These bureaucratic barriers burden developers with direct and indirect costs. For example, direct costs could be additional staff time needed to complete applications and ensure compliance, legal fees, and other transactional costs associated with closing multiple funding sources.
Indirect costs could include increased development timelines due to delays with layering financing, lack of alignment of deadlines among funding sources, layering of requirements from each lender, and meeting the eligibility requirements or policy goals of each lender. Ultimately, this complexity affects what can get built and who can be served by that development.
Looking forward: Strategies to streamline affordable housing finance
Tackling the housing supply problem will require reducing red tape and finding ways to streamline financing options to foster a more efficient and cost-effective pathway for developers to close the funding gap.
Many developers operating in different states have noted their work is adversely impacted by the number of agencies they need to work with to secure funding, especially if those agencies do not coordinate with each other.
One potential solution is to establish a single agency within a state to administer housing funding and financing programs. When this is not possible, active coordination can better streamline the funding process and program applications, and ultimately increase efficiency. Some states have established task forces or released memorandums of understanding to better coordinate across public agencies.
Consolidating applications and coordinating documents can reduce inefficiencies and produce cost and time-saving benefits. Additionally, getting buy-in from agency leaders has helped execute streamlining strategies. Having the infrastructure in place to deliver these efficiencies is critical.
Massachusetts sets the example
A good example comes out of Massachusetts. The state has developed a universal “one-stop” application for affordable housing developments. Local, state, public, and private funders all accept the one-stop application. Massachusetts has also created universal closing documents.
As Chrystal Kornegay, Executive Director of MassHousing, highlighted in a recent webinar exploring housing subsidies, this system creates a network in which funders can talk to each other and solve challenges together. It’s estimated that for a deal with three funding sources, developers who used to pay $37,500 to $55,000 at closing now pay closer to $12,500 to $18,500, resulting in accumulated savings of $12 million to $18 million over 18 years.
Increasing funding for important programs like the LIHTC is essential. But let’s not miss the opportunity to maximize the use of limited resources by reducing fragmentation, better aligning disparate funding streams, and investing in the infrastructure and staff capacity needed to sustain intergovernmental coordination. With such a staggering, unmet need for more safe and affordable homes, our collective failure to address the cost and complexity of affordable housing finance falls heaviest of the families these programs are intended to serve.
Dennis Shea is the Executive Director of the J Ronald Terwilliger Center for Housing Policy at the Bipartisan Policy Center.
Andrea Lau is a Policy Analyst at the J Ronald Terwilliger Center for Housing Policy at the Bipartisan Policy Center.
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