With a housing crisis occurring around the globe, it’s clear that more affordable units need to be constructed. The issue? When it comes to building, and funding, these projects, sources are limited and there are many obstacles. In fact, developers often need to rely on dozens of sources for funding before being approved to begin a project. In order to start building more affordable housing, we first must understand the funding sources available to developers.
Low-Income Housing Tax Credit (LIHTC)
LIHTC is the most common and usually the primary source of funding for developers. This federal program was created as part of the Tax Reform Act of 1986 and is cited within Section 42 of the IRS Code. The program gives approximately $8B per year to allocate and administer tax credits for acquiring, rehabilitating, and constructing new rental housing units for low-income individuals.
In order to receive these tax credits, the development in question must dedicate either 20% of its units to people who earn 50% or less of the area’s median income (AMI), or 40% of its units to people who earn less than 60% of the AMI. In addition, the rent must be no more than 30% of the AMI to qualify as affordable.
However, even if a development meets this criteria, tax credits are unfortunately not guaranteed. This is due to the heavy competition process as most states often have more applications than tax credits available.
HOME Investment Partnerships Program
This program is the largest federally-funded program for states and localities designed particularly for building affordable housing for low-income individuals. The program is often used in partnership with local non-profits to fund the building, buying or rehabilitation of affordable homes as well as provide rental assistance for those in need.
The funds are awarded annually as formula grants to Participating Jurisdictions (PJs). Similar to LIHTC, there are requirements. For rental eligibility, at least 90% of the families must have incomes at or below 60% of the area’s median income and the remaining 10% must have incomes at or below 80%. For homeownership, families given assistance must be at or below 80% of the area’s median income.
According to the U.S. Department of Housing and Urban Development’s (HUD) website, the program was designed to reinforce the values of community development by:
- Empowering communities to design and implement strategies tailored to their needs and priorities.
- Strengthening partnerships among all levels of government and the private sector in the development of affordable housing.
- Providing technical assistance activities set-aside for qualified non-profits to build the capacity of these partnerships.
- Requiring that Participating Jurisdictions (PJs) match 25 cents of every dollar in program funds to assist with community resources in support of affordable housing.
The Community Development Block Grant Program (CDBG)
The CDBG program has been administered by HUD since 1974, making it one of the department’s longest-running programs for affordable housing. These funds are not only utilized to build and rehabilitate housing for low-income individuals and families, but also place emphasis on community development and health and safety needs. Certain activities funded by CDBG include those around development projects, community centers, homeowners assistance, public services, public facility improvements (i.e. water and sewage facilities), and more.
Each year, HUD allocates funds to each state based on population, poverty, age of housing, and incidence of overcrowded housing. Funds allocated to each state or “eligible grantees,” must be metropolitan areas with at least 50,000 people or counties with at least 200,000 people.
Program Section 221 (d)(4)
HUD’s construction loan program, known as Program Section 221 (d)(4) is for affordable and market-rate housing development for multifamily properties with single-room occupancy (SRO) apartments. The idea is to insure lenders against mortgage loss and encourage the construction of SRO buildings with all financing insured by HUD. This provides people with limited income the ability to find safe, clean, and affordable housing.
The terms of these loans don’t change with the market, unlike conventional bank financing and there aren’t any federal subsidies involved. Typically, SRO developments will also receive financial assistance from local governments and/or charitable organizations to reduce occupants’ rents. While intended for individuals with significantly low incomes, the program currently doesn’t have an income limit for eligibility.
Aside from closing the funding gap and making financing more accessible, check out our whitepaper here to learn how technology, policy, and construction can work together to help our nation’s affordable housing crisis. If you would like to read more about government programs for affordable housing, you can read part 2 of this blog.