With rents on the rise and more people facing economic stress and even homelessness, affordable housing options are needed now as much as ever. Housing is considered “affordable” when it is 30 percent or less of the household’s monthly income. Yet, according to a 2019 report from Habitat for Humanity, 47.5 percent of renters pay more than 30 percent of their income on rent, and 1 in 6 households pay at least half of their income on housing! To make matters worse, not only are the number of at-risk renters increasing, the number of available low-cost rental properties is decreasing over time, and there is an increasing scarcity of new construction affordable housing developments.

Most affordable housing conversations focus on the prospective renters themselves — low-income households who qualify for various affordable housing programs like public housing, housing choice vouchers, and other types of subsidies and rental assistance programs. But not a lot of consideration is given to how affordable housing is created in the first place. How is affordable housing funded, and what can be done to create more affordable rental housing?

The Dilemma with Affordable Housing Development

Have you ever wondered why there seems to be a glut of high-rent developments being built — especially when fewer people can afford to live in them? The answer might surprise you. While economists and philosophers can debate over the overarching problem of greed, it’s not just individual greed that drives these decisions. The fact is that it’s easier for developers to get funding for high-rent projects than for affordable housing units. Lenders approve loans for these multifamily developments based on their projected revenues, not on what it actually costs to build them. When rents are set lower, it’s more difficult for the lenders to get their money back, and they don’t want to assume the risk. Add to that the fact that it simply costs more to build these days, and you can understand why investors head toward the higher rent housing projects. It’s the path of least resistance.

That said, it is highly possible to create more affordable housing opportunities for moderate-income and low-income families — it just takes a bit more creativity to get these projects funded. In fact, affordable housing developers typically rely on 3-5 funding sources, and in some cases as many as 20 or more, to get these communities built. Let’s take a look at some of the most common ways affordable housing gets funded.

Low-Income Housing Tax Credit (LIHTC)

By far, the most common funding source for affordable housing is the Low-Income Housing Tax Credit (LIHTC), a reduced tax liability incentives offered through the federal government but administrated by the states. The LIHTC incentivizes developers to allocate tax credits if they set aside a portion of their total units for affordable housing. To qualify for these credits, the development must set aside at least 20 percent of its units for people who earn less than 50 percent of the area median income, or 40 percent for people who earn less than 60 percent of area median income. The majority of new affordable housing utilizes the LIHTC for at least one of their funding sources.

Federal Block Grant Programs

Additional funding sources for affordable housing developments frequently come in the form of one or more federal block grants — fixed federal grants given to state and local governments for various purposes to benefit those communities, including economic development. Most block grants allocated for affordable housing are administered through the Department of Housing and Urban Development (HUD). Some of the more common grant programs include the HOME Investment Partnerships Program, the Community Development Block Grant (CDBG), and the National Housing Trust Fund, to name a few.

Choice Neighborhoods Initiative

Widely considered the next generation of the HOPE IV program, Choice Neighborhoods is a special competitive grant designed to transform distressed public housing neighborhoods into revitalized mixed-income neighborhoods, either through rehabilitation or demolition and rebuilding. Many affordable housing projects are designed to revitalize such areas and, therefore, may qualify for Choice Neighborhood grants.

USDA Rural Housing Service

Administered by the US Department of Agriculture, the Rural Housing Service provides several funding options for services in rural areas, including affordable single and multifamily housing. Since many affordable housing developments are built in larger urban areas and don’t qualify for this funding, these loans and grants provide developers with an incentive to build in less populated areas that are in no less need of affordable housing.

State and Local Funding Initiatives

While the federal government sponsors all the above funding options, many state and local governments also offer various appropriations for funding affordable home programs in their respective communities. These may include loans, grants, tax credit programs, and other supportive services designed to improve housing affordability for low-income families. These initiatives may be administered by state and local housing authorities or other departments.

Private Market Funding

In many cases, not even a combination of available mortgage loans, grants, and tax credits are enough to bridge the gap between the cost of affordable housing and available funds. In many cases, this gap is filled by private market institutions known as community development financial institutions (CDFIs). These institutions exist solely to provide low-cost loans to help create economic development opportunities for underserved communities — including funding for affordable housing. These institutions are sometimes nonprofit agencies, and sometimes they are modestly for-profit. Either way, their goal is to subsidize the gaps in funding that prevent or hinder economic development in areas that need it most.

Since 1989, Olympia Management has been serving the needs of low- and moderate-income households by providing clean and safe affordable housing options throughout the southeastern United States. To learn more about our properties, determine eligibility and income limits, and any other questions you may have, give us a call at 256-894-2382.