Much like unsubsidized market-rate housing, producing housing that is affordable to low-income households requires significant financial resources and technical expertise. Developers of both types of housing must account for projected costs associated with property acquisition and professional service fees, land use approvals required by government agencies, and construction materials and labor.
While both market-rate and affordable housing require significant financial resources and technical expertise, affordable housing developers cannot recuperate their projected costs through the revenue typically earned when a future tenant pays rent. Consequently, affordable housing developers need financing mechanisms offered by federal, state, and local governments to help fill the gap between a development’s projected development cost and its projected cash flow from collected rents.
Affordable housing developers layer multiple sources of funding to help make their developments financially feasible. (In California, developers often layer up to 15 different funding sources!) The Low-Income Housing Tax Credit (LIHTC) Program is a critical financial tool for affordable housing development. Created by Congress through the Tax Reform Act of 1986 and made permanent in 1993, the LIHTC program incentivizes private investors to give equity financing in exchange for reduced tax liabilities once the affordable housing development is complete, or “placed in service.” First, federal tax credits are distributed to state agencies, which then award the credits to affordable housing developers that meet competitive standards set by the state agency. Affordable housing developers that are awarded tax credits can then sell the LIHTC to investors. This investment provides upfront capital that subsidizes development costs and reduces the need for debt financing from lending institutions.
The State Treasurer administers LIHTC through the California Tax Credit Allocation Committee (CTCAC). A qualifying affordable housing development ensures that the development will remain affordable for 15 to 30 years (although state funding programs often require an affordability period of 55 years).
A related agency, the California Debt Limit Allocation Committee (CDLAC), sets the annual debt ceiling for bonds that are used to finance tax-exempt projects like affordable housing developments. California also provides its own programs to finance the development of affordable housing, including the Multifamily Housing Program and the state LIHTC program.
Developers of affordable housing also rely on federal programs that provide funding for the construction, maintenance, and rehabilitation of units, such as project-based vouchers, HOME Investment Partnerships, and Community Development Block Grants (CDBG), as well as programs that provide funding to households through rent subsidies, such as the Housing Choice Voucher program.
