High interest rates and low inventory are just two of the factors contributing to the affordable housing crisis. Demand is strong, but building affordable housing can be challenging. Real estate developers often need to combine dozens of financing sources to fund their projects.
Affordable housing finance can include federal, state, local, and private funding sources. Learn more about these options and how they can help you complete your low-income housing project.
Low Income Housing Tax Credits
The Low Income Housing Tax Credit (LIHTC) program is part of the funding stack for almost all affordable housing projects. The program subsidizes developers who acquire, build, or rehabilitate affordable housing.
The federal government gives tax credits to state governments. State housing agencies award the credits to private developers. Developers compete for the credits because only a limited number are available.
Housing developers usually sell the tax credits to investors. These investors are often corporations with a large income tax liability. They can benefit from non-refundable tax credits.
Two Types of Low Income Housing Tax Credits
Housing developers can qualify for 9% or 4% tax credits. The 9% credit is available for projects that:
- Purchase existing properties,
- Rehabilitate existing housing, or
- Build new housing
The project must not have any other federal funding. This level of tax credit is highly competitive.
The 4% credit is available for projects that:
- Purchase property to rehabilitate, or
- Use tax-exempt bonds
The rules for getting LIHTC funding vary by state.
Other Federal Programs for Affordable Housing Finance
The Department of Housing and Urban Development (HUD) has other financing options for low-income housing. The Rental Assistance Demonstration (RAD) program and HOME Investment Partnerships Program (HOME) are two options.
Rental Assistance Demonstration
RAD supports the improvement of existing affordable housing. Public Housing Agencies administer the program at the state and local levels.
Housing developers can use RAD funding to renovate or redevelop an existing property and turn it into a Section 8 property. Section 8 is the federal housing choice voucher program.
HOME Investment Partnerships Program
HOME is the largest federal block grant for affordable housing. State and local governments can award HOME funds to buy, build, or rehabilitate low-income housing. Developers can use the funds for expenses including:
- Development hard costs and related soft costs
- Acquisition costs
- Refinancing
- Relocation
Participating governments determine how to spend HOME funds through a planning process that involves the public.
State Financing Options for Affordable Housing Development
States and some municipalities offer their own financing options. Funding sources can include:
- State tax credits, incentives, or abatements
- Land donation
- Bonds
- Local grants
- Deferred development fees
A combination of these options is usually necessary for real estate developers.
Private Affordable Housing Finance
Affordable housing finance options are available at the federal, state, and local levels. Low income housing tax credits are one of the most common federal programs. State and local governments typically offer a range of possible funding sources, but the options vary by region.
Private funding is another key piece of the funding stack for housing developers. ISC Financial Corporation has experience in affordable housing finance. We understand the complexity of financing these projects.
Our resources include both debt and equity sources of capital. Contact ISC Financial Corporation today to see how our unique approach to real estate finance can make your affordable housing project a reality.