Category: Affordable Housing

Appraisal of Affordable Housing

Major affordable housing development programs and initiatives are as follows:

  1. Public housing
  2. Section 202 housing
  3. Section 221(d)3 and Section 221(d)4 Mortgage Insurance       Program
  4. Section 236 Rental Program
  5. Section 8 Certificate and Voucher Program
  6. Market to Market Program
  7. HOPE VI Program
  8. Rural Housing Development Program
  9. HOME Investment Partnerships
  10. Community Reinvestment Act

The Low Income Housing Tax Credit (LIHTC) Program is by far the most important of the current affordable housing development programs.  It is the current iteration of affordable housing development and has been generally recognized as the effective means of providing necessary incentives to promote development. 

From a real estate perspective, the principle advantage of the Low Income Housing Tax Credit Program is its flexibility.  It is adaptable to a wide variety of property types:

  • New construction
  • Developments with a variety of bedroom counts
  • Projects of various size (as small as ten units and as large as hund of units)
  • Specialized assisted-living properties
  • To develop programs for troubled properties
  • To preserve properties at risk
  • To privatize public housing

The Low Income Housing Tax Credit Program offers market-quality housing at rents that are affordable to low-income residents whose available income is constrained.  Affordability standards are based on HUD median incomes and allowable percentage to be paid for rent.  The development must remain affordable for an extended period of time, and therefore has to be carefully underwritten and financed.  There is no assumption of additional rental subsidies.  The program is structured to produce the development that will offer limited direct cash return to its investors.  The principle motivation for the investor is a tax credit that can be used to offset federal income tax obligations directly.  The exact amount of tax credit is dependent on the specific nature of the project.  The program was originally structured so that the annual tax rate per year is approximately 4% of the cost of acquisition and 9% of the cost of new construction or a substantial rehabilitation period.  The project includes federal subsidies or tax exempt financing, the tax credit rate is reduced to no more than 4% for all components of the project.  The tax credits are taken over a 10-year period even though the holding period is longer.  Therefore, approximately 40 to 90% of the project cost, depending on the program, will generate tax credits that can be sold to investors to offset development cost. 

Over the years, a wide variety of programs and incentives have been used.  They include many of the following:

Land contributions 

  • Exclusive rezoning and density allowances
  • Direct construction assistance
  • Special financing including tax-exempt below-market interest rates
  • Debt write-downs and soft second financing options
  • Income subsidies
  • Auxiliary appreciation of other tax benefits
  • Federal and state income tax credit
  • Limited time restrictions after which the housing reverts to market-rent housing 

One way of looking at the major subsidy types is to consider that each can be categorized as either a capital-based subsidy or an income-based subsidy.

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