Incentives for Developing Multifamily Affordable Housing

Recent development studies highlight a severe lack of affordable housing in the United States, with some urban areas already reaching crisis proportions In many cities, those who work in the city center, often as teachers and public servants, cannot afford to live near where they work, forcing them into longer and longer commutes from outlying areas where they can afford rent. To compound the issue, there is sparse available or affordable land in already dense urban areas for development.

However, there is a way that developers can be a component of the solution to this growing housing crisis: build urban multifamily housing properties using tax incentives to guarantee financing for the project. The federal government issues tax credits each year to state governments, who then award the credits through a competitive process to private developers of affordable multifamily housing. Called Low Income Housing Tax Credits (or LIHTCs), the goal is to give priority to projects that provide affordable housing for longer periods of time.

Many investors seek affordable housing developments in order to receive the tax credits, as their income tax liability is much greater. It’s beneficial for developers because they are now guaranteed financing through these investors and have to put up less equity up front to build the property. The 10- to 20-year credit is toward the property taxes that the property owner must pay annually, and range anywhere from 4 to 9 percent, an attractive investment for lending companies who seek developers applying for LIHTCs.

According to the Low Income Housing Resource Center, LIHTC properties typically experience a relatively quick lease-up and offer strong potential economic returns, primarily due to the existence of the credit. LIHTC properties are often packaged as limited partnerships such that they afford limited liability to their investors.

There are millions of dollars available through LIHTCs in the form of lower cost loans, tax incentives and bonds in order to finance development. As for the available land, periodically municipalities and their agencies such as the City of Dallas and the Dallas Housing Authority offer several sites suited for development of affordable housing.

Affordable housing is simply rent-restricted housing; it is not Section 8 housing (in which qualifying residents are given vouchers). The rules stipulate that an individual’s rent cannot exceed 65% of their gross income, so each tenant may not pay the exact same amount as the others. At the end of the tax credit period, the properties remain under control of the owner who can now charge a full rental fee for all of the units. Because the tax credits and bonds are privately funded, a property owner can sell at any time during the life of the credit – ensuring continued affordable housing and making a significant return on their initial investment.

Enlisting a development adviser and architect who knows the application process, is efficient, accurate and knows multifamily development, is key. “At DSGNworks, we’re not only experienced in multifamily development, we know every step in the qualification process for LIHTCs,” says Bobby Finta, RA. “As a bonus, we can help select more experienced multifamily general contractors to construct the building on time and within budget.”

The development advisers at Vision+Architecture can guide you through each phase of the LIHTC application process to see your project realized. The experienced architects will help prepare the mortgage packages and applications specific for the LIHTC submission process, with detailed drawings and materials specifications. Once awarded the tax credits, the team will work diligently to ensure the project is completed and prepared for occupancy within the state-stipulated 12-month construction schedule.

If you envision developing a multifamily project, you might consider financing it through tax incentives that help supply affordable housing in urban areas.