The average number of financing sources layered in a low-income housing tax credit (LIHTC) development has ticked up in recent years, according to a new study.
Developers layered an average of 3.5 permanent sources to finance their developments between 2000 and 2018. One in four LIHTC projects layered at least five sources, and some projects had as many as 11 sources, reports the Terner Center for Housing Innovation at the University of California Berkeley.
Sponsored by Capital One, “The Complexity of Financing Low Income Housing Tax Credit Development in the United States” highlights the challenges associated with fragmentation of financing and offers several recommendations to streamline practices.
The new study provides affordable housing practitioners with data to support some of the more anecdotal points they’ve come to know, including how the number of sources adds complexity to a transaction, says Desiree Francis, head of community finance at Capital One.
The study will hopefully open doors on the policy side, adds Francis, noting that it includes best practices from several states, including Massachusetts and Minnesota. “There are opportunities for other states to think about how they might streamline their processes to better align funding sources and timelines,” she says.
For developers, there’s an opportunity to read the report and lend their voices and perspectives to the conversation, according to Francis.
Researchers pulled together data from multiple sources, including 11 LIHTC syndicators, the Department of Housing and Urban Development, and 2019 housing credit applications from California, Georgia, Ohio, and Virginia.
The study notes that part of the reason for greater funding complexity is the rising cost of building both market-rate and affordable housing across markets. For example, California saw a 13% jump in development costs from 2016 to 2019. The erosion of federal programs that have traditionally been part of the LIHTC capital stack also has forced developers to seek new and additional sources of funding.
“As total development costs have fluctuated over time, so too has the average number of sources layered in the capital stack,” says the new report. “Among 9% new construction developments in our sample, the average number of permanent hard and soft loans used to finance these buildings doubled from two in 2000 to four in 2017, mirroring trends in the average per-unit cost of development.”
The report by Carolina Reid and Elizabeth Kneebone offers several recommendations, including:
· Reduce fragmentation where possible: Consolidating different funding streams within a single agency at each level of government, beginning at the federal level and extending to lower levels of government, can reduce the inefficiencies and higher costs associated with multiple providers;
· Better align disparate funding streams to facilitate more seamless layering: “The federal government can play a leading role in efforts to better align requirements and deadlines across the multiple production-oriented funding programs administered by federal agencies. It can also encourage states and localities to follow suit, offering resources and technical assistance to encourage adoption of strategies that reduce funding complexity and the inefficiencies that arise from it,” says the report; and
· Create a one-stop-shop approach that allows developers to access multiple funding sources through a coordinated process: When dealing with several financings sources, it can be less cumbersome when one agency is in charge of allocating multiple programs. Where it is not feasible to route funding sources through a single entity, states could consider collaborative agreements, like the MOUs Maryland has used, that allow different agencies to keep individual program line items “on the books” but grant allocating authority to a lead agency.
“It is critical for stakeholders across all levels of government to push for streamlined processes, reduced costs, and efficient execution in the funding of affordable housing production,” says Carol Galante, faculty director of the Terner Center. “We cannot afford to waste precious time and money given the urgent housing needs we face.”