Local affordable housing developers say funding shortfalls could mean less affordable housing in the future — even as the need increases.
Since its creation in 1986, the federal Low Income Housing Tax Credit (LIHTC) program has provided the majority of funding for subsidized housing. The need for that kind of housing has accelerated in recent years as rents have outpaced wages and market rate housing falls out of reach for more residents of cities like Cincinnati. Studies suggest Cincinnati needs about 30,000 more units of housing affordable to its lowest income residents.
The credits work like this: Developers apply to state agencies like the Ohio Housing Finance Agency that administer the tax credits for the IRS. They generally come in a more valuable 9% form and a somewhat less valuable 4% variety. Applications are scored on a number of criteria, including level of affordability, community need and other areas. Generally, there are three applications for every award given, experts say. If a developer wins an award, they can use the credits to attract investors, who fund the project in exchange for use of the credits. Awards generally stretch over a decade, and a building built with the credits must remain affordable at the specified level for 15 years.
That process has worked well since its creation and through the decades since, when building costs and often interest rates were generally relatively low.
But Over-the-Rhine Community Housing Senior Developer Ben Eilerman, Urban Sites Vice President for Affordable Housing Tim Westrich and others say that as labor costs, materials and interest rates get more costly, that state-administered pool of federal money builders can apply for isn't keeping up.
"There was a project I worked on in Northside in 2016, and basically construction costs are almost double what they were in 2016," Westrich says. "It's amazing how much more public subsidy and creative thinking on behalf of the developer (go on) to make it work."
Even after a project gets awarded funding that will cover building costs, developers have to contend with financing. Construction loans are generally necessary to begin building before funding from the credits is available — and higher rates mean hundreds of thousands of dollars more in interest paid.
Feeling the squeeze 'from all sides'
"We are facing just unprecedented rising costs in the development of affordable housing," Eilerman says. "And we're really feeling that squeeze on all sides... projects that folks like OTRCH are imagining are just never getting to that application phase."
Novogradec is a national firm that advises developers seeking tax credits. The company's Director of Public Policy and Government Relations Peter Lawrence says the price increases and funding shortfall are having national implications.
First, he says, it's very costly to put together a LIHTC application — multiple layers of due diligence mean a developer could spend $250,000 or more assembling an application. Then you factor in building costs increases — up to 30% in some cases, according toa September reportby the National Council of State Housing Agencies. On top of that, the amount of credits available have actually decreased.
In 2018, Congress passed a 12.5% increase to the most valuable level of LIHTC for state agencies to distribute. That increase lapsed this year. Next year, states will get about $2.75 per resident in tax credits to dole out — a big decline.
The bottom line on what this all means
There is a very definite outcome to all of these dynamics.
"Fewer affordable homes will be financed," Lawrence says. "That's the bottom line, unless Congress takes action. That expiration couldn't have happened at a worse time as all those increased costs hit. There was a problem with rental availability before the pandemic, but the pandemic made it worse... we've seen through the course of this year housing costs really get very problematic. It's really this terrible storm to have this 12.5 percent decrease in resources. It's extraordinarily bad timing."
OHFA says it's trying to help offset these dynamics. For projects that won awards for the program's most valuable credits between 2019 and 2021, OHFA offered an extra $100,000 in credits over 10 years — or $1 million total — if big gaps related to rising costs endangered those projects.
"We're very cognizant of challenges developers are facing now," OHFA spokesperson Penny Martin says. "This is going to be something we continue to look at over time to make sure these deals pencil out to maintain and continue to provide affordable housing developments across the state."
There is movement in Congress on something called the Affordable Housing Credit Improvement Act — HR 2573 in the House and S 1136 in the Senate — to increase LIHTC allocations. That legislation could finance the construction of as many as 1 million new units of affordable housing over the next decade, Lawrence says — if Congress passes it as written.
There is also pending state legislation in Ohio that could create state credits to supplement LIHTC. Eilerman and others say the city's Affordable Housing Trust Fundcould also help.
Westrich says he's encouraged by the movements state and local lawmakers are making. But he's worried about what will happen if nothing changes.
"Because there have been such sharp increases in construction costs, more state and local governments are pouring resources into projects that are already on the books," he says. "And it's great they're making sure those projects are actually happening, but what's happening is it's also robbing the future of projects that could come next year, two years, three years from now. Barring some big unforeseen change, there will be fewer affordable housing units in the future. That's very bad because we already have such a short supply in Cincinnati and Hamilton County."