The National Council of State Housing Agencies (NCSHA) released a report last week on how housing finance agencies (HFAs) are filling funding gaps. The urgent need for more affordable housing units has been exacerbated by market conditions, a growing shortfall of Low-Income Housing Tax Credits (LIHTCs), and inflationary pressures causing a rise in construction costs. These have caused HFAs to seek alternative sources of funding to fill funding gaps for housing projects, and this report examines these efforts in 11 state agencies.
The 11 HFAs interviewed reported facing cost increases of around 30%, from a pre-COVID average per-unit cost of $150,000 to over $200,000 per unit. Deals that have been awarded LIHTCs since 2019 have faced significant cost increases since being awarded the credits, resulting in the developers seeking additional funding and/or credits to close the gaps. Eight of the 11 state agencies interviewed reported that nearly all LIHTC projects have experienced significant funding gaps since the pandemic began. The report also found that HFAs, developers, and other industry participants have shown flexibility to respond rapidly to the increasing costs despite a limited range of options.
The report ultimately concludes that when projects can fill the funding gaps, it often required trade-offs, coming at the expense of current and future affordable housing production. Additional financing tools and flexibility of existing mechanisms will be needed. These options could include lowering the 50% test for 4% tax-exempt bond-financed properties, which would free up additional LIHTCs; expanding allowable uses of existing funds, such as the July announcement from the Department of the Treasury that fiscal recovery funds can be used to fill affordable housing cost gaps; and other measures.