Know how to finance affordable housing developments


By ,
Ask a Lender
September 27, 2017


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Key Points

Financing for affordable housing

  • Municipal, state and federal programs encourage financing of affordable housing developments.
  • Fannie Mac and Freddie Mac have incentives to purchase affordable housing loans from banks.
  • Federal and state programs offer tax credits for affordable housing projects.
  • Developers can use the credits themselves or sell them to investors who become equity partners.

If you're looking for a loan for an apartment project or other multifamily complex that targets low-income residents, you should consider the many programs that facilitate funding for affordable housing.

Congress encourages financing of affordable apartment properties through its regulation of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the two government-sponsored entities that dominate the residential housing market. Loans that those agencies purchase to finance affordable units do not count toward a congressionally imposed limit that otherwise restricts their annual lending activity.

The loans, which are originated by banks and sold to the GSEs, qualify as affordable projects if they rent at rates that are within reach of households with income levels as small as 60 percent of an area's median income. The percentage is higher in the country's most expensive metropolitan areas and is based on area median-income figures kept by the U.S. Department of Housing and Urban Development.

Some states offer affordable housing tax breaks, and all state governments administer a federal program designed to attract private investors to affordable housing projects. Under the Low-Income Housing Tax Credit Program (LIHTC), the federal government gives the states money to fund federal tax credits for affordable housing development.

Developers, chosen under criteria set by state housing agencies, can use the tax credits themselves, but more often convert them to cash by selling them to banks or syndicates that obtain equity in the project and use the credits to offset tax liability. The projects don't have to be entirely for low-income residents — the level of tax credits is prorated based on how much of the development is deemed to be affordable housing.

The program's definition of affordable is the same as in the GSE-purchased loans: Rents must, in most areas, be within reach of households earning 60 percent of an area's median income (and, within reach means rent amounts to no more than 30 percent of household income).

Investors collect the tax credits over 10 years, and owners must maintain affordable rents over a 15-year compliance period. If they don't, the IRS can go after the purchasers of the credits to recover unpaid taxes.

Cities and counties also offer tax-free bond programs that fund low-income housing developments, and at least one city is attempting to tap well-heeled foreign nationals seeking legal immigrant status as sources of funds for low- and moderate-income housing.


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