The Low-Income Housing Tax Credit (LIHTC) program has been one of the most impactful byproducts of the Tax Reform Act of 1986. Since its introduction, LIHTCs have helped develop over 47,000 projects, totaling between 3-4 million affordable homes. It is fortunately one of the few areas that garners support from both sides of the aisle in Congress. It stands as legislation that policymakers can triumph to their voter base in almost any Congressional district across the United States as a success in addressing one of the key socioeconomic issues in America: housing affordability. 

How bad is housing affordability?

According to publicly available U.S. Census data, more than 40% of renters – over 19 million – are burdened with housing costs. “America’s Rental Housing 2024” report by the Joint Center for Housing Studies of Harvard University states that affordability is worse than ever before, and the primary factor driving more renters toward being cost-burdened is that median rents continue to outpace renter income. According to the report, median rents rose 21% (inflation-adjusted) from 2001 to 2022, while renters’ income rose 2% during the same period. LIHTC projects, combined with other programs by the Department of Housing and Urban Development (HUD), like Housing Assistance Payments (HAP), seem uniquely positioned to help ease the rent burden of renters experiencing chronic income stagnation.

How does affordable housing perform over time or under stress?

Creating more affordable units seems to be a bipartisan solution to address housing unaffordability. But before we get into the roadblocks preventing more annual supply of LIHTC projects, what about the long-term viability or performance of LIHTC; can affordable units perform under pressure, and are there investors interested in providing capital to these complex projects? Research gathered from the past few years can offer a litmus test. During the global pandemic, affordable housing, although not completely immune to the turmoil in the national marketplace, was one of the most resilient real estate classes regarding overall performance. Affordable housing – specifically, LIHTC properties – reported above 97% median occupancy in 2022, according to CohnReznick’s “2023 Affordable Housing Credit Study: A Comprehensive LIHTC Property Performance Report.” 

So, if affordable housing is a viable solution, what’s the problem?

Given the program’s positive impact, bipartisan support, and the proven financial performance of LIHTC projects, it may seem that any modifications or updates to the program that would result in more units would become a reality without much resistance. However, affordable housing production is falling below both demand and demonstrated need in most markets within the United States. According to the National Low Income Housing Coalition report “The Gap,” no state has an adequate supply of affordable rental housing for the lowest-income renters, and the U.S. has a shortage of about 7,300,000 affordable rental homes.

If there’s unmet demand, what’s limiting the supply of affordable housing from approaching economic equilibrium?

While there are many issues and variables related to affordable housing production, if you’re reading this, it’s safe not to bore you by itemizing each one. We’re not the IRS, after all. Here are a few that stand out as topics to discuss during 2024 – almost none of these are new to the industry or are new to this year but remain conservation-worthy – proposed policy, funding adjustments, and technological advancements. The outcomes of these topics will drive how affordable housing will expand, transform communities, and help more Americans afford a place to live in 2024 and beyond.

Propose Policy: One of the main struggles for legislators and policymakers is how to distribute government dollars most effectively. While dollars put into LIHTC have proven to create housing and jobs, how should taxpayer funds be allocated to the program, and how much? Streamlining regulations, expanding eligibility, and refining allocation processes are potential levers. Ideas like:

 – New standards for 50% test. A recent bill proposes to move the test to a minimum of 25%, allowing states to distribute already oversubscribed bonds in many states better, resulting in more affordable development projects. This idea has been around for some time. See this Report from Novogradac from 2021. According to the report, affordable development will be a huge boost if passed. (hyperlink https://www.novoco.com/products/analyzing-the-impact-of-lowering-the-50-percent-test-for-4-percent-tax-exempt-bond-financed-properties-march-2021-update). 

New tax credit programs such as the Neighborhood Homes Tax Credit would be the first tax provision to directly support building or renovating affordable homes for homeownership. This won’t directly impact most LIHTC developments since those represent rentals, but we believe that more affordable housing is a good thing.

 – Converting commercial office to housing. This is another one that has been simmering for years. Getting into the current office market is tangential, but many areas have reported obsolescent retail and office buildings that would be ripe for additional affordable housing. There are grants to help subsidize this work since many of these buildings would not be suitable or feasible for housing conversion otherwise. 

Funding Crossroads: Can LIHTC keep pace with housing needs? Increased allocations are crucial, but it’s important to explore different tax credit programs, soft funds, and financing executions. There seems to be an expansion in the availability of state tax credit programs that help develop more affordable housing. For example, the NJ ASPIRE program. This revamp of the former ERG program will help build much-needed housing in the Garden State. This program is currently underused due to its newness and lack of robust capital partners. Fortunately, we have been able to close on projects using this program and can help discuss new programs, available debt and equity sources, and the cost of capital with clients.

Fallbrook stays current on political advancements and new tax credit programs and continues to tailor financing executions to help investors deploy more capital and allow developers to have customized options for their capital stack.