Wednesday, October 11, 2023

Financing Affordable Housing

The process whereby affordable rental housing development is financed is based (about 90% according to my research) on the Low-Income Housing Tax Credit program. This is an extremely complicated process and doesn't seem like an efficient option.

This video should serve as a taster for what all is involved with financing a project this way.

Basically, an investor puts up money for the project, excluding land costs, maintenance costs and a few other things, and then they get this amount taken out of their taxes vs. a write off. They get the credit over a ten year period, so it's not all at once.

With this system, there's all kinds of costs, paperwork and organizations involved. There's consultants, CPAs, the builder/owners, developers, partnerships, lawyers, hefty applications, tricky financing, architects, etc.

First of all, there shouldn't be much spent on architects. These designs can be used across projects, and affordable blueprints are available. 

One thing with this is the tax credits mean less money for the government, so how any of these programs can work and how they effect that is another topic.

These projects involve state or local governments, so they can have union or prevailing wage requirements, which adds to the costs. These undertakings are often very expensive, and are cost prohibitive for smaller projects (i.e. a single, new construction 10 unit apartment building).

One thing worth noting is the total for the credits could be given all at once. Whether it's over time or at once, it's the same amount that is reduced revenue.

It seems like a more efficient way to do this would be to give the funding directly to legit nonprofits (the keyword here is legit), and let them handle the entire project with the funds including the land or not. They could always raise funds for the land and upkeep costs. These nonprofits can always be audited as well. 

This way, the investors just give the money to a nonprofit developer, and then they get the money back from the IRS. Another idea would be to allow individuals to get these types of credits, as the primary source of charitable giving is individuals.