Affordable housing costs as much as other housing. Actually it costs more due to high financing costs and complex regulations. And the rents are capped to be affordable to households earning 60% (or 30%) of area median income. Operating expenses consume 60% or more of the rental income. That leaves little cash flow to service permanent debt. So only 15-20% of the total development cost can be funded through a project’s permanent loan. The only way to bridge the gap is through one or more subsidies.
Several subsidies are available:
• Federal low-income housing tax credits are marketed to large corporations and banks with substantial taxable income. They pay up front for tax credits and tax losses, but at 85-90 cents on the tax credit dollar. The amounts paid by the investors becomes equity in affordable housing projects. The investors recover their investment plus a small return on their investment through their income tax savings over a ten-year period.
• Large private foundations provide grants for construction of affordable housing that never have to be repaid.
• State and federal housing agencies provide both grants and low-interest loans.
• State and federal programs provide “vouchers” to certain tenants. These allow the holders to pay what they can afford toward monthly rent. The agency issuing the voucher pays the rest of the monthly rent.
Central to all affordable housing subsidy programs is the typically non-profit developer, like OCV. They are willing to take the risk of developing these projects to earn a reasonable developer fee (12-16% of total costs depending on project size.) This economic incentive attracts the development talent required to plan and entitle projects and cause the dwelling units to be designed and built.