Federal and state governments encourage private developers to build affordable housing. The programs reward developers willing to take development risk with a reasonable developer fee (12-16% of total costs, depending on project size.) Development risk includes planning, entitlement, design, financing, and construction risk.
Major federal and state programs for financing the construction of affordable housing are:
- 9% LIHTC. Nationally a “cap” is imposed on the volume of low-income housing tax credits that can be committed in any calendar year. HUD allocates that “volume cap” among the 50 states. The state housing agency can then commit its portion of the volume cap to specific projects during that year. This program is designed to cover about 70% of the cost of construction.
- 4% LIHTC. The 4% LIHTC is not subject to the cap imposed on the 9% LIHTC. Rather, this program is limited by the state’s cap on issuance of tax-exempt private activity bonds, which must be used to finance at least 50% of the construction cost. This program is designed to cover about 30% of the cost of construction.
- Tax exempt private activity bonds. Tax exempt bonds issued by the state housing agency and purchased by a bank provide construction financing to fund 50% of the cost of construction. Must be used with 4% LIHTC.
- Long-term loans, at no interest or low interest rates. HUD administers these programs on the federal level; OHCS administers them on the state level.
- OHCS administers some grant programs for affordable housing development primarily through its General Housing Account Program (“GHAP” or “GAP”).
- Oregon Affordable Housing Tax Credit. Banks making loans qualifying for OAHTC reduce their interest rates by up to four percentage points and receive instead Oregon income tax credits. The housing project must pass along to tenants as lower rents an amount equal to the interest reduction.
- Federal and state funds are available for improving the exterior building envelope and/or insulation of an existing building to reduce energy consumption.
- Energy Savings. Major utilities provide incentives for developments that use appliances and systems that are highly energy efficient.