How Is Affordable Housing Funded?
Introduction to the types of assistance that affordable housing developers use to fill the funding gap for affordable housing
The rents that low- and moderate-income households can afford to pay are often too low to cover the full costs of owning and managing a rental property. This gap between the funding needed to develop and operate a property and the revenue available is called the affordable housing funding gap.To fill the gap, developers usually need help in the form of a subsidy. The subsidy most often comes from local, state, or the federal government, but it can also come from other sources. The subsidy can be used to help cover construction costs, rents, or operating costs. Assistance with construction costs reduces the amount the developer needs to borrow, and therefore reduces monthly financing costs. Rental assistance helps tenants pay the rents needed to cover costs. And operating subsidies reduce the rental income needed to keep the property financially afloat. Depending on the specifics of a project, it may need one, two, or all three of these kinds of assistance.
What types of subsidies are used to help fill the affordable housing funding gap
- Taxable or tax-exempt bonds
- Local loan funds
- Mortgages with below-market interest rates
- Federal Historic Tax Credit
- State Tax Credits
- State Historic Tax Credits
Grants and other subsidies
- State grants, subsidies, energy funds, loan funds, and tax incentives
- Land donations
- HOME Investment Partnerships (HOME) Program
- Community Development Block Grant (CDBG) Program
- Deferred developer fees
- General Partner (GP) capital
- Federal Home Loan Banks (FHLBs)
- Affordable Housing Program (AHP)
- Local grants
- National Housing Trust Fund Foundations
Why do developers use so many different sources of subsidy
Developers generally use the fewest number of subsidy sources possible because each additional source of subsidy makes funding more complex. For example, each subsidy comes with its own set of legal restrictions. But the truth is that, to reach the lowest income families with the greatest needs, a developer may need to cobble together multiple subsidy sources to make the project financially feasible.
A project is not feasible unless it covers 100% of its funding gap, so every source of funding matters. A small local contribution can be the critical investment that makes the project work, allowing the project to proceed and the community to benefit from a large amount of federal subsidy that would otherwise flow to a different community.