Removing Barriers for Developing Affordable Housing

Capital One funded a report from the Terner Center for Housing Innovation at the University of California Berkeley that examined ways to make the funding process for development of affordable housing for households with low to moderate incomes more efficient.

While the Low-Income Housing Tax Credit program (LIHTC) has been essential in the development of new affordable housing in the U.S. since inception, financing the development of those units requires a growing number of funding sources in order to maintain rent levels suitable for households with low to moderate incomes. 

“If we can remove the complexity that developers face to get funding from various sources, they’ll make more efficient use of limited resources and build those important developments faster,” says Carol Galante, Faculty Director at the Terner Center for Housing Innovation.

Although the LIHTC program enables developers to leverage tax credits to take on less debt, the equity generated from the tax credit is rarely sufficient to close the gap between the costs of development and the rents that would be affordable to households with low to moderate incomes. 

To close that gap, developers have worked through a complex system of financing in which federal tax credits from the LIHTC program are “stacked” with funding from state and local governments and private lenders — which in turn can often delay the development of affordable housing.

Findings on Zoning and Regulatory Barriers to Affordable Housing

Findings from this report identified three ways to reduce administrative burdens and streamline funding to ensure that the benefits of the LIHTC program are maximized. 

• Reduce fragmentation: Consolidate different funding streams within a single agency at each level of government, from the federal to local levels, to reduce the inefficiencies and higher costs associated with multiple providers.   
• Align requirements: The federal government can encourage states to align requirements and deadlines across funding platforms by offering resources and technical assistance to help states adopt strategies that reduce funding complexity. 
• Broaden coordination: States can maximize efficiency by requiring transparency in requirements and alignment of calendars across funding programs, while also encouraging synchronization of financing sources. 

Removing Affordable Housing Funding Barriers in Action

Some states, such as Massachusetts and Minnesota, have set a precedent for adopting such changes through formalized coordination efforts to streamline application and closing processes.

• Massachusetts adopted a “one-stop” application process in the early 1990s and has gone further to develop a single set of loan documents through its MassDocs program. 

MassDocs provides developers with a single loan agreement, mortgage and affordable housing restriction document which is automatically sent to various sources of public funding at the state and local levels.

According to Matt Henzy, Associate Director of Real Estate at Jamaica Plain Neighborhood Development Corporation in Boston, MA, those streamlining efforts can prevent significant delays in development.

“With state and local governments able to execute their commitments together through MassDocs, developers can expedite projects by roughly six to nine months,” Henzy said.

The clarity that programs like MassDocs create saves time that would otherwise be spent trying to get different agencies to align. Because everyone is working from the same information that has been certified by each agency, transaction costs are reduced.

The state estimates that, for a deal with three funding sources, public subsidy lenders now pay an average of roughly $15,500 at closing compared to the average of around $46,000 that they would have paid pre-MassDocs. 

Making a Lasting Impact

In addition to supporting research to remove barriers to develop affordable housing, Capital One is striving to support growth in underserved communities and advance socioeconomic mobility through the Capital One Impact Initiative, an initial $200 million, multi-year commitment to closing gaps in equity and opportunity.

“Capital One has been a terrific partner as they gave us the opportunity to access data from tax credit properties all across the country,” Galante said. “They really dove into this study with us and are committed to uncovering policy issues in the process of creating affordable housing that should be fixed.”

Launched in October 2020, the Capital One Impact Initiative seeks to create a world where everyone has an equal opportunity to prosper through advocating for an inclusive society, building thriving communities and creating financial tools that enrich lives.

“To make headway on the affordable housing crisis, we need to look at the processes and practices for financing affordable housing to drive efficiency, reduce costs and remove barriers,” says Desiree Francis, Head of Community Finance at Capital One. “Capital One is committed to working with industry stakeholders to identify and design solutions that create more affordable housing to strengthen communities and advance socioeconomic mobility across the country.” 

Go deeper: The Complexity of Financing Low-Income Housing Tax Credit Housing in the United States