The existing affordable housing crisis is a situation that our nation has faced for some time now. While there has been undeniable progress, there is still more that needs to be done. To that end, the current administration is aiming to implement additional policies and programs that will help address the current deficit of affordable housing in America. What better way to usher in change than to simplify the process, take down barriers, and make the deals more equitable? For those in the industry, it means an increase in incentives and opportunities aimed at energizing and enabling developers to be part of the solution. It means affordable housing is a highly active market and will continue to be hot through 2022 and beyond.
Zoning Reform is being considered at the local, state, and federal government levels. Across the country, zoning reform will help to expand affordable housing stock and opportunities (via location availability). What does that mean? In some areas, it means eliminating exclusionary zoning policies that limit lot sizes and imposed height restrictions and implementing inclusionary zoning that requires (or encourages) a certain percentage of below-market units to be included within new developments. Cities like Sacramento and Berkeley in the State of California have taken historic steps to decrease the amount of land dedicated to single-family zoning which is a huge step in creating space for more affordable housing. As zoning reform takes shape within your region, it will be crucial to pay particular attention to emerging markets and opportunities that may not have been feasible or available previously.
Opportunity Zone Initiatives defer taxes! They represent additional policy changes aimed at incentivizing development in distressed communities. The primary focus of Qualified Opportunity Zone (QOZ) designations is to foster partnerships between cities and developers that direct their focus and attention to areas in need and have been historically ignored. The incentive allows for the deferral of tax payments on capital gains. Similar to a 1031 exchange, a 1231 Qualified Opportunity Fund (QOF) defers the capital gains tax responsibility if invested in a QOZ project.
Similar to Opportunity Zones, Federal and State “Historic Preservation” Incentives are being leveraged to aid in affordable housing preservation and development in areas that were once thought to be better utilized by being razed or ignored since they had already entered the category of urban blight. Historic Preservation is an additional tax credit that can be combined with state and federal tax credits to make the affordable housing project even more feasible/economical. It is an added layer of benefit. In many cases, community heritage and traditions can be deep-rooted in these areas, so revitalization can gain momentum quickly through local support and inclusion in the development and master planning process.
The Federal Risk Share Program allows developers to leverage government programs such as HOME funds to tackle projects that may otherwise not get funded because they are not desirable or feasible through traditional financing models or sources and uses. Increasing volume/issuance of federal (and state) grants and awards to projects and developers, such as the recent $143M grant allocated for preserving senior affordable housing (Section 202s/PRACs), is keeping the needle and interest moving in various CRE sectors, not just traditional Section 8/affordable Multi-Family housing.
Additionally, the Federal Housing Finance Agency (FHFA) recently approved an increase in both Fannie and Freddie’s annual cap for LIHTC investments by $350 million bringing it to $850 million for each. This is a big step in the right direction to support efforts to provide affordable rental housing in underserved markets.
The momentum shift is noticeable, and the above incentives and policy changes are just a few instruments that are garnering attention and spurring continued LIHTC interest and action, which only broadens the pool of prospective affordable housing projects. Retaining a consultant who has extensive knowledge of these incentives and programs will help to keep your projects on track and ensure you are taking advantage of every opportunity available.