Financing Options Affordable Housing Developers Should Consider

Sponsored content by Stoel Rives LLP originally published by the Portland Business Journal on October 10, 2022.

According to the latest figures from organizations such as the National Low Income Housing Coalition, Oregon needs tens of thousands of additional affordable rental homes just to meet the current housing demand, a demand that continues to rise. And while the need for additional rental units remains as great as it has ever been, affordable housing developers are navigating the same challenges that developers of market rate units face in terms of the rising costs of labor, materials and land acquisition. Market dynamics continue to impact both the pace of development and, often, the ultimate viability of new affordable housing projects.

In response to these challenges, affordable housing developers are increasingly using a broad range of financing sources and programs to help bridge the gap in project budgets. The most important source of financing for affordable housing in Oregon (and around the country) remains the federal Low-Income Housing Tax Credit (LIHTC) program. Under the LIHTC program, affordable housing projects are awarded federal tax credits that are then allocated to outside investors in those projects. A developer will use the capital from those outside investors to help finance the cost of building the project. The value of the tax credits fluctuates based on market conditions, but the equity derived from the LIHTC program will typically fund well below half of a project’s total costs and apartments in the LIHTC program must be rented at below-market rates. While owners of market rate apartments have the option of raising rents to help cover project costs (so long as the market will support the desired rents), owners of affordable housing units are restricted in the rent they can charge.

Developers of new ground-up construction typically partner with private lenders to secure financing. Here in Oregon, affordable housing developers are automatically eligible to take advantage of tax-exempt bond financing when awarded lower-value 4% credits through the LIHTC program. Use of tax-exempt bond financing leads to lower interest rates on both construction and permanent financing, and helps lower the ultimate cost of construction. The use of bond financing, however, adds additional complexity to how a project is managed. For example, the development team will need to follow numerous IRS rules and document how proceeds from the bond financing are spent on project costs. Because of the complexity of both the financing structure and the additional programmatic rules and requirements, it’s important for affordable housing developers to engage legal counsel experienced in navigating bond financing transactions early in a project’s lifecycle.

Of course, there are other programs that can help finance development costs beyond the LIHTC program and the use of tax-exempt bond financing. Oregon’s state housing finance agency, Oregon Housing and Community Services (OHCS), manages a number of additional financing programs available to affordable housing developers. The Local Innovation and Fast Track (LIFT) program uses proceeds from the sale of Oregon’s general obligation bonds to fund loans (with deferred payments) to new affordable housing projects. In 2009, the Oregon legislature also created a separate financing mechanism called the General Housing Account Program (GHAP) to help fund predevelopment, construction and soft costs of new affordable housing projects. And the state of Oregon continues to demonstrate flexibility in working to solve funding issues for affordable housing projects. In April 2022, OHCS announced the opening of its Market Cost Offset Fund to fill funding gaps for projects that have a reservation of OHCS funds that have not yet closed due to market conditions and the increase in construction costs. In addition to these statewide funding programs, hundreds of millions of dollars remain unallocated from local affordable housing bond measures, including the 2018 voter-approved Metro bond measure, to help finance the cost of building affordable housing.

Affordable housing developers have always had to be creative when searching for the right mix of funding sources and financing mechanisms to move a project from the predevelopment stage to being shovel ready. Given the surging demand for affordable housing, and the increasing costs of securing land, materials and labor, we expect policymakers and the affordable housing community will continue to focus on streamlining the processes through which projects get funded. Until the current housing crisis abates, developers will need to continue to be creative and draw on every tool in their arsenals. As always, an experienced affordable housing attorney can help developers identify and navigate the programs that make sense for a given project.