Three Ways Governments Can Boost the Effectiveness of LIHTC

The pandemic exacerbated already crisis-level supply constraints in affordable housing. The multifamily asset class is notoriously challenging to develop for a number of reasons, but a recent report from Capital One and the Terner Center for Housing Innovation at the University of California Berkeley found that fragmented funding sources was among the biggest challenges for affordable housing developers. However, there are key moves that local governments can do to enhance the effectiveness of affordable housing funding sources, namely LIHTC.

To ease the financing burden, the report recommends governments reduce fragmentation, align funding sources at the state level and enhance coordination among funding sources. “In The Complexity of Financing Low-Income Housing Tax Credit Housing in the United States, we identify the following three key solutions for state and local governments to ensure that the LIHTC program works as effectively as possible since the program has been one of the most successful program to address affordable housing needs in this country,” Desiree Francis, head of community finance at Capital One and a member of the Terner Center team,” tells GlobeSt.com.

Reducing fragmentation requires that government agencies at every level—including both federal and local governments—consolidate funding sources. This will help to both reduce inefficiencies as well as lower the costs of funding, according to Francis. “In states such as Arizona and Texas, HFAs administer some soft funds alongside tax credits,” she says. “In Illinois, the state’s Housing Development Authority (IHDA) administers tax credits and other soft sources (e.g., HOME, the Illinois Affordable Housing Tax Credit, Illinois’ Housing Trust Fund Program), and disburses these additional resources in a manner that doesn’t require LIHTC applicants to choose which soft sources to pursue.”

Pennsylvania’s HFA takes a similar approach, but it takes the alignment beyond the initial funding to ensure that the program has the same terms and conditions, program requirements and monitoring processes across all sources. Rather than using third-party sources, the agency uses in-house staff to manage compliance reviews.

Next, aligning funding sources at the state level will require that requirements and deadlines are aligned among different funding sources to eliminate the complexity of using several funding sources. “Some states have formalized coordination efforts through mechanisms to streamline application and closing processes,” says Francis. “For instance, Minnesota created a Consolidated RFP to provide one-stop shop by consolidating and coordinating multiple housing resources within a single application process. This has ensured better aligned timing between the state’s three sub-allocators of LIHTC.”

Finally, Capital One and Terner recommends governments “broaden and deepen coordination among funding sources to maximize efficiency gains,” according to Francis. This would involve a requirement that each funding program is transparent about requirements and deadlines. “Some states are currently convening task forces or interagency working groups to facilitate broader communication and coordination among funding entities,” says Francis. “In Illinois, the Governor’s Housing Tax Force develops an annual comprehensive housing plan, making sure that it includes goals for the number and type of housing units to be constructed, rehabilitated and preserved. Although it does not directly determine funding decisions, it has provided a venue for all agencies to understand state priorities and to communicate and plan for housing needs across public and private funding entities.”

Each of these steps is focused on reducing the complexity that comes with using multiple funding sources. These solutions aim to both reduce the number of funding sources as well as eliminating the challenges of using multiple funding sources. “At a minimum, states and localities should work toward reducing the complexity that comes from differing timelines, levels of transparency, and requirements across various sources,” says Francis. “More states and localities could also take steps to apply and expand on Pennsylvania’s HFA efforts to align terms and conditions, program requirements, and monitoring processes across multiple funding sources.”