NCSHA Reports Scramble to Fill Funding Gaps for LIHTC Developments
A recent report released by the National Council of State Housing Agencies (NCSHA) highlights the actions state housing finance agencies are going through in this period of increased labor, materials, and financing costs to ensure pending LIHTC projects can proceed as planned. The report is titled, “Filling Funding Gaps: How State Agencies are Moving to Meet a Growing Threat to Affordable Housing.”
In a representative example, the report finds 39 of 42 developments one state HFA recently had provided funding for now need additional funding, with funding gaps ranging from $145,000 to $5.7 million. The agency said that, while pre-COVID development costs averaged $150,000 per unit, they have risen to more than $200,000 per unit.
According to the report, to help developers close unexpected funding gaps, state agencies are using strategies such as reducing costs through administrative flexibility, allocating future-year LIHTCs, increasing financing from tax-exempt bonds, using coronavirus state and local fiscal recovery funds, and working with developers to identify project cost savings.
Here are other key themes the researchers identified:
- Nearly all deals that were awarded LIHTCs from 2019 to the present have faced significant, unexpected cost increases after being awarded credits. As a result, many projects have had to seek additional credits, soft funding, or other resources from state agencies and other sources to close unexpected funding gaps;
- The stakeholders interviewed consistently reported cost increases of around 30 percent. Some developments face even larger gaps;
- With given rising interest rates, the longer a deal is delayed while looking for the resources to close remaining gaps, the more likely it is that problems will compound and become even more difficult to solve;
- Some agencies are better resourced and equipped to move quickly to fill funding gaps than others. States that had been experiencing high demand for bond financing before the pandemic may be especially challenged;
- Even when these strategies have filled funding gaps and enabled projects to proceed, they have often come at the expense of the current and future production of affordable housing; and
- In late July, the U.S. Treasury Department announced guidance that provides states and cities additional flexibility to use recovery funds to fill cost gaps for affordable housing development. This guidance will provide many states a significant new tool to address recent challenges.