Subsidies for Affordable Housing Development

By the late 1970s, the government began to pursue several new approaches to subsidising low-income housing owned and operated by either for- profit private development firms or non-profit development organisations. The subsidy was initially delivered by below market interest rate financing (e.g. the ‘Section 236 Programme’). The US government would provide mortgage financing at below market terms on the agreement that the reduced debt service costs would be translated into below market rents for low-income households.

This subsidy was later shifted to a leasing mechanism, known as the ‘Section 8 New Construction and Substantial Rehabilitation Programme’. The government would enter into a lease agreement with the developer, agreeing to guarantee the rents on units built or renovated for this programme, and the developer would agree that the units would only be occupied by poor households. With this agreement, the developer was able to borrow the funds necessary to develop the property because the income was guaranteed, assuring the lender that the development would receive sufficient income to repay the loan and operate the property. Many projects were developed under these two approaches as well as other programmes for specialised populations (people with HIV/AIDS, projects for the elderly, housing sponsored by non-profit organisations, and so on). However, many of the developments financed in this way have subsequently been withdrawn from the assisted housing portfolio upon completion of the contractual obligations of the lease or financing mechanism.

The Low-Income Housing Tax Credit (LIHTC) programme is the second major approach of the federal government to produce affordable housing. With the slow contraction of public housing stock and forms of other multi-family housing, in 1986 the US federal government turned to the use of tax credits to develop new or renovate existing rental housing for occupancy by low-income households. The tax credits reduce the federal income tax liability of investors who purchase the credits. These investors purchase the credits by partnering with developers of the low-income housing. The developers receive the credits through a competition held in each state. The proceeds of credit sales pay some portion of the costs of low income housing development. The development must be occupied by low-income households and must charge rents no more than the government permits under the programme’s regulations. These reduced rents would prevent the developer from being able to leverage the money necessary to finance the project. However, the reduced leverage is offset by the proceeds from the sale of the tax credits, making the project viable.

The LIHTC developments tend to serve the least worst off of the poor. The programme incentivises private for-profit or non-profit developers to build or renovate housing for occupancy by households whose income is low-income must be below 60 % of the metropolitan Area Median Family Income (AMFI) but not too low (generally a household must have income above 30 % of the AMFI in order to afford the rent charged).

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