Access to affordable housing is crucial for communities and their members to thrive. United States Census Bureau data from recent years reveals approximately 19 million renters are putting more than 30 percent of their household income toward housing, leaving many burdened by costs and living in substandard housing. This data indicates a pressing need for more equitable housing options.

Additionally, there’s the enduring need to improve existing low-income facilities and secure their long-term affordability. Doing so is not only important from an economic standpoint but is crucial to the overall wellbeing of both the residents who are directly impacted and their communities at large.

Affordable housing developers and their design teams are tackling this issue using initiatives like the Low-Income Housing Tax Credit (LIHTC) program and the Rental Assistance Demonstration (RAD) program. These programs help developers invest in and build affordable housing communities.

Low Income Housing Tax Credits

To support the development of economical rental options, the Tax Reform Act of 1986 gave life to the LIHTC program. to the program provides federal assistance that incentivizes the acquisition, construction and rehabilitation of this type of housing. This incentivization results in the IRS providing a 1-1 credit against corporate income tax returns for developers accepting income and rent limits on affordable housing properties. These credits and their subsequent equity are bought and provided by corporations, primarily financial institutions. As a result, they offset any loss of income taken on by development teams as a result of reduced rent.

Since its inception, the LIHTC program has financed approximately 2.9 million units of rental housing through its provision of tax credits to private developers and investors, making it the largest federal assistance program of its kind. If a developer takes on an affordable housing project without the aid of a resource like LIHTCs, the ultimate profit may not exceed their investment, as the cost to finance the construction of the project exceeds its anticipated revenue. Therefore, understanding the various routes and related steps involved in the LIHTC process is crucial to completing these important project types in the most productive, holistically beneficial way.

LIHTC Funding Options

To take part in LIHTC funding, developers must comply with three categories of guarantees and risks:

• Construction completion timeline
• Credit delivery, meaning developers commit to providing credits in a prescribed manner and time to avoid penalties
• Compliance, ensuring the developer cannot lease to households that exceed maximum income requirements.

Another detail to note is that LIHTC funding necessitates a developer fee covering 12% of costs, though some is deferred and ultimately pulled from cash flow. So, while developers pay predevelopment costs upfront, the majority, if not all, of those funds are reimbursed at closing.

Two Major Credit Types

Before pursuing LIHTC funding, one must understand the two different avenues available: four percent and nine percent tax credits. Both types can be claimed for up to 10 years, but the more appropriate funding route typically depends on the specific project type and whether or not it scores competitively based on the specific requirements established by the state where the project is located.

Developers seeking funding should propose a project to the appropriate state’s Housing Finance Authority (HFA) and go through the required application process. The specifics of each state’s process vary, so project teams can improve their odds of success by carefully studying and following the scoring criteria identified in the state’s Qualified Action Plan.

1.       Nine Percent Credits

Nine percent tax credit funding can be utilized for the acquisition of existing properties, new construction and rehabilitation opportunities that are not backed by federal supports. By subsidizing roughly 70 percent of the costs of selected projects, it is usually the more desirable option to development teams. However, the distribution of this financing can be highly competitive and only secured through an application for limited funds and allocated based on a defined scoring system.

Projects proposed to a state’s HFA for nine percent funding are competitively rated and ranked, with points awarded in relation to building design, location and proposed services. A project therefore must score well in order to receive this type of funding. Nine percent credits are typically allocated once annually, and development teams can try again if funding for their project is initially rejected by resubmitting in a subsequent funding cycle or converting to a four percent application.

2.       Four Percent Credits

Four percent tax credit funding subsidizes approximately 30% of eligible project costs. Given the smaller subsidy percentage, this route may sound less desirable on the surface. However, it is a tax-exempt, bond-financed funding mechanism and consequently not competitive as long as a state’s bonding capacity is not exceeded.

Development teams must meet the applicable scoring threshold and meet specific cost criteria in their proposed project. If the project ultimately meets the appropriate funding requirements, it results in more certain project financing and subsequent completion. Developers can usually apply for four percent funding at any time, although application cycles vary according to the state in which the project is proposed.

Where to Begin: Qualified Allocation Plans

Equipped with a baseline understanding of funding possibilities, where do developers begin when they want to pursue one of these options? It’s crucial to recognize which financing category best accommodates a proposed project. To do this, look to the state in which the project will be completed, as each state’s requirements for obtaining either nine or four percent LIHTC funding will differ according to their specific Qualified Allocation Plan (QAP).

QAPs are issued annually and the guidelines within are determined by federally determined, state-specific factors. Therefore, a project team should reference the most recent QAP available, as information may change each year and varies significantly between states.

A state’s QAP includes precise requirements that LIHTC projects must meet, as well as rules to follow in order to secure desired funding. Additionally, the QAP will highlight scoring criteria and minimum design standards. By referring to this document, teams can determine if a low-income housing project is eligible for funding. If so, it will then serve as a resource that details how to apply, what the application deadlines are, design and other building requirements, and information regarding any associated fees or additional considerations.

Rental Assistance Demonstration

While the primary goal of LIHTC funding is to increase supply to meet the demand for affordable rental housing, the RAD program is a resource available to Public Housing Agencies (PHAs), either alone or in partnership with a developer, that seeks to improve occupied affordable housing facilities and aid in obtaining the necessary financial support to do so. RAD is a federal program that originated from the federal Department of Housing and Urban Development (HUD) and the overall goal of finding solutions to improve existing affordable housing facilities rather than build new ones. It was officially enacted in 2012 as a part of the Consolidated and Further Continuing Appropriations Act to address the shortage in repair funds to maintain quality housing for low-income residents. Aging, poorly maintained, or deficient properties are prime candidates for RAD.

In such cases, the program allows PHAs to rehabilitate or even redevelop these facilities and begin the RAD conversion process, transforming them into Section 8-funded properties and thus making long-term affordability for renters a primary goal. An important detail to note in these circumstances, however, is that the resulting Section 8 contract is tied to the property itself and not the PHA.

The RAD program is also utilized to help HUD manage the costs associated with funding PHA projects. Additionally, RAD acts as a subset to LIHTCs, as almost all RAD conversions involve either four or nine percent tax credits. The end result of the RAD process converts purely public housing into a public-private partnership between the PHA and developer with a guarantee to maintain affordability for a period of 15-20 years.

Section 18 Demolition and Disposition

In the event that an occupied facility must be completely redeveloped, a RAD project might operate in conjunction with the demolition and disposition guidelines enacted under Section 18 of the U.S. Housing Act of 1937. This is generally utilized by PHAs when a housing property is deemed unsafe or unsuitable for tenants and is beyond the point of rehabilitation, thus permitting demolition and reconstruction; or, when ownership of a property is transferred. In such cases, the PHA must receive clearance from HUD to move forward with either route.

As with LIHTC funding and RAD approval, the specific needs of each individual project determine whether or not it is eligible for Section 18 demolition and disposition, and local PHAs can provide the most relevant and updated information for developers interested in pursuing this option.

RAD Conversion Process

The RAD process does not directly provide tax credits, but can work in conjunction with them, as it allows teams to leverage various means of funding. Financing for a RAD conversion project could be supported by a combination of private equity; loans such as HUD-provided funds, housing trusts, tax exempt bonds, or home funds; grants; a deferred development fee; or gap funding, which is backed by LIHTC proceeds.

Properties that are candidates for RAD conversions are initially identified by the PHA, after which development teams submit their qualifications to partner with the PHA for a specific project. Similar to the LIHTC process, developers should look to a project’s applicable state for specific guidelines. While it is a federally established program, state housing regulations can determine RAD implementation procedures and it is often influenced by market conditions and local funding availability. Overall, however, there are a few basic steps that all teams must adhere to when pursuing a RAD conversion:

Step 1:  Developers and their PHA partners take their project through a pre-application process with HUD, which will determine its feasibility.

Step 2: If the project is deemed eligible to undergo a RAD conversion, teams must then go through the HUD application process for ultimate approval. Only then can they secure funding and receive the green light to begin the project.

Engaging Stakeholders

Throughout this process, stakeholder engagement is important, perhaps most notably the inclusion of resident engagement, a critical step in the process. This is especially valuable, as RAD conversion projects don’t impact potential residents—rather, they most often impact occupied buildings, thus changing the living environment of current residents.

Additionally, RAD obligations don’t end when the conversion process is complete. Developers must maintain communication with HUD and demonstrate consistent compliance with program guidelines.

Conclusion

While the methods may differ, these funding options share a common essential goal: to improve the lives of the community members we serve. By addressing the struggle that many cost-burdened households face, we are ultimately able to make an impact that exceeds mere monetary gain or tax credit advantages. Rather, learning to navigate these programs and their required steps will ideally—and most significantly—prove as an important step in creating healthy and high-quality living environments for future generations, regardless of income.

Moseley Architects’ Experience with LIHTC and RAD Programs

Moseley Architects has an extensive history with these programs. Over the past six years, our firm has completed 48 RAD and LIHTC-funded projects, totaling over 6,046 affordable housing units with a construction value of more than $725 million. Currently, our workload includes 17 projects that fall under the RAD or LIHTC umbrella. These active projects encompass over 2,000 dwelling units in various stages of design and construction, with a total construction value of over $300 million. Two projects are utilizing nine percent LIHTC funding:

• Trinity Court, a collaboration with Community Housing Partners, will redevelop an abandoned 40-unit public housing building in Chapel Hill, N.C. Through utilization of the RAD program, the restored facility is set to be completed by the end of 2024 and will feature 54 units of newly constructed affordable housing units, as well as community space.
• The Better Housing Coalition’s Carter Woods III is a multifamily housing project in Richmond, Va. that will include two LIHTC-funded multifamily housing buildings (one 9% LIHTC and one 4% LIHTC) as well as affordable townhomes, community amenities and offices.