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Confronting Crisis: Affordable Housing Trends in 2020

Publications - Article | December 20, 2019

It’s no secret that affordable multifamily housing has reached crisis level across the United States as wages fail to keep up with soaring rental costs. Here’s a brief snapshot of where we are right now and why it matters.


States are tasked with finding solutions to chronic homelessness, public health issues and transportation problems, along with helping special-needs groups who are often heavily represented among the homeless population, including veterans, the elderly, single parents, and LGBT youth, among others.

In response, we’ve seen one of the busiest years ever, as more complex housing structures emerged requiring more levels of subordinate financing. The sheer number of projects is increasing in tandem with financing complexity. The crisis is most prominent on the coasts, but it’s also happening in high-cost areas in the middle of the country.

As a result, there’s a significant increase in political attention being paid to the affordable housing crisis that we’ve not seen before. It’s an issue that politicians feel they need to address.


Local Responses: State and local governments, citizens via ballot initiatives, private foundations and the corporate community are taking on the issues and willing to spend the time and invest their money to alleviate the housing problem. A number of local housing authorities, counties and states allocate their general revenues to provide grants, or more often, loans to fill the gap. In a lot of cases, it’s a pretty big gap between the actual costs and what senior debt and tax credit equity can produce. Citizens in Los Angeles, San Francisco and Alameda County, California have all recently voted tax increases to fund approximately $2 billion in subordinate loans for affordable housing.

Project Bifurcation: One development we’ve seen lately is a bifurcation of projects between 9% and 4% tax credit facilities. Developers who are unable to secure enough 9% tax credit allocation to fund their developments have “condominiumized” their project into two. One portion is financed with taxable debt and the equity contributions generated by 9% tax credits, while the remainder is financed with tax-exempt debt and equity contributions generated by 4% tax credits.

State Tax Credits and Revolving Funds: In the last year, many states adopted a state housing tax credit. Compared to the federal low income housing tax credit program, state credits don’t generate a lot of money, but can help especially deserving projects fill financing gaps. States have also established revolving funds, which provide construction funding for projects, which are then repaid with the tax credit equity or other subordinate financing funded upon project completion. These programs have a fiscal impact, and they are increasingly popular with the public and hence politicians.

Affordable Housing Trends in 2020

Although no one has a crystal ball to see into the future, here are notable trends to watch in 2020.

More Privatization of Affordable Housing: Traditional public housing, owned by housing authorities and other local government agencies, continues to shrink. The expansion of HUD’s Rental Assistance Demonstration (RAD) program is placing more affordable housing units in the hands of private ownership, permitting the use of Low Income Tax Credits to provide much-needed capital improvements to aging facilities. As housing authorities exit the ownership role, more are looking to contribute to the affordable housing supply by acting as finance agencies, providing below-market subordinate financing.

Volume Cap Restrictions: For many years, multifamily housing volume cap flowed freely, with any project satisfying the federal tax code minimum income restrictions receiving the requested allocation. Lately, demand has outstripped supply in a number of jurisdictions. For example, New York, Massachusetts, Connecticut, and Washington ration volume cap. Sometimes they’ll require a taxable component to the financing. There’s so much need that the states have to prioritize. Other states may soon have to, as well.

Recycling: There’s a provision in the Housing and Economic Recovery Act of 2008 (HERA) that allows for recycling of volume cap. Recycling permits a second use of volume cap to finance a second project. Unfortunately, the second project does not qualify for LITCs, which is the primary purpose for using private activity volume cap to finance multifamily housing. Another hurdle to maximizing the utility of recycled cap is that the second tax-exempt issue must take place within four years of the first and within six months of payment of the initial issue. Nonetheless, in a higher interest rate environment with greater spreads between taxable and tax-exempt rates, using recycled volume cap will provide cheaper financing for affordable housing. Consequently, large issuers, with a lot of outstanding multifamily bonds, are looking into recycling. A recycling program joining such an issuer with a large multifamily lender would have the best chance of success.

Innovation: Projects are being built in any number of nontraditional ways with nontraditional materials. Currently there’s a project that will use shipping containers as a modular building material to basically speed up construction and hold down costs. That’s something new, and a lot of people on the transaction are excited about it. Other projects use modular construction techniques with portions of the project built in controlled conditions, delivered to the project site and combined with other pieces to form a complete facility. Even massive 3-D printers pouring concrete are being used to quickly build small housing units. In general, we’re also seeing a lot of reuse—office buildings, warehouses, etc.—that designers reconfigure into housing. Also, we’re seeing high-density housing projects. These projects house a number of unrelated persons in a single unit, which contains basic cooking and sanitation facilities as in any multifamily housing unit. These units typically have shorter lease periods (less than the standard six to 12 months). We’ve seen other projects which stretch the housing construction dollar by creating smaller living facilities for individuals, but also providing for a large communal kitchen, with more extensive amenities.

Veterans Programs: We’ve certainly seen efforts to assist veterans on both the federal and state levels. The VA and HUD have a Veterans Affairs Supportive Housing (VASH) program which provides housing vouchers for veterans. In California there’s a program that the state runs called VHHP or Veterans Housing and Homeless Prevention Program, which also provides subordinate financing for veteran-only projects.

Affordable housing has also received relief from the IRS. The tax code’s requirement that bond-financed units be available to the general public no longer applies to housing designated in state and local programs for specific groups. Thus, owners of bond-financed housing may now restrict occupancy to these specified groups, which include veterans.

Rent Control: State and local governments have turned to rent controls to address the skyrocketing rents in many areas, most recently in New York, Oregon and California. One-third of California renters spend over half of their take-home pay on rent. A minimum wage earner in California needs to work 92 hours per week to pay the average rent on a one-bedroom apartment. These statistics make rent control attractive to a large number of voters and we should expect more expansive rent control measures to gain political traction.

Transportation and Social Services: Multifamily facilities in high-density areas are being located at transportation hubs (train, subway and bus stops) to ease the stress of commuting in these areas. Many new projects also combine on-site social services (job training, drug/alcohol counseling, health clinics) to serve the targeted tenant population (which includes chronically homeless, persons with developmental disabilities and transition-aged youth) as well as the neighborhood in general. These facilities serve as catalysts for revitalizing blighted and economically depressed areas. In a number of cities, the local government is deeding or leasing surplus land to developers.

More information on the firm’s national Multifamily Housing Practice is available here, or listen to a recent Freddie Mac podcast featuring Toger Swanson, a partner in the firm’s Omaha office.

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