Filling Funding Gaps: How State Agencies Are Moving to Meet a Growing Threat to Affordable Housing

In the midst of an affordable housing crisis stemming from a chronic undersupply of affordable homes, COVID-19 has wreaked further havoc by interrupting supply chains and raising the cost of labor and building materials. The result is state and local agencies are facing shortfalls as they pursue much-needed affordable housing construction under the auspices of the Low-Income Housing Tax Credit (LIHTC) program, which awards federal funding to affordable rental housing projects.

To understand the challenge—and identify possible solutions—the National Council of State Housing Agencies (NCSHA) engaged Abt Global and the Tingerthal Group in the Summer of 2022 to examine the experiences of 11 state agencies. Individuals at each agency were interviewed, as were 11 practitioners, including developers, accountants, and attorneys. Several themes emerged, including:

• Nearly all LIHTC projects from 2019 on faced significant cost challenges that required extra efforts to close the gaps.
• Cost increases averaged 30 percent across states, with some developments facing even greater increases.
• The longer the delay, the more likely a project was to encounter additional expense and complications, including rising interest rates.
• Solutions typically require the collaboration of multiple parties, including local and state governments, tax credit and bond allocating agencies, and developers.
• Approaches to closing funding gaps include reducing costs through administrative flexibility and flexible use of funding (e.g., allocating future-year LIHTCs, increasing financing from tax-exempt bonds, and using Federal State and Local Fiscal Recovery Funds).
• Even when funding gaps have been closed, this often comes at the expense of the current and future production of affordable housing. Longer-term and more comprehensive solutions are needed to avoid significant reductions in affordable housing production and preservation in the coming years.
• Fortunately, recent guidance from the U.S. Treasury Department provides some states and cities with additional flexibility to use recovery funds to fill cost gaps for affordable housing development.