Filling That Project Gap: Traditional, New, Emerging Sources Are Available

By Caitlin Jones
June 18, 2009 8 min read

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Tax Credit Advisor, May 2009: Finding the vital gap funds needed to make a new low-income housing tax credit (LIHTC) project pencil out has always been challenging. It’s even more so today, given the shortage of tax credit equity and the tighter state and local budgets that fund subsidies.

Gap dollars, though, are still available, both from traditional sources and from overlooked, new, and emerging sources that are coming more into play with the growing linkage between affordable housing and areas such as energy and transportation. Bottom line: Think holistically about your project as you look for gap funds.

HOME Program

The federal HOME Investment Partnerships (HOME) program, operated by the U.S. Department of Housing and Urban Development (HUD), is probably the most widely used source of gap financing for LIHTC projects.

Under HOME, HUD annually allocates grants to “participating jurisdictions” (about 640, mostly local governments). These PJs decide which particular affordable housing activities and projects to fund out of the multiple eligible uses (e.g., owner-occupied, rental housing), and they solicit requests for funding such as from LIHTC developers. Eligible uses include hard and soft costs related to the construction, acquisition, and rehabilitation of affordable rental housing projects, and for tenant-based rental assistance.

For the federal fiscal year (FY 2009) ending 9/30/09, the federal appropriation for HOME is nearly $1.7 billion.

The HOME program has its own set of targeting requirements and tenant income and rental limits, and LIHTC developers should be mindful that PJs have heavily favored awards to projects with very deep targeting.

Rental units assisted with HOME funds – affordable to low-income households – are known as HOME units.

In a recent interview, Cliff Taffett, Director of HUD’s Office of Affordable Housing Programs, said about 41% of all HOME rental units produced since the HOME program began in 1992 have also been LIHTC units, or roughly 253,000 units.

He said the percentage “spiked” to 81% in FY 2007, but was less – 70% – in FY 2008. In FY 2008, the number of HOME-assisted/tax credit units was about 27,300.

Taffett said HOME funds are used to fill the funding gap in tax credit projects, and typically are secured by a second or third mortgage.

Taffett said HUD plans to issue a proposed rule to “update” the existing regulations for the HOME program – the first broad changes since 1996. He hoped the rule will be issued by year-end, but indicated delay is possible given that his office is also administering the Tax Credit Assistance Program and will be writing a rule to implement the new National Affordable Housing Trust Fund Program.

CDBG Program

Less utilized for LIHTC projects is HUD’s Community Development Block Grant (CDBG) program, which has an FY 2009 appropriation of nearly $4 billion. The stimulus act also provides an extra $1 billion.

CDBG funds may be used for a wider variety of projects and activities than HOME, including community and economic development projects, plus certain housing-related purposes. In a rental housing project assisted with CDBG funds, generally at least 51% of the units must be rented to low- to moderate-income households.

HUD allocates CDBG funds annually to grantees – more than 1,000 “entitlement communities” (i.e. local governments), 49 states, Puerto Rico, and some small communities in Hawaii. Grantees decide which projects and activities to fund, and whether to award funds as a grant or loan.

CDBG funds may be used in different ways with LIHTC projects, including to help pay for acquisition, housing rehabilitation, site clearance, and infrastructure. Funds generally can’t be used to fund new construction directly, but can be used for eligible purposes that support new construction.

HUD official Stan Gimont said special disaster recovery allocations of CDBG funds for the Gulf Coast may be used for new construction.

FHLBank Programs

The 12 regional Federal Home Loan Banks (FHLBanks) are probably best known as a source of subsidies for LIHTC projects for their Affordable Housing Program (AHP). But these Banks have other resources that may be utilized for housing credit projects.

The AHP and Community Investment Program (CIP) are operated by each of the 12 FHLBanks, but subject to program regulations administered by the Federal Housing Finance Agency.

Financial institutions that are members of the Federal Home Loan Bank System (8,000+) apply to their applicable regional FHLBank on behalf of proposed projects for AHP or CIP funds.

AHP funds can be used to help finance acquisition, construction, or rehabilitation costs for affordable rental housing projects. All AHP funds used for housing – owner-occupied, rental housing – must benefit households earning no more than 80% of the area median income (AMI). At least 20% of AHP-assisted rental units must be occupied and affordable to households at or below 50% of AMI.

Each Bank holds one or more competitive application cycles each year for AHP funds, and awards funds for individual projects to the sponsor member institution, either as a subsidized advance (i.e. a loan, at a reduced interest rate) or as a direct subsidy or grant. The institution, in turn, decides whether to provide the funds to the project as a loan or grant.

AHP funds typically are provided to LIHTC projects as soft deferred payment mortgages.

According to federal data, during 1990-2007, $1.129 billion in AHP direct subsidies and $156,700 in AHP advances were awarded for 4,392 LIHTC projects containing 256,753 proposed units.

The present financial crisis is reducing the amount of AHP funds available. Annual contributions by the Banks for the AHP program, which peaked at $319 million in 2007, tumbled to $188 million in 2008, meaning competition for AHP funds this year is greater.

In addition to the AHP, each FHLBank operates the non-competitive Community Investment Program, which can be used to help finance or support LIHTC projects (see article on p. 9). Beyond AHP and CIP, member institutions can obtain regular priced advances from the Banks and loan them to affordable housing projects. In addition, each Bank can provide letters of credit to credit enhance tax-exempt bonds issued to finance affordable rental housing.

The 12 FHLBanks are in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, Seattle, and Topeka. (Link to individual Bank sites and program information: http://www. fhlbanks.com)

Housing Trust Funds

A growing source of gap financing for LIHTC projects is the housing trust fund. This is an entity providing funding for affordable housing projects and activities that typically has a dedicated funding source (e.g., local real estate recording fees).

There are about 600 housing trust funds today in the U.S. These include housing trust funds for most of the states. The rest are primarily local housing trust funds, and some regional funds. Housing trust funds are administered by variety of entities, including local governments and state and local housing finance agencies. They vary in their source(s) of capital and in the specific kinds of housing activities and projects that they will finance. (Details on housing trust funds: http://www.communitychange.org/our-projects/htf)

A new development this year is possible available initial funding from the National Affordable Housing Trust Fund, which was created by the Housing and Economic Recovery Act of 2008. The Trust Fund was supposed to be capitalized with a portion of the annual profits from Fannie Mae and Freddie Mac, but the financial woes of the two government-sponsored enterprises have precluded this. The Obama Administration, however, has proposed a $1 billion appropriation for the Trust Fund in the FY 2010 HUD budget request. House Financial Services Committee Chairman Barney Frank (D-MA) has indicated his panel will write this into legislation this year.

Meanwhile, HUD’s Taffett said his office, in anticipation of funding, will be drafting a regulation to implement the new national trust fund program. He anticipated this regulation will be published this summer as an interim rule that solicits public comments.

Additional Resources

Other actual or possible sources of gap financing for LIHTC projects include:

• States and state housing credit agencies. A number of states, including Maryland, Massa-chusetts, California, and others, operate programs that offer subsidies, soft debt, and other funds that can be used to fill gaps in tax credit projects. Check the Web sites of individual state housing finance agencies for information on these.
• State tax incentives. Many states have their own affordable housing and historic rehabilitation tax credits, which can help generate additional equity for projects.
• Energy funds, incentives. The importance of green and sustainable development has been accompanied by a growth in the amount and types of assistance that can be tapped to help finance energy-efficiency features and renewable energy systems in new and existing rental projects. These include federal and state energy tax incentives, utility rebates, loan programs, and more. The stimulus act, for instance, provides $250 million that HUD will be offering competitively this year to fund energy retrofits and green investments in existing HUD Section 8, 202, and 811 rental housing properties.
• Transportation. Through special funds, density bonuses, and other means, a growing array of incentives are now available from localities and states to help fund or support real estate projects that embody smart growth and “transit-oriented development.” Many states in their LIHTC programs encourage these types of projects as well. The linkage between housing and transportation at the federal level is growing. Congress this year is expected to write a major new transportation bill that will likely provide some resources supportive of housing.