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There are several hurdles facing those who are interested in pursuing low income housing projects. The costs of labor and supplies have risen during the past couple of years, the supply of available land has dwindled and many communities are hesitant or strongly against having low income housing in their neighborhood.

But perhaps the most difficult hurdle for low income housing developers to overcome is financing. Obtaining financing is especially critical for for-profit developers, whose projects need to make financial sense at the end of the day.

Low income housing development
Financing a low income development can be difficult
First of all, "'low income' means that the maximum total combined household income in the family does not exceed 50 percent of the area median income, adjusted for the household size," Nancy Stangle, development director of Georgia-based Athens Land Trust, said.

There are many financing programs from which to choose, from local and federal government programs to tax credits, partnerships, low interest loans, grants and even donations. But low income housing is in high demand, and the resulting competition for each of these types of financing is fierce.

"It is very competitive to apply for every subsidy program [available] to do affordable housing," Ronne Thielen, managing director of Center Line Capital Group and president of the Affordable Housing Tax Credit Coalition, said. "It's also very complicated in most of the cases."

"One of the biggest hurdles is the timing of applying for all of these different sources and being able to pull it together at the right time," she said. "Everyone has a different deadline and coordinating all your applications and winning is probably the most difficult part" of the financing process, she said.

Applicants are considered based on the developer's experience, the income limits and building types of the project and other criteria, which can vary by program. Georgia's low income housing tax credit program, for example, favors projects that demonstrate energy efficiency, Stangle said.

Developers must apply for a variety of funding because many sources of funding are required in order to make low income housing projects financially feasible.

"Costs are escalating every year—not only in construction materials but in operating costs. So we always find ourselves reaching for yet another level or two or three of additional financing to help us get feasibility," Bob Greer, president of Michaels Development Company, said.

These other avenues include applying for Federal Home Loan Bank awards, seeking funds from programs from municipalities and states, low interest "soft money" and more, and up to seven layers of financing can be required in order to make a deal work, he said.

Construction of a low income housing development
Construction costs rise each year, making financial feasibility harder to reach
"Almost every project requires local funding, city funding, county funding, as well as state funding and federal funding," David Esselman, vice president of external relations for National Community Renaissance (National CORE), said.

The most popular source of funding is the low income housing tax credit program, which "has been a very successful program for creating affordable housing in the country," Stangle said. "Corporations buy the tax credits from the organizations, and the income from the sale of these credits is used to subsidize the cost of the development."

Corporations buy these tax credits because they allow for a dollar-for-dollar reduction in a federal income tax payment rather than just a reduction in taxable income. Developers are able to take the money they receive from the sale of tax credits and use it to pay for building their project.

Both for-profit and non-profit low income housing developers can apply for these tax credits. Each state receives an allocation of tax credits and is free to design its own program.

The application process for tax credits is extremely competitive, Greer said. "A state agency may have enough money to…fund 10 developments, but they'll receive 40 or 50 applications for those limited tax credit resources."

The competition for funding is so stiff, particularly for tax credits, that developers are now providing "expanded family supportive services, such as job training, such as computer learning centers, such as drug and alcohol abuse counseling and homeownership counseling," Greer said.

Tax credits help offset the cost of building
Tax credits can help offset the cost of building
While low income residents are defined as those who make 50 percent of an area's median income, many developers are aiming their projects at residents who make far less in an effort to provide the most-needed housing and perhaps increase their chances of submitting a successful application.

Tax credits are popular in large part because they reliably provide developers with necessary equity. "We're finding that our average is about 91 cents on the dollar," for each tax credit, Greer said. The proceeds received from the sale of tax credit dollars are often used to help pay for construction.

The tax credit program, while a mainstay of low income housing funding, is not sufficient on its own. Developers who receive tax credits must still find additional sources of funding.

"We have most recently combined the tax credit program with the Hope VI program as a financing tool to help us achieve financial feasibility," Greer said. Hope VI is a program wherein housing projects that have become substandard can apply to the federal government for an allocation of funds.

"Upon receipt, if approved, the housing authority goes out and finds a private, profit-motivated developer…to be their partner in designing and developing a removal of the old public housing and construction of new, mixed-income housing," Greer said.

"These are the two primary [sources of funding] we're using today: stand-alone tax credits in combination with the Hope VI program," Greer said.

While there exists a vast array of financing options for low income housing, there is so much competition that many projects go unfinanced. There is simply not enough money to go around.

"Unfortunately, it has been several years since HUD or any other institution has put on a new program that would create growth," Esselman said.