It’s no secret rents in Idaho are getting more expensive, but the mechanics behind how the state’s biggest program to create affordable housing works is a little more complicated.
With no state-funded programs to develop affordable housing, the Gem State’s best weapon for developing new affordable housing units is the Low-Income Housing Tax Credit program through the U.S. Treasury. This program uses taxpayer money to incentivize partnerships where private companies get government funding for projects and in return promise to restrict the rent for forty years.
The program created over 2.3 million units nationwide since it was launched in 1986. In 2020, 527 of them were built in Idaho.
This initiative, overseen by the Idaho Housing and Finance Association, is the main driver of affordable housing development statewide and without it, it’s likely that hardly any units set aside for low-income residents would be created at all. But, there aren’t nearly enough tax credits to fund all of the proposed projects every year and critics say the program includes too many regulatory hurdles and built-in profits for developers that result in a high cost to taxpayers for not enough units at low enough rates.
How does it work?
It’s more complicated than a cash grant to developers.
Every year, the federal government distributes the housing tax credits to different state and local housing agencies depending on population size and other factors. These agencies then take applications for projects and distribute the credits to the winning developers, who proceed to sell them for cash to banks or other investors. They then use this cash as equity to build the project and help them absorb the cost of building a new building and then capping rents, instead of charging top dollar.
The challenge with affordable housing built by the private sector is always making the math work. In order to build projects, developers need enough cash on hand to be able to land loans from banks to finance the project with the more restricted rents they’d like to charge. This is usually achieved with a combination of the LIHTCs, loans from a bank and what’s frequently called “gap financing” by an outside source. Because Idaho doesn’t have any money in its affordable housing trust fund, the gap financing for these projects is left up to cities, urban renewal agencies or nonprofits.
Vanessa Fry, interim director for Boise State University’s Idaho Policy Institute, said when the program was created there needed to be a way for developers to make a profit to ensure participation.
“I think engagement of the private sector requires the ability to have a positive return on the investment you’re making,” Fry said. “Is it right or wrong? I guess the question would be if there wasn’t a profit margin to be made, would anyone engage in LIHTC? I imagine there was a lot of conversations back then about what developers need to engage in this sort of partnership.”
‘Because it’s the right thing to do’
The deal might not be as sweet as it seems from the outside though.
Clay Carley, a prolific developer in downtown Boise, is about to start moving residents into a LIHTC project at the corner of 6th and Grove with 60 units. The majority of the apartments will serve those making less than 60% of the area median income, or less than $31,000 for a single person. The rents will be calculated based on a maximum formula set by the federal government depending on the person’s income and the size of the unit. According to BoiseDev’s reporting in 2020, the units will start as low as $350 a month and scale up to as much as $2,300 for units that aren’t restricted by the tax credit.
When developers typically build a project, they receive between a 4 and 6% development fee up front to compensate them for building the project, but developers who build LIHTC projects get as much as a 12% development fee as compensation. Carley said this helps keep developers interested, but it’s a drop in the bucket when it compares to the high costs of completing such a difficult project and the millions in lost rent over 40 years of restricted rates.
“There is some period of time you can’t even sell (the project),” Carley said. “At the end of 40 years, it goes for market rate (rents), if you choose. Then your value goes up dramatically, but you have a 40-year-old product. It just has restricted value because of (LIHTC), so you don’t do affordable housing for the economics. You do it because it’s the right thing to do.”