Typical Sources of Funding

US Department of Housing and Urban Development (HUD)

Historically, HUD directly supported the development of housing that served many different types of households. Currently, HUD does not provide financing for family developments, but makes a limited amount of funding available for housing that serves seniors and people with disabilities. Some funds for the development of family housing are distributed through local public agencies. For the last decade, very limited funding has been available for the Section 8 program. The Section 8 program is important because it subsidizes the ongoing operating costs of affordable housing. With limited Section 8 funds available, it has been increasingly difficult to develop housing that serves households with very low incomes because it often costs more to operate a building than very low-income tenants can afford.


Conventional Financing (Bank Mortgages)

Like market-rate developers, nonprofits use conventional financing from banks. The loan, or mortgage, from a private bank must be repaid with interest, often at the market rate. Bank mortgages help defray the cost of developing the units, but because the loans must be repaid with interest and because the goal is to provide low rents, conventional mortgages typically cover only a relatively small portion o development costs. Obviously, tenant rents could be reduced if there were no mortgage payment; however the lack of other sources of housing subsidy means that developers have to leverage as much private financing as possible. Once the developer has a mortgage, all the other financing must be "free" or the rents cannot be make affordable. In other words, they can't rely on tenants' rent for repayment. Today typical sources for filling the remaining "funding gap" are low-income tax credit equity, deferred payment loans, public and private grants, fee waivers or reductions.


Tax Credits

Sponsors can compete to obtain allocations of federal and state low-income tax credits. Using tax credits, sponsors can partner with corporate investors who provide equity to the development in exchange for the tax benefits generated by the housing. Although using tax credit financing is extremely complicated and adds administrative costs, it fills a substantial portion of the funding gap with no impact on the tenants' rents. With the reductions in financing from HUD, tax credits are very valuable. Tax credit equity typically covers 40% -50% of project costs.


Public Agency Deferred Payment Loans

Local public agencies have a number of resources for providing funding for affordable housing development. Limited resources are funneled from HUD to states, cities and counties through Community Development Block grants (CDBG), the HOME Investment Partnership Program (HOME), and the Housing Opportunities for People With AIDS (HOPWA) program. Very limited funding is available directly from the state. In addition, redevelopment agencies in California are required to reserve for affordable housing 20% of the increased property taxes generated in redevelopment areas. Public agencies typically award these funds to sponsors whose projects meet local needs. The awards are typically made as loans to the developer, with all payments of principal and interest deferred, as long as the development continues to provide decent well-managed housing with affordable rents.


Other Sources

In areas where development is particularly costly, such as Los Angeles and the Bay Area, combining a conventional mortgage, tax credits and public agency funds is usually still not enough to make a development feasible. Other sources that developers may have to include are the Federal Home Loan Bank's Affordable Housing Program (AHP), private foundation or corporate grants, fee waivers or reductions from local public agencies, and the State of California's Proposition 1A rebate program for local school impact fees.
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