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Affordable Housing Developers Facing Increased Development Challenges

Published by Michael J. Novogradac on Wednesday, May 1, 2024

Journal Cover May 2024   Download PDF

Rising construction costs and operating expenses, paired with volatile interest rates, are creating ever-greater headwinds for affordable multifamily rental housing developers. These headwinds come amid increasing competition for private activity bonds (PABs), a key funding tool, and the multiyear phasing out of accelerated tax losses.

The coalescence of these factors exacerbate financial challenges for developers, though there is an accompanying bright spot: Clean energy provisions in the Inflation Reduction Act (IRA) of 2022.

Here’s a look at some of the factors complicating affordable multifamily rental housing development in 2024:

Increasing Costs

Construction Costs Rising

Construction costs for multifamily rental housing have risen significantly over the past three years, though the annual rate of increase dropped notably.

The COVID-19 pandemic and the subsequent economic aftershocks caused a dramatic 17.5% increase in construction costs in 2021, over 2020. Modest good news is that year-over-year construction costs were up only 4% in 2022 and construction costs will increase by 3% to 6% in 2024, according to projections from Curry & Brown, a cost management, project management and advisory service provider.

However, the modest year-over-year increases come after a big jump, meaning that building affordable multifamily rental housing in 2024 is significantly more expensive than five years ago.

Operating Expenses up Sharply

Existing affordable housing properties–which typically project operating expenses to increase at 2% or 3% annually–saw expenses go up 10.4% in 2022, according to the Novogradac 2023 Low-Income Housing Tax Credit Income and Operating Expenses Report. Much of that increase was offset by increases in rental income, but many developers are still concerned about the dramatic uptick in expenses.

Property insurance has been in the spotlight and many developers have attempted such approaches as packaging properties or increasing their insurance deductible to bring down that expense. However, insurance isn’t the only area of expenses causing concern. Payroll increased 9.2% in 2022, while repairs and maintenance saw a pandemic-affected year-over-year jump of 21.7% in 2022. 

Most investors continue use lender-driven underwriting assumptions of annual increases of 2% for income and 3% for expenses, while stress-testing of those growth rates is often requested. 

Interest-Rate Instability

A dramatic rise in interest rates–the prime rate doubled over 10 months in 2022 and 2023–has slowed but was replaced by instability. Developers now see a likely ceiling on the overall interest rate increase but face the possibility that rates can swing by as much as 20 to 30 basis points in one week, meaning those closing transactions can see a major change in a short period, which creates significant changes in the gap funding requirements.

While there’s little a developer can do to stabilize interest rates, many are avoiding future adverse surprises by locking in the rate early in the financing process. 

Good News: Rising Income Levels

Some good news: Rising income levels and projected rents can help offset some of the effects of rising operating expenses and interest rates. The U.S. Department of Housing and Urban Development (HUD) issued 2024 income limits April 1 to determine eligibility and maximum rent increases for affordable housing properties. The ceiling for increases is 10%, but more than half of counties in the nation will allow an increase of more than 6% in maximum rent in 2024, with 38.3% of counties having a ceiling of more than 8%.

Financing Challenges

As developers seek to address the cost challenges, the ability to access PAB-financed equity is as challenging as ever and the phasedown of bonus depreciation has modest downward pressure on equity pricing. Both factors are significant.

PAB Competition

A key source of funding for LIHTC developments is permanent “hard” debt, often in the form of PABs. The combination of higher operating expenses and volatile interest rates means long-term debt financing is declining and the competition for PABs remains high in well over half the states in the country.

As recently as 2014, only Virginia had no carryforward on its annual private activity bond cap (and just five states had less than $500 million in carryover), so affordable housing properties that sought PAB funding (and the 4% federal LIHTCs that pair with such funding) treated it as by-right financing. That is no longer the case. As of February, the Novogradac-Tiber Hudson PAB cap scarcity map showed that 20 states and Washington, D.C., were oversubscribed for PABs, 19 states were undersubscribed and 11 states were near parity.

Many states now have a competitive process to allocate PABs. In PAB-oversubscribed states, PAB applicants compete under the state’s qualified allocation plan, meaning PAB competition is like (but often not as fierce as) 9% LIHTC competition. 

The number of PAB-oversubscribed states also affects timelines for development. Historically, an affordable housing property that received an allocation of PABs and didn’t close in the same year would apply for bonds the following year and expect to receive them. With more states at or near their bond cap, there’s increased pressure to close on transactions for the year in which bonds are allocated to ensure the financing.

Decreasing Bonus Depreciation

Unless Congress enacts legislation addressing bonus depreciation this year, bonus depreciation will remain at 60% for 2024 and decrease to 40% in 2025. The decrease heightens the value of cost segregation studies, particularly for acquisition/rehabilitation cost segregation studies.

Potential Good News: Tax Bill

Tax legislation passed by the House of Representatives in January would address both the tight PAB market and the declining bonus depreciation rate.

One provision of the Tax Relief for American Families and Workers Act (H.R. 7024) would decrease the 50% financed-by test for PABs to 30% for two years, which would allow states to spread the same volume of PABs over more transactions. Another provision would increase bonus depreciation back to 100% for 2023, 2024 and 2025, reverting to 20% for 2026. That change would benefit developers.

However, H.R. 7024 remained stalled in the Senate as this column went to press.

Clean Energy Provisions

Increased costs and more challenging financing create difficulties. Fortunately, there are additional ways to address financial challenges–solutions that go beyond the traditional use of permanent loan financing, LIHTC equity and such soft sources as HOME funds, federal Housing Trust Fund dollars and Affordable Housing Program funds from Federal Home Loan Banks to finance LIHTC properties.

The Inflation Reduction Act of 2022 included multiple provisions for the intersection of clean energy and affordable housing.

Green Resilience and Retrofit Program

Perhaps, currently, the most significant IRA affordable housing provision is HUD’s Green Resilience and Retrofit Program (GRRP), which is authorized for up to $837.5 million in funding and $4 billion in loan authority.

The GRRP, which is designed to facilitate investments that save utility costs and mitigate environmental hazards at HUD-assisted properties, has three property-type cohorts. Since project-based Section 8 housing is a staple in LIHTC-financed housing, the GRRP is a natural fit for LIHTC developers facing financial gaps, but the time is short to apply for and earn the funding.

The first cohort (Elements Awards) is for properties undergoing recapitalization to create a greener and more climate-resilient property. These awards are for the lesser of $40,000 per unit or $750,000, regardless of the property size.

The second cohort (Leading Edge Awards) is for properties with ambitious goals, including obtaining either a net zero energy certificate or net zero carbon certification. Leading Edge properties get the lesser of $60,000 per unit or $10 million–a significant increase over Elements Awards.

The third cohort (Comprehensive Awards) includes the most money and is for properties looking to achieve significant green initiatives and utility benchmarks. Comprehensive funding is $80,000 per unit or $20 million.

Any of those awards will cover a significant gap for LIHTC properties, but there is urgency. The GRRP awards require correctly filing the applications and choosing which award to seek. Properties can apply for only one such category. Looming deadlines of May 15 (for Leading Edge), June 12 (for Comprehensive) and July 31 (for Elements) create urgency to complete the applications. Early awards suggest that those who meet the criteria and apply correctly stand a good chance of getting an award.

ITC, Section 45L

Many credit allocating agencies require specific levels of energy efficiency to score well on their LIHTC application–improvements that add to the development cost of many LIHTC properties. Two provisions of the IRA can provide funding to help offset those additional costs.

The IRA included a competitive 20% bonus on top of the 30% solar investment tax credit (ITC) for facilities built on properties that are part of covered federal affordable housing programs, with an annual limit of 200 megawatts. Eligible properties include those financed by LIHTC equity, so developers can conceivably cover most of the cost of adding solar with tax credit equity. 

The IRA also extended and modified the Internal Revenue Code (IRC) Section 45L energy efficient home credit (worth $500 to $5,000 per unit) and the IRC Section 179D energy efficient commercial property deduction (worth $2.50 to $5 per square foot for qualifying properties), which can both be used for multifamily housing. It is important to note that while the IRA eliminated the LIHTC eligible basis reduction associated with the Section 45L credit and the solar ITC, the eligible basis reduction remains effective for properties claiming the Section 179D deduction. 

Greenhouse Gas Reduction Fund

Another provision of the IRA is the Greenhouse Gas Reduction Fund (GRRF), which is authorized to provide $27 billion in investment in various projects across the nation. In April, the Environmental Protection Agency awarded $20 billion in grants–with $14 billion going to organizations that will establish hubs to provide funding and technical assistance to lenders in low-income communities who can then deploy projects–including affordable housing–and build capacity for those lenders to finance even more developments. Another $6 billion will go largely to create a national clean financing network for clean energy and climate solutions.
Another $7 billion devoted to the Solar for All program, which will help enable millions of low-income households access to solar energy.

Over the coming months and years, the GRRF awards should provide an opportunity for developers to seek additional funding for affordable rental housing development and operation.


In an era of higher construction costs, increased operating costs, more volatile interest rates, the phase out of bonus depreciation, new clean energy financing sources and more, LIHTC developers must continue to be alert and flexible.

More than ever, there is wisdom in working with a seasoned consultant or group of consultants to identify opportunities and navigate the complexities of the ever-changing LIHTC environment.

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