Unprecedented Challenge, Extraordinary Response: How State Housing Finance Agencies are Filling Affordable Housing Construction Cost Gaps

State housing finance agencies (HFAs) in recent years have taken extraordinary steps in response to unprecedented cost increases in affordable apartment construction. They have helped secure billions in additional funding from the federal government and many state legislatures, created an array of new gap-filling programs across the country and provided substantial cost-saving regulatory and administrative flexibilities to developers and their properties.

HFAs' efforts have saved countless developments from "falling through the cracks" and ensured delivery of thousands of affordable apartments during a period of worsening housing needs for millions of low-income renters. 

The interrelated drivers of cost increases–first, the supply chain and workforce disruptions of COVID-19, then inflation and higher interest rates, exacerbated by spiraling insurance premiums–created compounding challenges for almost every agency, as well as many developers. Unexpected gaps in development budgets need to be filled quickly, demanding flexible subsidies, often from programs that have to be created from scratch. Previously approved developments need to be re-underwritten and reapproved, which in many states trigger public disclosure requirements, agency board sign-off or the blessing of the state Legislature. Future development pipelines need to be reassessed–as Peter is sometimes robbed to serve Paul–with the escalating resource needs to preserve existing properties, as well as fund new deals, coming into ever-clearer view. And through it all, HFAs must balance the brutal economic realities developers are facing, through no fault of their own, with the agencies' statutory obligation, often under heavy political scrutiny, to stretch every affordable housing dollar they control as far as it can possibly go.

The Need for More Funding

The National Council of State Housing Agencies (NCSHA), the HFAs' trade association and representative in Washington D.C., has been focused on securing more federal resources to arm the agencies for these challenges. In 2022, NCSHA commissioned Abt Global (formerly Abt Associates) to produce the first independent national evaluation of the extent of the problem. The firm's report found that agency-approved developments had experienced unexpected cost increases over the prior 18 months averaging 30% and more than that in a number of cases.

In a representative example, the report found that 39 of 42 developments one HFA recently approved needed additional funding to close, with gaps ranging from $145,000 to $5.7 million. The agency said that, while pre-COVID-19 development costs averaged $150,000 per unit, they had risen to more than $200,000 per unit–a 33% increase – in a matter of months.

American Rescue Plan Funding and Other Federal Assistance

By mid-2022, states had begun to commit some of their share of fiscal recovery funds provided by the America Rescue Plan of 2021 to address the issue. NCSHA identified a flaw in the Treasury regulations for the program that would have severely limited their efficacy for plugging development cost gaps. The organization's advocacy with the Treasury Department and members of Congress from both parties led to policy changes that unleashed a massive amount of new funding. In January, U.S. Treasury Secretary Janet Yellen, speaking to the U.S. Conference of Mayors, said: "In 2022, Treasury put out new guidance giving greater flexibility for funds to be used for long-term affordable housing. Communities have since increased the funds budgeted for housing stability, preservation and construction by 59%, representing a total of $18.5 billion as of last fall." 

More than 20 states have used recovery funds to fill development cost gaps, according to NCSHA survey data. One example is Florida, where the Housing Finance Corporation was quickly able to get 65 developments, with more than 4,600 apartments, over the finish line in 2022–then leveraged the success to secure another $100 million from the state Legislature that ensured completion of thousands more in 2023 and this year. 

State HFAs are also applying focus and creativity to use other pandemic-era programs for new gap-filling purposes, such as the Emergency Rental Assistance program. As a result of HFA advocacy, the Treasury Department now allows agencies that have met program benchmarks for delivering rental aid to repurpose remaining funds for development purposes. As of this month, more than a dozen HFAs to date are doing so, such as the Michigan State Housing Development Authority, which has earmarked $76 million for targeted transactions.

State Funding

HFAs have also been instrumental in securing funds from their state legislatures to support new rental development. At least 15 states–red and blue and in all parts of the country–have made unprecedented commitments over the past few years. They range from Arizona to Florida to Maine to Wisconsin to Washington, among others. And, as readers of this publication are aware, more states have authorized state housing tax credits as yet another new gap-filler.

Increasing Efficiency

HFAs have also worked to reduce regulatory and administrative requirements in order to save developments time and money. According to Abt Global's analysis: "All the allocating agencies examined are working collaboratively with developers, offering flexibility in a credit award and execution process: allowing timeline extensions; waiving penalties for returning unused credits; and allowing changes to some aspects of the development, such as the number of units, amenities, and community space."

Continued Advocacy

HFAs recognize that even when they have been able to bring new funds and flexibilities to bear, developers also often make significant sacrifices to get to closing and ultimately completion. Leading firms joined NCSHA and the agencies in advocacy campaigns that have won more resources–advocacy efforts that must continue. For all the developments that have succeeded because of agency-developer cooperation, some have still failed or stalled–and countless others in the planning and predevelopment phases may face additional hurdles as the largely one-time federal and in some cases state appropriations are depleted. 

Regrettably, the construction cost crisis shows few signs of abating and available resources for addressing it will likely tighten. HFAs and affordable housing developers–along with lenders, investors and syndicators–will need to redouble our efforts to do more with what we have and fight for more to accomplish the mission we all share.

Stockton Williams is executive director of the National Council of State Housing Agencies.