Market-rate housing developers can obtain long-term mortgage loans from commercial lenders, but need to contribute at least 25% of the total project cost in the form of equity.
Like market-rate housing, affordable rental housing has many of the same cost components: land, development fees/taxes, labor and materials, and soft costs. However, affordable housing often has higher costs of development due to requirements placed on homes built with public subsidies. This includes: prevailing wages for construction workers and additional environmental requirements. According to the Terner Center at UC Berkeley, affordable housing developments “are often subject to increased local scrutiny, further inflating costs. A 2014 study found that local government design requirements for affordable housing added an average of seven percent in total costs, and that community opposition (measured by holding four or more community meetings) increased expenses by five percent.”
Traditional deed-restricted affordable housing limits who is eligible to live in a development and what rent they will be charged based on the level of household income and the number of people living in the household. The income level categories are established by the Department of Housing and Urban Development (HUD):
ELI = Extremely Low-Income (0-30% of Area Median Income, or AMI)
VLI = Very Low-Income (30-50% of AMI)
LI = Low-Income (51-80% of AMI)
Mod = Moderate-Income (81-120% of AMI)
Above Mod = Above Moderate-Income (>120% of AMI)
Eligibility is determined by percentages of area median income (AMI) by household size. Rents are established at no more than 30% of various percentages of AMI (not necessarily just at the upper limit of the ELI, VLI, and LI income categories), varying by unit size.
For traditional affordable housing development, the revenue stream from rents cannot support the same level of debt from private lenders that can be supported by market-rate rents, so loans are smaller. These loans come in two forms: a 30-year mortgage from a bank or other commercial lender at market-rate interest (typically somewhat higher than is available for homebuyers); or a somewhat larger loan in the form of the proceeds from a bond issued by a public agency at an interest rate about 1% lower than those of a commercial bank.
Because the private lender loans are smaller, there is a funding “gap,” which is typically filled with multiple different funding sources. Virtually all of these subsidy sources adopt thresholds for funding, such as: depth of income levels to be served, locational criteria, age, and disability or homelessness status. Low-interest loans with very favorable repayment provisions (known as “soft money” loans) as well as grants are made available by cities, the County, and the State. Forgivable loans are provided by the Federal Home Loan Bank. The U.S. Department of Housing and Urban Development provides forgivable loans for projects serving certain populations. Low-Income Housing Tax Credits are invested in projects in the form of equity that does not need to be repaid. The Housing Authority can provide operating subsidies in the form of project-based Section 8 vouchers.
For those cities in Santa Clara County that finance affordable housing development, each has its own ways of raising revenue that is used for financing the development of affordable housing. Each city will have some but not necessarily all of the sources listed below. Please note that this listing uses generic titles in some case, so a city may have such a listed funding source called by a different name.
- The Low- and Moderate-Income Housing Asset Fund consists of repayments received on loans made to developers from the 20% set-aside before redevelopment agencies were abolished in 2012.
- A commercial linkage fee is a type of impact fee that can be charged based on an assessment of the extent to which new commercial and/or non-residential development generates additional demand for affordable housing. Typically, the fees are based on the square footage of the development and vary by type: offices; hotels; retail stores; industrial space.
- A housing impact fee is similar to the commercial linkage fee but is charged on the development of market-rate housing. It is also charge on the square footage of the project. Most cities which had this fee on the books have discontinued it since inclusionary housing requirements on rental housing became legal at the beginning of 2018. Fees collected in the past – or repayments on loans made from this source – will continue to be a source of financing into the future.
- For cities that have inclusionary housing requirements, some allow the payment of in-lieu fees rather than providing the affordable units.
- The State of California imposes fees on the recordation of documents associated with certain real estate transactions, commonly known as Senate Bill 2 (SB 2) Starting in 2019, the revenue is being shared, by formula, between the State, cities and counties.
- Larger cities receive annual entitlement grants from the U.S. Department of Housing and Urban Development (HUD) from the HOME Investment Partnership Program, under which affordable housing development is an eligible use. Those cities also receive entitlement grants under the Community Development Block Grant program – CDBG – which can be used to finance some expenses of development.
- Many cities offer fee waivers or discounts on some impact fees — parkland dedication in-lieu fees, for example – for housing developments that will serve certain lower income levels.
Santa Clara County
The County administers funds raised by the sale of general obligation bonds authorized by Measure A, approved on the November 2016 County-wide ballot. Out of the total of $950 million of authorized bonding, at least $800 million is allocated to multifamily rental housing developments. The housing funded from this source must be targeted to certain populations, including veterans, seniors, disabled persons, victims of abuse, the homeless, and individuals suffering from mental health or substance abuse illnesses. Funding to individual projects is made in the form of soft-money loans. As of mid-2019, the County had approved loans totaling $205,030,000 to 16 new construction projects (totaling 1,418 units) and $29,150,000 to rehabilitate two existing affordable housing properties (totaling 481 units).
The Housing Authority can provide an indirect subsidy to an affordable housing project by providing project-based Section 8 vouchers. For the units with such vouchers, the normal affordable rent level plus the extra subsidy provided by the voucher means that the developer will receive more revenue than would otherwise be the case. This, in turn, allows the developer to borrow more funds in the form of either a tax-exempt bond or a conventional commercial loan.
State of California
The Department of Housing and Community Development (HCD) administers the State’s several funding programs that are available to affordable housing developers. HCD does not permit any one development to receive funding from more than one of these programs.
- The Affordable Housing and Sustainable Communities program, or AHSC, funds compact development in infill projects that will reduce greenhouse gas emissions. Local Governments can use the funds towards affordable housing developments, housing related infrastructure, and sustainable transportation infrastructure. Funding awards are the result of a competitive process. In 2019, $31.5 million was awarded to two projects in San Jose.
- The No Place Like Home program funds developments that will house persons who are experiencing chronic homelessness or who are at risk of chronic homelessness, and in need of mental health services. The County of Santa Clara has been awarded $20,478,901. Developers will need to apply directly to the County to receive funding.
- The Veterans Housing and Homeless Prevention program, or VHHP, funds housing for veterans of the U.S. armed services and their families. In 2019, $75 million was allocated to the program, though none had been awarded by mid-year. Not less than 15% of the funds must be awarded to projects in Alameda, Contra Costa, Marin, San Francisco, San Mateo, Santa Clara, Santa Cruz and Sonoma Counties.
- Multifamily Housing Program, or MHP, funds new construction, rehabilitation, and preservation of permanent and transitional rental housing for lower income households. The funds are a permanent funding source available for post-construction costs such as social services associated with housing units, property acquisition, refinancing to maintain affordability, building improvements. A $1.5 billion general obligation bond was authorized by the State Legislature in 2018; a NOFA for $178 million in the first round of funding was issued in June 2019. There are no formal regulations that allocate potential funding awards by region, though HCD is known to have informal, internal guidelines to ensure that MHP funding is fairly distributed across the State.
- The Supportive Housing Multifamily Housing Program, or SHMHP, funds are available for permanent affordable rental housing that includes supportive units. Eligible projects include 5 or more units with associated supportive services. In 2019, $155 million was allocated to the program, though none had been awarded by mid-year. Awards will be the result of a Statewide competitive process with no regional allocations.
Private funds are invested in affordable housing in three ways:
- Affordable housing qualifies for funding using private-activity bonds issued by public agencies. Those private entities who buy these tax-exempt bonds pay about 1% less than the going rate for a mortgage from a commercial bank. By federal law, there is a limited amount of private activity bonds that can be issued every year, and that amount of authorization is divided between the states on a population basis. The California Debt Limitation Allocation Committee (CDLAC), staffed by the State Treasurer’s Office, administers the State’s authorization allocation. If demand for bonding authority is relatively low, it can be relatively easy for developers to get an allocation through an over-the-counter process. As of 2019, CDLAC was considering making awards through a competitive process. Projects that receive a bond allocation automatically qualify for 4% tax credits.
- Low-Income Housing Tax Credits are features of both federal and State tax codes. In exchange for corporate tax savings, private entities — mostly banks – invest funds in developments in the form of equity. In essence, the investment is the equivalent of a grant to the developer. Like the tax-exempt bonding authority, federal law caps the total tax credits that be awarded annually.
- 9% tax credits provide the greater percentage of project cost and are highly coveted. Funding rounds at the California Tax Credit Allocation Committee (TCAC), staffed by the State Treasurer’s Office, are extremely competitive and some projects have to be submitted several times before receiving an award. 9% credits cannot be combined with tax-exempt bonds. TCAC has established allocations by region; San Mateo and Santa Clara Counties comprise one such region, and can be awarded no more than 6% of the total awards in any one funding round. As of mid-2019, it had been more than two years since any project in Santa Clara County had received a 9% tax credit award.
- 4% tax credits finance a smaller percentage of project cost, but they are automatically available to projects that receive a tax-exempt bond allocation.
- The Federal Home Loan Bank of San Francisco – an institution privately owned by financial institutions in the region of all sizes and many types – provides forgivable Affordable Housing Program (AHP), loans to projects meeting certain income and other criteria. AHP loans are awarded in funding rounds that can be competitive, and if a round is over-subscribed, developers will likely get smaller awards than they applied for. AHP awards average about $10,000 per unit.
- Affordable housing developers receive a “developer fee” in lieu of making a profit on the project. The size the developer fee is generally set by either CDLAC or TCAC regulations. A deferred developer fee is, in effect, a loan to the project by the project sponsor that typically has priority over other soft money.
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