20 Affordable rental housing production
This chapter covers four programs that incentivize the production and preservation of affordable rental apartments.
Highlights
Major takeaways in this chapter include:
- According to providers, the Commonwealth’s four main affordable rental housing programs maximize effectiveness with flexibility, adaptability, responsiveness, and targeted financing.
- The Low-Income Housing Tax Credit is Virginia’s dominant engine for affordable rentals; 75 percent of LIHTC households are very low-income or extremely low-income, earning less than 50 percent AMI.
- The needs of cost-burdened households continue to exceed the combined capacity of programs to meet the demand.
- Primary program challenges include restrictive local land use policies and widespread community resistance to affordable housing development. At best, such difficulties delay production and increase costs. At worst, they stop new affordable homes altogether.
- These initiatives can be improved by increasing investments in programs focused on deeply affordable rental housing, and by leveraging existing strategies and best practices like income averaging in LIHTC development.
- Creating new programs, such as developing a version of the Wasington, D.C. Local Rent Supplement Program and fostering greater minority-led developer involvement, can support the development of and greater access to deeply affordable rentals in Virginia.
Programs in this grouping
Click each program name for a PDF fact sheet.
Virginia Housing
Department of Housing and Community Development
20.1 Findings
These findings are based on data provided by Virginia Housing, DHCD, and other sources on the scale of these programs, demographic information on their beneficiaries, and other trends.
Finding 1
The LIHTC program is the largest engine for affordable rental housing production and preservation in Virginia.
FIGURE 20.1: LIHTC allocation and units funded
LIHTC produces thousands of affordable rental units across Virginia. In the last five credit-award cycle years, the program has produced as many as 7,234 units to a low of 4,319 units. The growth of the Virginia Housing Trust Fund and the Virginia Housing Opportunity Credit enacted in early 2021 have the potential to increase production across the Commonwealth.
Finding 2
Over 75 percent of all households in Virginia’s LIHTC apartments earn less than 50 percent AMI.
FIGURE 20.2: Profile of LIHTC households
Although LIHTC can serve households making up to 60 percent AMI, LIHTC units in Virginia are serving those households who are most in need of affordable housing. Over 75 percent of LIHTC units serve ELI and VLI households in Virginia.
Finding 3
In spite of Virginia’s prolific affordable rental development programs, the need consistently eclipses the supply.
FIGURE 20.3: Cost-burdened renters by AMI and LIHTC units
The number of active LIHTC units in Virginia has been increasing steadily over the last decade. But the number of cost-burdened renter households has remained consistently well above the number of affordable units supported by LIHTC, even with additional subsidies like Housing Choice Vouchers.
20.2 Program successes
These successes are based on feedback collected from the statewide provider survey, focus groups, and conversations with experienced users of these programs.
Success 2
The flexibility of Virginia Housing’s REACH program is a major asset.
Funds from the REACH program positively impact the underlying loans for multifamily projects and help make these deals less costly. This can take the form of reduced interest rates and/or loans amortized over 35 years.
Success 3
Virginia Housing is responsive to feedback from developers and advocates on the Qualified Allocation Plan.
Developers and advocates frequently cited Virginia Housing’s consistent adjustments to the QAP as a major advantage in dealing with the LIHTC program. The QAP adjustments allow the program to keep pace with shifting economic conditions as well as changes to other affordable housing resources.
Success 4
Virginia Housing adapts extremely well to federal actions that impact the LIHTC program.
Virginia Housing effectively monitors and addresses federal actions and events that may have an impact on the LIHTC program (e.g., their proactive response to potential reductions in credit valuation as a result of the Tax Cuts and Jobs Act of 2017).
Success 5
Virginia commits a large amount of its Private Activity Bonds for affordable housing development.
Virginia has designed the Private Activity Bond (PAB) allocation system so that the PAB allocation is completely expended every year. In the last decade, this has meant that nearly all of the allocation is used for housing—either multifamily four percent bond deals or Mortgage Credit Certificates.
The multifamily bond program carries the extra benefit that investors generate additional equity to further reduce the cost of this housing. The result is that no multifamily bond proposals have been denied because of a shortage of bond allocation—and Virginia renters benefit from the additional equity generated from the tax credits.
Success 6
State-level programs to address permanent supportive housing needs have been improving in terms of program guidelines and increases in the critical Virginia Housing Trust Fund.
DHCD’s Affordable and Special Needs Housing Program (ASNH) provides higher per unit awards for targeting special needs/permanent supportive housing (PSH); this beneficial prioritization recognizes the particular underwriting needs of these types of projects.
During the past few years, the LIHTC pool for PSH projects and the 10 percent PSH leasing preference requirement in the QAP years have supported the development of more housing for this population.
20.3 Program challenges
These challenges are based on feedback collected from the statewide provider survey, focus groups, and conversations with experienced users of these programs.
Challenge 1
Developers and advocates need additional support in addressing NIMBY-ism at the local level.
Despite some progress on this issue, many affordable rental housing developers and housing advocates experience strong community opposition to new housing, especially apartments that use some form of rental assistance and/or that are serving a population that is the subject of misperceptions. At best, this opposition can delay projects and increase costs and at worst, it can derail proposals entirely.
Challenge 2
Local land use restrictions lead to limited site availability and higher acquisition costs when land is available.
As a result, affordable housing developers must search longer for land and pay exorbitant prices for sites when they become available. These delays and expenses stymie the addition of new affordable rental supply, especially in high-cost areas where those homes are badly needed.
Challenge 3
The interest rate on ASNH loans can be an issue for certain projects.
The ASNH interest rate is a three percent “must pay” interest-only loan with repayment of principal deferred. However, DHCD lowers this rate for most nonprofit organizations. Upwards of 90 percent of the ASNH loans are at a rate less than three percent and most nonprofits have rates ranging from one-half percent to one percent.
Some for-profit providers have suggested that the interest rate should be even more flexible, given the type of the project and the households that are targeted. Rates that are too high can reduce initial feasibility and/or cut cashflow during operations and delay payment of the developer fee.
Challenge 4
Households in LIHTC units are still cost-burdened.
There are relatively high levels of rent burden in many LIHTC communities. This means that households are frequently paying more than 30 percent of their income for rent and utilities. Almost half of households living in LIHTC housing are below 30 percent AMI and most of them have some type of rental assistance; rent burdens are falling primarily on the households above that income level.
Challenge 5
The QAP does not always reflect the specific needs of the local community. Those needs may vary from area to area.
One stakeholder noted that housing developers are adept at adjusting their plans to meet scoring criteria. This survival instinct to adhere strictly to the QAP guidelines to maximize scoring may stifle certain needs or types of projects. (e.g., it is difficult to get awards for larger projects). Some developers also expressed that the current QAP may lead to excessive design/construction standards that drive up the cost of apartments.
20.4 Recommendations
These recommendations synthesize the findings, successes, and challenges identified for this cluster of programs. They offer a roadmap to a future where these state initiatives are efficient, impactful, and best serve Virginians who need greater housing opportunities.
Recommendation 1
Expand support for increasing supply of apartments available and affordable to very low income households earning less than 50 percent AMI.
Why this is needed:
- The majority of Virginia’s renter households in affordable apartments have incomes below 50 percent AMI, and they still commonly experience cost burden because most rents set by LIHTC program guidelines remain higher than they can afford (i.e., at 60 percent AMI).
- As of 2017, more than 300,000 cost-burdened renter households in Virginia with incomes below 50 percent AMI—over three times the number of active LIHTC apartments.
- Households with incomes below 50 percent AMI are the most severely disadvantaged in seeking quality, affordable rentals. While there is an overall shortage of affordable apartments across all incomes, the gap between the affordable supply and the number of VLI households seeking those units is greater than for other income groups.
Who is responsible:
- Virginia Housing
- Department of Housing and Community Development
- General Assembly
- Governor
- Congress and the federal administration
- Virginia Housing Alliance and advocates
How to accomplish:
Virginia can act to expand existing state programs, especially the Virginia Housing Trust Fund. Providing housing for more VLI households using a deep subsidy is expensive and will require the allocation of new resources, such as an expansion of services. A state sponsored rental assistance program—also recommended in Chapter 26 this report—could be one additional valuable tool to meet needs using state resources.
Congress and the federal administration are also considering proposals that would expand production of deeply affordable rentals through the expansion of federal rental assistance, the National Housing Trust Fund, the LIHTC program, and other avenues. The scale of federal dollars potentially available for this effort is considerable and essential to begin meeting the full need for affordable rental homes.
Education and advocacy of elected officials at both the state and federal levels will be a key element in accomplishing this recommendation.
Recommendation 2
Monitor, report, and expand the use of income averaging across LIHTC developments. This relatively new option has the potential to create housing that has greater income mixing and the opportunity to include more apartments that are targeted to households below 50 percent AMI, where needs are greatest.
What is income averaging?
The Affordable Housing Credit Improvement Act of 2016 altered income restrictions in LIHTC developments to allow for some units at 80 percent AMI, as long as the overall average of incomes across an entire development is equal to 60 percent AMI. Benefits of this option are described in more detail below.
Why this is needed:
- Virginia has a severe shortage of apartments that are affordable to individuals and families with incomes below 50 percent AMI. Income averaging is a strategy that can begin to address this need.
- Income averaging can address community uneasiness and other concerns about poverty concentration. While such perceptions are often not founded on an accurate understanding of the LIHTC program or the program’s residents, communities with positive regard for “workforce housing” are more likely to welcome households up to 80 percent AMI (balanced with households at lower incomes).
- Income averaging is not widely adopted because of the current complexity of its administration and management. Investors are not yet fully confident that income averaging is a positive opportunity and they avoid investment risk, including recapture if noncompliance occurs.
Who is responsible:
- Virginia Housing
- LIHTC owners and managers
- Virginia Housing Alliance and advocates
How to accomplish:
More data and reporting are needed to bring greater clarity to the issue of income averaging and to encourage its use. This may require enhanced guidance from the IRS and compliance safe harbors. It will require increased technical assistance to managers and education of investors once the investment risk can be reduced and clarified.
Recommendation 3
Form a task force to design and propose a statewide program similar to the District of Columbia’s Local Rent Supplement Program (LRSP).
Why this is needed:
- The LRSP was created in 2007 and provides rental assistance to households with incomes below 30 percent AMI who are most at risk of homelessness and who frequently have a need for additional services to keep them stably housed.
- The LRSP operates like the Housing Choice Voucher program except that it is more deeply income targeted. The program makes up the difference between what a family can afford (30 percent of income) and the rent.
- LSRP assistance can be tenant-based, project-based, or organization-based.
- It is frequently used as part of a supportive housing program and is an important tool in preventing homelessness.
Who is responsible:
- Virginia Housing
- Department of Housing and Community Development
- Department of Behavioral Health and Developmental Services
- Virginia Department of Social Services
- Homelessness service providers
- Virginia Housing Alliance and advocates
How to accomplish:
Stakeholders recommend a task force of representatives from the above groups to explore the feasibility of a program similar to LSRP that would help meet needs of individuals and families advancing from homelessness and ELI households. This initiative relates to a companion recommendation for a state-supported rental assistance program. Depending on that outcome, this LSRP-modeled initiative could fold into a broader rental assistance program as a focal component.
Recommendation 4
Consider lower interest rates for ASNH funding, especially with respect to projects that serve special needs and/or ELI populations.
Why this is needed:
- Some providers are unable to use the lower ASNH interest rate on certain projects where it would significantly help.
- Inflexibility on the rate can reduce initial feasibility and/or cut cashflow during operations and delay payment of developer fees that support the sustainability of many nonprofit providers.
- Lower or zero interest rate loans would also enable rent reduction and/or the securing of additional debt to close gaps in the capital budget.
Who is responsible:
- Department of Housing and Community Development
- ASNH program users
How to accomplish:
DHCD and providers should engage in an informed discussion on the benefits and disadvantages of ASNH loans payment and how to potentially reconcile their inherent competing interests. The interest-only ASNH loans developers pay back to DHCD return directly to the Virginia Housing Trust Fund, but the payments, though more generous than other sources, can hinder some development projects. DHCD, with input from affordable housing developers, should evaluate whether ASNH can deliver greater loan term flexibility that would remove impediments to smaller, more challenging projects.
Recommendation 5
Conduct overhauls of the QAP every five to six years to make adjustments that account for important macroeconomic and demographic trends to reconsider basic program requirements and targeting.
Why this is needed:
- Currently the QAP undergoes modifications every other year. These adjustments can be significant or incremental. Stakeholders recommend that Virginia Housing consider a “zero base” overhaul periodically that would respond to major economic, social, demographic shifts and changes in other issue areas.
- Stakeholders also saw this type of review as one that would allow for renewed conversation about components of the program that otherwise are considered to be “settled law.” An example cited was the progression of design and construction standards, which individually seem logical and desirable but periodically require a comprehensive, aggregated assessment.
Who is responsible:
- Virginia Housing
- Developers, lenders, investors, consultants, other program users
- Local governments
- Virginia Housing Alliance and advocates
How to accomplish:
Virginia Housing already has an effective system for feedback and review of the QAP. This system can also provide a broader review over a longer period of time and with the development of several “large issue” focus groups.
Recommendation 6
Virginia Housing should consider allowing 30 to 45 year amortization for certain new construction and rehabilitation projects.
Why this is needed:
- Longer amortization periods are available in certain USDA-Rural Development loan products as well as some HUD and FHA loans. Longer amortization periods reduce debt service and improve project feasibility. They may also create the opportunity for reduced rents and/or for additional debt to close gaps in the project budget.
Who is responsible:
- Virginia Housing
- Multifamily developers and loan program users
How to accomplish:
Virginia Housing already has an advisory group in place for its multifamily programs. The same advisory group or a separate dedicated group could address amortization periods.
Virginia Housing may need to clearly articulate the financial risks associated with longer terms balanced with the benefits. Developers need to clarify the benefit of enhanced amortization within Virginia Housing’s loan program if other existing long term amortization programs can already be used as an alternative.
Recommendation 7
Virginia Housing and DHCD should recruit more minority-led developers to participate in programs.
Why this is needed:
- The affordable housing development industry does not have adequate representation from for profit and nonprofit development groups that are Black, Indigenous, people of color (BIPOC) led and governed. Many minority development groups are under-capitalized and under-staffed; they have difficulty accessing affordable housing programs that often rely on experience and track record as key factors in scoring and selection.
- Affordable housing developers often work with properties and/or neighborhoods where there is a high minority population. The inclusion of BIPOC-led organizations in this work will have a positive impact on resident and community support.
Who is responsible:
- Virginia Housing
- Department of Housing and Community Development
- Minority development groups
- Other minority participants in the housing industry
- NAACP, Urban League, and other associations representing minority interests
How to accomplish:
Virginia Housing and DHCD should collaborate in this effort since their constituencies overlap to some degree.
Virginia Housing has an internal process underway, including staff additions, to enhance its outreach to the minority community and better serve that population through its programs. Stakeholders felt that Virginia Housing should augment this effort to reach and encourage minority developers.
Chapter 30 includes a series of suggested strategies to begin addressing racial disparities in housing in Virginia. One strategy is the use of Racial Equity Impact Assessments (REIAs) to evaluate programs and activities to determine barriers to minority participation. The city of Chicago and the state of Oregon have used REIAs to examine their QAPs; one outcome has been proposals to increase BIPOC developer/contractor participation in these programs.
Recommendation 8
Virginia Housing should conduct a comprehensive review of all active Low-Income Housing Tax Credit properties to assess the potential risk of LIHTC units exiting the affordable housing supply.
Why this is needed:
- Virginia Housing’s LIHTC program currently has a 30-year affordability commitment, but after the initial 15-year compliance period, property owners can increase rents.
- Virginia’s LIHTC affordable stock is facing a loss of nearly three quarters of its active units (over 60,000 units) by 2040 due to current existing affordability expirations.
- Current data provided by the National Housing Preservation Database is inconsistent or lacking in regards to property ownership (i.e., whether a nonprofit or for-profit organization owns and/or manages a property).
Who is responsible:
- Virginia Housing
How to accomplish:
Virginia Housing should survey all active LIHTC properties and provide a report on how many are nonprofit owned or have a nonprofit right-of-first-refusal (ROFR) for an accurate assessment of properties at-risk of conversion to market rate.
Virginia Housing should also explore other ways to expand compliance periods within the QAP and other regulations. Many other states have established longer compliance requirements through extended use periods. California requires a 55-year extended use period for nine percent tax credit projects, while 4 percent tax credit projects frequently receive a basis boost by agreeing to a 55-year extended use period.36