New Study Highlights Benefits of the Affordable Housing Credit

A new study of California affordable housing developments provides important findings concerning the role and benefits of the Low-Income Housing Tax Credit (LIHTC). The affordable housing credit ensures a supply of equity financing for the development of needed rental housing.

The report was prepared for the California Department of Housing and Community Development, the California Tax Credit Allocation Committee, the California Housing Finance Agency, and the California Debt Limit Allocation Committee. It was authored by the public policy and economics team at Blue Sky Consulting Group. The study was also peer-reviewed by an economist and a research associate at U.C. Berkeley.

The focus of the study was the set of factors that determine the cost of new affordable multifamily housing in the state of California. However, the report also detailed the economic and social benefits of ensuring a stock of affordable housing, including the impacts of the LIHTC.

Among the findings and citations of the paper’s literature review:

  • Access to affordable housing improves education outcomes by reducing the mobility of low-income families
  • Affordable housing improves resident health by reducing exposure to environmental hazards and frees resources to pay for health expenses and food
  • Citing NAHB’s economic impact of home building model, the report notes that construction of LIHTC units generates jobs, taxes and economic income
  • The report also noted affordable housing yields an increase in regional competitiveness by lowering local housing costs and increasing employee retention
  • Challenges the notion that affordable housing developments reduce neighboring property values, and notes that well-maintained properties may raise values in distressed neighborhoods
  • Affordable housing saves taxpayer money by reducing demand for other government services, including homeless, health and other social programs
  • Improves commuting behaviors when locating near transit options

Summarizing the existing research studies, the authors of the report note:

In sum, the body of existing social and economic research suggests that access to affordable housing can produce important benefits for California. This research suggests that access to affordable housing can improve education outcomes, increase health and wellbeing, boost economic activity, and can lower social service costs for the state and local governments, among other benefits.

The analysis section of the paper concerns the cost of affordable multifamily rental housing. The authors used regression analysis of cost and housing data provided by housing developers, state housing agencies, and public sources representing 400 multifamily projects receiving LIHTC allocations for new construction (no substantial rehabilitation projects).

The data reveal that construction costs totaled, on average, 69% of development costs (net of land) in California. The report notes that construction costs increased, net of inflation, about 15% from 2001 through 2011. However, the authors also state that the number of bedrooms per unit increased through 2006 (and again from 2008 through 2011), which increased per unit costs. The study also detailed significant regional cost differences across the state.

The key findings of the statistical analysis:

  • Local factors raise project costs, including community opposition (5%), local design-review requirements (7%), or funding from a redevelopment agency (7%)
  • Projects with podium or subterranean parking cost 6% more than other developments
  • Large developers and developers employing general contractors build at reduced cost, however the authors are uncertain of this result. They note that more durable/resilient, energy-efficient, or of higher quality can cost more but provide benefits. An increase of 10% in quality raises costs by 15%.
  • For-profit developers built affordable housing at lower cost than government or non-profits
    • The authors noted concerns with this finding due to possible incomplete data, although they noted that for-profit developers used general contractors 73% of the time, compared to 24% use by non-profit organizations
    • The finding is generally consistent with a national 1999 GAO study
  • Affordable housing development is characterized by economies of scale, with each 10% increase in unit count reducing costs by 1.7%
  • Unit types matter. Units with higher counts of bedrooms cost more, while smaller, single room occupancy (SRO) units cost more on per square foot basis. SRO units were found to cost 31% less than larger, family units targeted for seniors cost 18% less than family units.
  • Land costs play an important role in determining the cost of new affordable housing developments

Overall, while the study is specific to California developments, the overall themes of the benefits of the LIHTC program and drivers of cost are important results concerning policy to ensure the production of affordable housing.

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