“Seventy-one percent of extremely low-income renter households are severely cost-burdened, spending more than half of their incomes on rent and utilities,” according to the National Low-Income Housing Coalition. The main channel for expanding the supply of affordable rental housing in the U.S. is a public-private partnership (PPP) approach, combining tax credits and bank regulation. Specifically, these are the Low-Income Housing Tax Credit (LIHTC) and the Community Reinvestment Act (CRA), respectively.
Citi Community Capital (CCC) tasked the SIPA Capstone team with identifying the most cost- effective way to finance affordable housing. Their goal was to identify the optimal capital structure to achieve private return targets, while minimizing the public costs of developing the project. For this project, the Capstone team conducted a comparative analysis of four CCC affordable housing developments in New York (two developments), Florida, and California. The report began with an overview of the four projects, followed by an analysis of the sources and uses of funds for each project using distribution waterfalls. Then, the team conducted a regional analysis, including trends in construction costs, area median incomes, and the gap between rents for market- rate and affordable housing units. These assessments were enhanced by a discussion of project- specific risks identified from interviews with the project developers and ways to mitigate these risks.
The research determined that mixed-income housing maximizes returns for investors, while minimizing public costs. However, since the analysis was limited to four housing developments, and only one was mixed-income, future research on the trade-offs of mixed-income housing deserves more attention to support the Capstone team’s theory. Due to the complexity of the relationship between affordable housing markets and related policies, the Capstone team recommended future research on LIHTC funding, EB-5, land acquisition and climate change impact on afforadable housing.