Government Support Alone Won’t Help Affordable Housing Developers
(This article was originally posted on multifamilyaffordablehousing.com)
Federal funding for affordable housing faces an uncertain future. The ongoing push for government efficiency has put long-standing affordable housing programs under scrutiny.
Some programs under the U.S. Department of Housing and Urban Development (HUD) are on the chopping block. The Green Mortgage Insurance Premium Reduction and Green and Resilient Retrofit Program, as well as the Department of the Treasury’s Capital Magnet Fund, may not be available to developers for much longer.
These funding concerns compound an already challenging situation. Since 1986, the Low-Income Housing Tax Credit (LIHTC) program has served as the primary engine for creating and preserving affordable housing by supporting approximately 3.6 million rental units nationwide. Yet this cornerstone program and other federal project-based subsidies that have funded 5 million units in the United States, already are stretched thin.
Smart developers supplement public funding with alternative financing strategies. When primary funding sources fall through or face delays, having backup plans becomes crucial. A developer counting on green retrofit incentives might have to pivot to state resources if federal programs change. Developers working on preservation projects may need to modify rehabilitation scopes to match available capital.
Building flexibility into every project plan remains essential as the affordable housing crisis continues to deepen for millions of Americans.
Understanding the Widening Gap
According to a 2024 Pew Research Center survey, 69 percent of Americans report being “very concerned” about housing costs, up from 61 percent a year earlier. The numbers are particularly concerning when you consider that of the nation’s 44.3 million renter households, 27.3 percent spend more than half their income on housing costs, according to the Joint Center for Housing Studies of Harvard University.
This affordability gap continues to grow. From 2001 to 2023, inflation-adjusted renter income grew by just 5 percent while rents increased by 23 percent, significantly reducing the stock of units affordable to low-income households. A full-time minimum wage worker cannot afford a fair market, two-bedroom rental in the United States on a 40-hour work week.
Developers face their own set of challenges. Construction costs have jumped 30 to 50 percent since 2020. Over the past four years, higher interest rates have limited the amount of debt projects can support, creating larger financing gaps. This volatility creates uncertainty in the market.
As bond issuance for 4 percent LIHTC deals faces headwinds, and multifamily construction starts have declined significantly, the need for more flexible financing approaches has only become more evident.
Diversifying Funding Sources
With federal support unclear, developers must rely more on state and local solutions to get deals done. Over the past five years, state housing tax credits have gained significant traction. Now available in 31 states, these programs mirror the federal LIHTC by offering dollar-for-dollar reductions in state tax liability. Designed to pair easily with tax-exempt bonds and taxable financing, they can measurably increase the equity available for qualified projects.
The combination of state and federal tax credits can make projects feasible in high-cost areas where affordable housing is greatly needed. In Kansas, the introduction of the Kansas Affordable Housing Tax Credit Act in 2022 led to an increase in applications for 4 percent LIHTC projects, particularly in new construction, demonstrating the program’s effectiveness in stimulating affordable housing development.
Meanwhile, mission-driven capital is filling some of the gaps. Green banks, for instance, help developers close financing gaps while advancing sustainability goals. The DC Green Bank, for example, has established its $4.6 million Energy Efficiency Revolving Loan Fund to provide below-market-rate financing for energy efficiency upgrades in affordable housing developments. Similar institutions in states like California, Connecticut, Michigan and New York also are using public funds to leverage private investment and reduce the cost of capital for projects that improve energy efficiency and resiliency.
Likewise, social impact bonds let private investors front the capital for affordable housing, with repayment tied to measurable outcomes. These financing mechanisms create partnerships where investors assume the upfront risk while government entities pay only when specific goals are achieved — such as reduced homelessness or decreased emergency service utilization. Both Fannie Mae and Freddie Mac have introduced social impact bond programs in recent years.
Today’s capital stack looks nothing like it did a decade ago. Navigating it takes persistence and a clear handle on a shifting mix of public, private and mission-driven funding.
Maximizing Available Resources
As traditional funding sources fall short, developers are getting creative, and it’s paying off. One tactic gaining traction is the NewPoint Impact Synthetic 221(d)(4) construction-to-perm loan. Unlike conventional HUD financing, which often comes with red tape and slow approvals, this loan offers faster closings, higher loan proceeds based on the future stabilized value and significant interest savings once the project transitions to permanent financing. It has revived deals that had stalled out because of rising interest rates and injected speed and liquidity when developers needed them most.
Public-private partnerships are also unlocking value. Ground-lease models — where a government or private entity holds the land and leases it to a developer at minimal cost — slash upfront expenses and preserve long-term affordability. For projects trying to reach lower-income targets, the land savings act as a de facto subsidy, often making the math pencil out. Tax credit strategies are evolving, too. Income averaging under the LIHTC program is a popular approach. It lets developers serve households earning up to 80 percent of the area median income, as long as the overall income at the community hits an average of 60 percent
The IRS clarified guidance in 2022 to give this model a green light, and by using moderate-income rents to support deeper affordability elsewhere in the project, it has become a powerful way to cross-subsidize units.
Then there’s twinning. For large-scale developments, combining the LIHTC’s 9 and 4 percent tax credits through separate but concurrent legal structures can unlock a significant amount of equity. It’s heavy on legal work and layered deals, and it helps stretch scarce 9 percent allocations across more units, though developers should prepare for the complexity. The tools are out there. It’s about knowing how and when to use them.
Adapting, Thriving in Changing Times
No one knows exactly how policy changes will reshape affordable housing finance, but one thing’s certain: developers must have a working command of tools that go well beyond traditional government programs.
Relationships will matter more than ever. Developers who build strong ties with state housing agencies, community development financial institutions, impact investors and private capital sources will have the flexibility to move when funding windows open.
Developers must also build financial resilience into every project plan. This means creating multiple financing scenarios from the outset and becoming well-versed in traditional and emerging funding mechanisms.
A successful affordable housing project will require multiple funding streams. Developers who embrace hybrid models — combining state tax credits with mission-driven capital, leveraging public land with private expertise, or coupling tax-exempt bonds with taxable debt and other entrepreneurial financing structures — will carve a path forward.
Bryan Dickson is senior managing director of affordable originations at New York City-based NewPoint Real Estate Capital. NewPoint provides affordable and workforce housing financing programs.