An affordable housing development needs various types of funds at the different stages of development.

• Pre-development finance
• Acquisition finance
• Construction finance
• Permanent (take-out) finance

Pre-development funds are the riskiest for lenders. At the point at which developers need pre-development finance for activities such as identifying possible sites and preliminary feasibility studies there is no guarantee that a development will in fact be built. If it is not built, there is no way to recover these costs since they cannot be folded into a permanent mortgage.

Acquisition finance provides the funds needed to purchase the site.

Construction finance is a short-term loan used for construction only. Interest rates are higher than those for permanent financing. Construction lenders want to be sure that the development already has a commitment for permanent financing before agreeing to lend.

Permanent finance is made up of a combination of the long-term loans (mortgage) and equity investments in the development. Also called take-out finance because it is used to repay, or take out, the construction loan. Most affordable housing developments have three or more sources of permanent finance including tax-exempt bond finance on which the owners pay interest, a deferred payment loan from local government, and a tax credit equity investment that will have to be refinanced when the tax credit benefits terminate. Developments may also have grants from foundations or local government.

Sources of affordable housing finance

Tax-Based Housing Subsidies

Tax-based housing subsidies either reduce the investor's income taxes through a credit or exempt certain income from taxes. The Low-Income Housing Tax Credit gives investors an annual tax credit that reduces the amount of income tax they owe. Tax-exempt bonds provide tax-free income to those who buy the bonds. Most tax-based subsidies are federal, governed by the Internal Revenue Code.

• Low-Income Housing Tax Credits (LIHTC) Under this program, each state receives an allocation of federal tax credits that are awarded on a competitive basis to individual proposed housing developments. The housing developer then sells the tax credit to private investors who want to claim the credit against their federal taxes. California also has a similar program for state low-income housing tax credits which are claimed against state income taxes.
  
  The California Tax Credit Allocation Board (TCAC) in the office of the State Treasurer allocates both federal and state tax credits to individual affordable housing developments. TCAC draws up an allocation plan that sets forth the criteria for tax credit projects, develops an application process based on the plan, reviews the applications and awards tax credits to the projects that score highest. The developers apply for the tax credits then work with either individual investors or investment pools to sell the tax credits.
  
  
• Tax-exempt bonds. The total amount of tax-exempt debt is regulated by the federal government. Cities and counties can issue tax-exempt bonds to finance affordable housing. Interest rates on bond financing are about 20 percent lower than market rates. These bonds are attractive to investors because they do not pay taxes on the income generated by the bond. Every year the California Treasurer's Debt Limit Allocation Committee (CDLAC) sets the debt limits for issuing bonds. About 80 percent of the allocation usually goes to affordable housing.

Conventional Finance

In addition to bond finance, tax credits and City grants or deferred payment loans, affordable housing developers also use conventional mortgages to finance their projects. Because affordable housing finance is so complicated, only a few banks specialize in affordable housing loans. The most prominent of these lenders at present are Bank of America, Citibank, Wells Fargo, U.S. Bank and Washington Mutual. These banks usually lend at market rates.

Local Government subsidies

• Community Development Block Grant. Initiated in 1974, the U.S. Department of Housing and Urban Development (HUD) provides annual grants of Community Development Block Grant (CDBG) program funds to larger cities and counties throughout the United States. The City develops and submits to HUD a Consolidated Plan that documents how it plans to spend its block grant and other similar federal funds. HUD requires that 70 percent of CDBG funds must be spent to benefit low-and moderate-income persons. The City uses CDBG funds to pay the administrative costs of the City's Community Development, Housing and other City departments. CDBG funds may be spent on affordable housing as well as on infrastructure improvements in eligible communities, on public services and on certain economic development programs. The City's one year and five-year Consolidated Plans, showing how it will spend its CDBG funds, can be found online at http://www.lacity.org/CDD/home_reports.html.
  
  
• HOME Investment Partnership Program. The U.S. Department of Housing and Urban Development (HUD) provides annual grants of the HOME Investment Partnership Program to state and local governments. Its sole purpose is the creation of affordable housing for low-income individuals and families. As long as the beneficiaries are eligible under HOME income guidelines, and the housing constructed remains affordable for between five and 20 years, HOME funds can be used to build, purchase or rehabilitate single family homes or condominiums, and to build or rehabilitate privately-owned rental housing. Fifteen percent (15%) of HOME funds must be reserved for community-based nonprofit groups designated as Community Housing Development Organizations, called CHDOs. The City's plans for expending its HOME funds must be set forth each year in the Consolidated Plan. This plan is available on the Community Development Department's section of the City's website. http://www.lacity.org/CDD/ Look for "reports and annual plans" on the left side of the page.
  
  
• Affordable Housing Trust Fund. The City's Housing Trust Fund was established in 2000 after advocacy by a coalition of affordable housing supporters, developers and financial institutions. In 2002, its goal was set at $100 million per year but its current funding level is determined annually through the City's budget process.
  
  The principal purpose of the Trust Fund is to create additional units of permanently affordable housing. The "high leverage" program awards funds to developers who will "leverage" them with tax credits or tax-exempt bonds and other monies. Funds are also allocated to supplement the City's homeless support programs and keep shelters open year round. Affordable Housing Trust Fund monies may be used for a number of purposes, and new programs are being developed to implement the other priorities listed below.
  
  
• 60 percent for multifamily rental projects serving households at or below 60 percent of the Area Median Income (AMI).
  
  
• 20 percent for projects that create home ownership opportunities for households at or below 120 percent of AMI.
  
  
• 5 percent for emergency rental assistance
  
  
• 10 percent to remain flexible with the priority going toward preservation of housing that is at risk of converting to market rate
  
  
• 5 percent for administrative costs.
  
  
• Tax Increment Finance. State law gives local governments the authority to establish redevelopment areas based on poverty, deteriorated housing and other conditions collectively called "blight." A redevelopment agency is created to administer the redevelopment area. Within the boundaries of the redevelopment area, the difference between the property tax revenues of the base year and property tax revenues in subsequent years, called the tax increment, is collected by the redevelopment agency and used as set forth in the area's redevelopment plan. State law requires all redevelopment agencies to "set aside" 20 percent of their annual tax increment revenues for low- and moderate-income housing.

State government subsidies

• Multifamily Housing Program (MHP) The State's Multifamily Housing Program is administered by the State Department of Housing & Community Development. MHP provides permanent financing for construction, rehabilitation or preservation of rental housing for lower-income households. Public agencies, Indian reservations, for-profit and nonprofit corporations, individuals and limited partnerships can all borrow money from this program. The interest rate is 3 percent simple interest on loans that have a 55-year term. Borrowers are required to pay 42 percent of the loan balance in annual payments. The balance of the loan principal and interest are due at the end of the 55-year term. The program funding was authorized by the voters in Proposition 46.
  
  MHP has a general program and three special programs. The special programs are Supportive Housing (Disabled), Health and Social Services Facilities and Student Housing.
  
  
• California Housing Finance Agency (CalHFA). CalHFA's Multifamily Loan Finance Programs provide permanent financing for the acquisition, rehabilitation and preservation of existing rental housing, as well as the new construction of rental housing. CalHFA-financed affordable units are targeted to low- and moderate-income families and individuals in California. CalHFA issues tax-exempt bonds to raise money and then lends the money at slightly higher rates. The agency lends money for both multifamily rental housing and single family ownership housing.
  
  CalHFA programs for rental housing include:
• Housing for persons with special needs
• Construction financing (Loan to Lender Program)
• Tax-exempt bridge loans for "at-risk" apartments
• Predevelopment loans to nonprofit developers

Descriptions of CalHFA programs are found on their website at: http://www.calhfa.ca.gov/multifamily/index.htm

• Land use subsidies: Density bonus law. A density bonus allows a developer to build more units on a site than are allowed under the zoning for that particular parcel. The State's density bonus law gives developers a 25 percent density bonus if the developer makes 20 percent of the units affordable to lower-households (60 percent of area median income) or 10 percent of units affordable to very low-income households (50 percent or less of area median income). If the developer meets the State's conditions, the developer is entitled to the density bonus "by right," and the City cannot deny the additional density. The 25 percent density bonus is available citywide.
  
  Through the Affordable Housing Incentives Ordinance, the City provides an additional density bonus of 10 percent (35% total) to developers who agree to build affordable units within a 1,500 ft radius of:

• a major bus center, bus stop along a major bus route (with minimum 15-minute headways) or rail station;
• an intersection of transit priority arterials (as identified on the map in the Transportation Element);
• the boundaries of a regional center (as designated in the Citywide General Plan Framework Element); or
• the boundaries of a college or university with an enrollment exceeding 10,000 students.

In addition to the density bonus, developers building in these areas can reduce the number of parking spaces for the affordable units.

For example, with a 25 percent density bonus, a developer building a 40-unit project can build 10 more units. Of the resulting 50 units, either eight must be affordable to households earning 60 percent or less of median income or four must be affordable to households earning 50 percent of median income. The developer could also reduce the parking by four spaces if building eight affordable apartments or by two spaces if building four affordable apartments if the apartments have more than four rooms.

Federal government subsidies from the U.S. Department of Housing & Urban Development

• Section 8 rental assistance vouchers. The federal government provides rental assistance to eligible tenants through the Section 8 Voucher Program. In the City of Los Angeles, this program is administered by the Housing Authority of the City of Los Angeles, (HACLA). About 47,000 Los Angeles households are currently assisted by Section 8 Vouchers. Due to the enormous need, the waiting list for a voucher is often several years.
  
  The federal government has introduced changes in the Section 8 program that will cause funding shortfalls for many housing authorities in 2004. In Los Angeles, approved rent levels have already been reduced, forcing families to either pay larger amounts of their incomes for rent or risk eviction. In 2005, the federal government plans to reduce funding for Section 8, and make many changes that will direct assistance away from those who need it most, raise the renter's share of rent and remove other important tenant protections.
  
  
• HOPE VI. HOPE VI is the federal government's program to revitalize its aging stock of conventional public housing units. HOPE VI provides grants on a competitive basis to demolish and rebuild public housing developments that are in poor condition. These developments are often rebuilt as mixed-income projects and at least some of the original public housing residents get Section 8 vouchers instead. Unfortunately, in a high rent area such as Los Angeles, it may be very difficult for displaced tenants to find stable rental housing. HOPE VI-funded housing developments in Los Angeles include Harbor Village (formerly Normont Terrace) and Pueblo del Sol (formerly Aliso Village, Pico Gardens) in Boyle Heights.
  
  
• Section 202. Section 202 is a federal program that provides capital and operating funds to nonprofit organizations that develop and operate housing for low-income seniors. The GAO estimates that there are about 260,000 Section 202 units in the United States. About 22,500 of these units are in 260 developments in Los Angeles.
  
  About one third of Section 202 properties have a service coordinator funded by a HUD grant. The service coordinator assesses the needs of senior residents and links them to community services. Section 202 programs do not provide such assisted living services as meals, housekeeping, transportation or medication management.
  
  
• Section 811. Section 811 is a housing subsidy program for persons with disabilities that is funded and operated like the Section 202 program. Persons with mental illness or development disabilities and those with physical disabilities are eligible for units in Section 811 developments. Apartment buildings subsidized by Section 811 must provide supportive services that could include case management, training in independent living and other services. However, residents cannot be required to use these services.

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