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Making the Most of Low-Income Housing Tax Credits

October 24, 2018

The Low-Income Housing Tax Credit (LIHTC) program is a piece of the tax code that plays an outsize role in providing housing for low-income households. Since being written into law in 1986, LIHTCs have financed over 3 million units, making them the largest source of federal assistance for developing affordable housing.

Affordable housing advocates praise the program for its public-private partnership model and the high quality—and sheer number—of affordable units produced. Occasional headlines about high per-unit price tags, however, have raised questions about what drives the costs of LIHTC-funded units. The National Council of State Housing Agencies (NCSHA) commissioned Abt Global to help answer these questions.

We started by creating a unique dataset that includes information on more than 2,500 LIHTC projects around the country placed into service between 2011 and 2016.

Our team found that, despite concern over skyrocketing development costs, the median cost of constructing a LIHTC unit in our dataset (per-unit total development costs, or TDCs), was just under $165,000. Further, between 2011 and 2016, costs rose by 8.4 percent, which was similar to the average growth of construction costs nationally.

We also found that per-unit costs vary widely. We used multivariate regression to analyze the reasons for this, and found a few factors that stand out:

  • Location matters. Units in more expensive regions of the country cost more to produce than those elsewhere even after excluding the cost of land, perhaps because higher land costs require denser development with higher-cost construction features. Projects in urban areas had higher per-unit development costs than those in other areas, as did projects in census tracts with high concentrations of low-income households. We also found that construction wages contribute significantly to development costs.
  • Project and unit size and type matter. Smaller projects were more expensive on a per-unit basis than larger projects, suggesting economies of scale in multifamily development. An increase of 10 units was associated with a $3,000 decrease in per-unit TDC. Projects with larger numbers of bedrooms – a proxy for larger units – were also more expensive per unit. Units produced through new construction cost more than units produced through acquisition-rehab.

The Government Accountability Office (GAO) conducted its own study of the costs of LIHTC projects over a similar period and came to similar conclusions.

These findings do not suggest easy solutions for stretching LIHTCs to serve more low-income households. Projects are needed in both urban and non-urban areas; smaller units are not appropriate for all household types, and larger projects are not desirable in all locations. Nevertheless, some of the study findings – such as the cost savings associated with acquisition-rehab and larger developments – may suggest ways for developers and states to reduce per-unit costs.

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