S2 Ep3 – Affordable Housing, Powered by CDFIs

Hi, welcome to Funded. I’m Katelyn Phinney and this is a Clearinghouse CDFI podcast, here to give you a glimpse into the community development work Clearinghouse CDFI is doing around the country. Listeners can expect to tune into conversations discussing what a CDFI is, how getting funded by a CDFI works, community impact stories and how we are all working towards building better communities together. Hello and welcome back to Funded by Clearing House CDFI. I’m your host, Caitlin Finney. You are joining us on season two, episode three of Funded. And in this episode, we are talking all about affordable housing and the housing crisis. As many of us know, the cost of living and the cost of housing in California and around the United States has been growing over the last several years. And we are at a point where housing has become the most expensive element of individual’s budget.

Speaker 1 (01:02):

Cities having access to funding affordable housing projects, it’s going to be crucial for fostering equitable communities and addressing the growing issue of homelessness around the country. But I want to talk to you guys about how CDFIs are investing in these initiatives to ensure that low income families have access to sustainable living conditions, which in return supports their overall wellbeing and their economic stability. So funding affordable housing projects is not just a moral imperative, but it’s a practical solution for sustainable urban development. Now, if it’s so apparent that we need affordable housing projects to be funded around the country, why aren’t more projects like this being rolled out? Well, there are a variety of roadblocks that stop these kinds of projects from being funded and that’s what we’re going to talk about today. We will address the challenges and discuss some creative solutions that CDFIs like clearing house CDFI are doing to push through projects and address the housing crisis.

Speaker 1 (02:02):

So understanding these roadblocks will make a solution more clear and hopefully result in more of these kinds of projects to be funded around the country. So I guess the best place to start is what defines an affordable housing project That is regulated to us by the US Department of Housing and Urban Development, also known as HUD, HUD. And this department is responsible for creating policies and programs that address the housing needs around the United States. They improve communities and they enforce fair housing practices nationwide. This department also defines what constitutes as an affordable housing project. And according to them, it’s defined as housing where the occupant pays no more than 30% of their gross income. And unfortunately, there is a shortage of affordable housing across many areas of this country, particularly in urban centers where housing costs have skyrocketed. And with the cost of housing continuing to outpace wage growth, it’s making it increasingly difficult for low and moderate income families to find affordable options to live in.

Speaker 1 (03:11):

And while there are some promising developments and ongoing efforts from government officials, the affordable housing crisis in America remains a significant issue requiring comprehensive and sustained action from all levels of government, private sectors, and communities. And that’s where community development financial institutions can step in and help. But before we get into the solutions that CDFIs can offer, let’s try to wrap our heads around the challenges and roadblocks that are stopping these projects from being funded. There are a number of financial and market factors that go into stopping these kinds of projects. First, let’s address the high development costs that come with constructing a new building for affordable housing. There are very high upfront costs for land, construction, and that doesn’t even account for the high interest rates that we are experiencing. In addition to those high upfront costs, there are limited public and government funding options available.

Speaker 1 (04:12):

With the constraints on government budgets and competition for limited funds, there are a number of bureaucratic hurdles and political disagreements that stop funding for these kinds of affordable housing programs. And on top of that, there are complex issues related to zoning laws and community opposition that might prevent these kinds of projects from seeing the light of day. Aside from the purely financial challenges, there are a number of market factors that may prevent these kinds of projects from coming to fruition. Changes in the economy can impact the feasibility and attractiveness that affordable housing projects may present to developers. With the upcoming election this November and historic trends of an economic recession, people don’t feel so confident in starting a new housing project amongst such uncertainty. Another hurdle that presents itself in the housing market is that there are often low returns on investment for affordable housing projects, mainly because they typically offer lower rental income and they have longer payback periods.

Speaker 1 (05:21):

It takes a long time for a developer to see their return on investment there. Now, despite those challenges and roadblocks, there are companies out there who are well versed in getting creative funding accomplished to deploy such necessary projects out into the community. And right now, the best ways to do that is through a CDFI like Clearinghouse CDFI. By going this route, you get to explore alternative financing models like low income housing tax credits and other resources that allow these kinds of outside of the box projects to be funded. And I briefly want to speak to you guys about some of those CDFI solutions that we can bring to the table and there are a number of them, but some of our most utilized programs are the LITECH program, the Capital Magnet Fund and the ED-1 program, specifically for the city of Los Angeles. Okay. One of the first ways that clearinghouse CDFI can get creative in funding affordable housing projects is by utilizing the LITECH program, also known as the Low Income Housing Tax Credit Program.

Speaker 1 (06:30):

This is our nation’s largest and most significant affordable rental production program. The LITEC program incentivizes developers to build maintain affordable housing for low income and moderate income households by leveraging tax credits to lower their overall costs. So in this program, states receive a fixed number of tax credits annually, which state housing finance agencies then allocate to developers through a competitive process. And then developers sell these credits to investors who in turn use them to offset their federal income taxes and raising capital for affordable housing properties. There are a number of pros and cons when going this route, but for us, the pros often outweigh the cons. Essentially, it’s free money through tax credits that increase the affordability of projects so that we get to push more of these through. Another benefit of using the LITECH program is that there are often easier permitting processes that allow projects to cut through some of the red tape and there’s even possible extra incentives from using this program depending on the project city.

Speaker 1 (07:37):

Some of the downsides to this program is that there are a ceiling limit on tax credits that are able to be used and it does require a prevailing wage. So in exchange for those tax credits, developers agree to provide a certain amount of affordable units in their project. Another way that clearinghouse CDFI can get creative in funding affordable housing projects is through utilizing capital magnet funds. Also known as CAPMAG funds are unique to CDFIs and this is grant money that reduces the cost of lending on affordable housing projects. In our case at Clearinghouse CDFI, we apply this grant money to lower your interest rate and in turn that sets up our borrowers for longer term success. So the Capital Magnet Fund is provided through the CDFI Fund, a government run program, and it competitively awards CDFI’s grant money and these awards can be used to finance affordable housing projects as well as any related economic development activities.

Speaker 1 (08:39):

But when pairing up with a CDFI, you can combine this and other programs to help ensure that your project gets the funding that it deserves. Okay. As we wrap up today’s episode, I want to take another moment to reflect on the critical role that funding plays in the development of affordable housing projects. It’s not just about building the structures, it’s about creating communities where everyone has a place to call home. Investing in affordable housing means investing in stability, opportunity, and dignity for individuals and families. And these projects can transform lives, reduce homelessness, and foster economic growth. And when we prioritize funding affordable housing, we’re not just addressing a pressing need. We’re paving the way for healthier and more resilient communities. Whether it’s through government initiatives, private investments, or teaming up with a CDFI, we all have a part to play in this vital effort. So advocating for policies that support affordable housing and challenging ourselves to think creatively about those solutions is vital.

Speaker 1 (09:40):

Until then, we’ll be here keeping the conversation going and pushing for change. Thank you for tuning in to this episode of Funded. I hope you found it valuable and got to pick up on some extra tidbits of how we can make affordable housing more accessible across this country. If you have any questions at all, please leave them in the comment section below and we’ll be sure to respond to you swiftly. If you have your own affordable housing project you’re looking to get developed and funded, please reach out to our loan inquiries email and somebody will be in contact with you to figure out how we can get the ball rolling. I’ll also be leaving some resources to the projects and programs that we talked about today in this episode. Well, again, thank you for joining me on this episode of Funded, and I hope to see you in the next one.

Bye.