2024 Update: Local governments are closing the financial gap…

Community and Economic Development – Blog by UNC School of Government

2024 Update: Local governments are closing the financial gap for affordable housing developments

By Frank Muraca

Published September 4, 2024

Earlier this month, DFI examined how local governments in North Carolina have stepped in to make new affordable housing construction economically viable after a historic increase in construction costs and elevated interest rates. In 2023, local governments contributed nearly $30 million in soft loans to new construction projects funded by 9% Low-Income Housing Tax Credits (LIHTC) — more than double the amount in any previous year.

In August, the North Carolina Housing Finance Agency (NCHFA) released the latest funding awards for 2024. This update examines how gap funding trends have evolved in the past year for new construction projects awarded 9% tax credits.

The data shows that affordable housing developers continue to struggle with closing financial gaps in their projects (Table 1). The median development cost per unit remained steady at $250,000, more than 50% higher than in 2020. And while approximately 100 more units were funded this year than in 2022 and 2023, developers are still building smaller projects than before COVID-19.[1]

What’s changed?

Historically, affordable housing developers have accessed gap funding through a state program called the Workforce Housing Loan Program (WHLP), administered by NCHFA. However, funding for WHLP lapsed from 2021 to 2023, just as construction costs surged. In response, developers increasingly relied on local governments to fill the financial shortfall. Local governments can assist housing projects for low-to-moderate income households when they meet the requirements described by my colleague Tyler Mulligan in blog posts here and here.

In 2024, the North Carolina General Assembly renewed funding for WHLP, with NCHFA awarding $32.5 million to 88% of new construction projects. However, the return of WHLP funding did not fully alleviate the need for local government support (Figure 1). This year, local governments committed over $28 million to 9% tax credit projects, an amount still well above the historical average of the past decade. Across both sources, gap funding exceeded $60 million.

The availability of WHLP funding may have helped reduce the amount local governments were asked to provide to any one project. In 2024, the median local government loan to new projects dropped from $41,400 to $25,800 a unit (Figure 2).[2] In addition to high construction costs, 2024 was the first year that NCHFA encouraged developers to secure “non-agency awarded” funds. Non-agency could include local government and other private or non-profit funding. The result was that the number of projects that includes local government soft loans jumped from 56% in 2023 to 64% this year.

[1] Each year, the IRS allocates tax credits based on each state’s population. In 2024, North Carolina was awarded $31.1 million tax credits, a $2 million increase from the previous year because of population growth. In addition to available gap funding, North Carolina also had more tax credits to fund more units.

[2] Municipalities and counties should review their legal authority to provide loans for housing projects, including procedural requirements such as a county referendum, in Tyler Mulligan’s blog post here.