By: Mike Harlan, CPA
Developing federally subsidized housing for low-income and senior residents has been a tough endeavor in the past couple of years amid ballooning construction costs and rising interest rates. However, economic factors and the growing potential for bringing in non-rent income streams still make these developments attractive for investors and developers who are experienced in the marketplace.
“Experienced” is the key word. Developing federally subsidized housing is not for beginners. You need extensive training to know what the government requires when receiving subsidized funds through the federal Department of Housing and Urban Development (HUD). The compliance requirements are extensive, including a complex annual audit in most cases.
Nevertheless, two factors make HUD-subsidized housing a good bet for experienced developers. The first is demographics. The nation is aging, and people are living longer, which means the need for subsidized housing for seniors is growing. Second, the economic gap between rich and poor is growing, with more Americans, unfortunately, unable to afford market-rate housing in most parts of the country.
The U.S. has a shortage of 7 million affordable rental homes available to extremely low-income renters, whose household earnings are at or below 30% of their respective area median income. This means there are only 36 affordable units for every 100 extremely low-income renter households. Not a single state has enough affordable housing for low-income renters.
Incentives for Building Subsidized Housing
The good news is that there are numerous incentives and advantages to building multi-family HUD-subsidized housing that benefit developers and investors.
- Federal tax credits – The Low Income Housing Tax Credit (LIHTC) is chief among the tax incentives available to developers and investors in the HUD-subsidized market. A dollar-for-dollar tax credit incentivizes the use of private equity in developing affordable housing aimed at low-income Americans. The LIHTC credits applied for on a state-by-state basis and are utilized in developing approximately 90% of newly created affordable rental housing.
- Solar panels – Increasingly more building projects are being renovated and retrofitted with solar panels. This enables developers to claim valuable tax credits that are ongoing from year to year. Tax credits can be applied for on the solar equipment and the tax basis must be reduced by 50% of the credit received in the year when the panels are placed in service to get the tax basis for depreciation. Then that basis will increase the low-income tax credits, which expands the benefit for developers and investors.
- Cost segregation – When existing buildings are acquired, the composition of the personal property and other assets are lumped into one number and not broken out. Therefore, a cost segregation study allows developers to get higher depreciation write-offs on the personal property that is separate from the building providing faster tax deductibility.
- Cell towers – It is becoming increasingly common for developers to allow cell phone companies to place towers on top of their buildings, which creates a significant revenue stream that is unrelated to rental income.
- Building management – Developers often have a management division that provides ongoing property management, creating another income stream.
While it is unknown whether federal funding for low-income multi-family housing will increase anytime soon, the need will not go away.
Contact your KRD advisor to discuss opportunities in the HUD-subsidized real estate market.
