The Low-Income Housing Tax Credit (LIHTC) program has been a cornerstone of affordable housing development in the United States for decades. Designed to incentivize private developers to create affordable rental housing, LIHTC has provided billions in funding for multifamily rental units. However, as housing needs have evolved, it has become increasingly clear that LIHTC’s narrow focus on large-scale multifamily rental properties is no longer sufficient to address the diverse demands of today’s housing market.
In this blog post, we’ll explore the challenges posed by LIHTC’s rigid structure, the barriers it creates for developers, and the need for more diverse and flexible financing tools to meet the full scope of affordable housing needs in the U.S.
The Shortcomings of the LIHTC Framework
At its core, the LIHTC program is intended to help finance affordable rental housing by providing tax incentives to developers. While this has certainly helped to create thousands of affordable units, the program’s design has limitations that have become more apparent as housing needs have diversified.
1. Inflexibility for Mixed-Income and Smaller-Scale Housing Projects
One of the major challenges with the LIHTC program is its emphasis on large, multifamily rental projects. Developers who wish to include mixed-income housing—where a portion of the units are designated for moderate-income households—often find it difficult to navigate the process.
Take Rochelle Mills, president and CEO of Innovative Housing Opportunities in Los Angeles, as an example. Her organization was awarded funds from Measure HHH to build 100 units, with half designated for very low-income households and the other half for the chronically homeless. However, when Mills engaged the surrounding community, she found that many residents were not opposed to the new development but wanted to see it expanded to accommodate more mixed-income housing. The residents, often older and “house rich but cash poor,” wanted to stay in the area but were unable to afford the limited affordable options available.
To meet this demand, Mills redesigned her project to add 60 units for households earning 60 to 80 percent of the Area Median Income (AMI). However, securing financing for these mixed-income units proved to be a significant hurdle. This scenario underscores how the LIHTC program, designed for large-scale rental housing, does not easily accommodate mixed-income or smaller-scale projects that could help meet the broader range of community needs.
2. Competitive Barriers for Smaller Developers
Another issue with the LIHTC program is that it often favors larger, more experienced developers. The application process for LIHTC funding is complex and highly competitive, which means smaller, community-based developers can struggle to secure the necessary financing for their projects. These developers, who are often more in tune with the specific needs of local communities, face significant barriers in competing against large firms with deep pockets and established relationships in the affordable housing sector.
As a result, smaller-scale developments that could address niche housing needs are often left behind, as the system tends to prioritize larger projects with predictable financial outcomes. This dynamic reinforces the status quo and reduces the opportunities for innovative or community-focused affordable housing projects.
Why We Need More Than LIHTC: The Case for Diversified Financing Solutions
While LIHTC remains an essential tool for affordable housing development, it should not be the only tool in the toolbox. The housing sector needs a more diverse and flexible approach to financing that can accommodate a wider variety of housing types, funding models, and community needs.
1. Expanding Housing Options Beyond Rental Units
The LIHTC program focuses heavily on multifamily rental units, but there are other viable affordable housing solutions that don’t fit neatly into this framework. For example, shared housing, homeownership projects, and smaller-scale developments could help meet a wider range of needs, particularly in communities where rental properties are oversaturated or where homeownership opportunities are needed.
Currently, alternative housing models struggle to find financing under the existing system. Without access to alternative sources of funding, these projects are often left on the sidelines, despite their potential to provide meaningful, affordable housing options to diverse communities.
2. Supporting Mixed-Income Developments
The future of affordable housing lies in more mixed-income developments, which provide a diverse range of housing options that can help stabilize communities. However, developers like Rochelle Mills face significant barriers when trying to integrate mixed-income housing into their projects. While LIHTC can fund up to 40 percent of affordable units in a development, many developers aim for 100 percent affordability in order to maximize their eligibility for credits. As a result, mixed-income developments are often left in the dust, despite offering the flexibility to serve a broader spectrum of income levels.
To foster community development and economic integration, policymakers must create financing structures that prioritize mixed-income projects, offering a solution that balances affordability with market competitiveness.
3. Encouraging Innovation in Housing Design and Development
The over-reliance on LIHTC has led to a “one-size-fits-all” approach to affordable housing, which stifles innovation. Developers are often constrained by the rigid requirements of the tax credit system, which discourages creative solutions like modular housing, eco-friendly designs, and affordable homeownership models.
By diversifying the sources of funding and allowing developers more flexibility, the affordable housing sector can better meet the needs of the modern market. For example, innovative housing models that incorporate sustainable materials or design features that cater to specific community needs could help reduce costs and improve the overall quality of affordable housing.
The Need for Comprehensive Reform in Affordable Housing Finance
To truly address the affordable housing crisis, the U.S. needs a comprehensive approach to financing that extends beyond the limitations of the LIHTC program. Policymakers and developers alike must advocate for a wider variety of funding sources, such as opportunity zone investments, social impact bonds, and community development financial institutions (CDFIs), which can provide more flexibility for developers working on smaller, mixed-income, or non-traditional housing projects.
This broader toolbox would help foster more creative, cost-effective, and community-driven solutions to affordable housing challenges. Ultimately, a more diverse financing landscape will better equip the housing sector to meet the wide-ranging needs of all communities.
Conclusion: A Vision for the Future of Affordable Housing
While the Low-Income Housing Tax Credit has undoubtedly played a vital role in the development of affordable housing in the United States, its current framework is inadequate for meeting the diverse housing needs of the 21st century. To overcome this limitation, we must embrace a more flexible, innovative approach to financing affordable housing.
By diversifying financing tools, supporting mixed-income and smaller-scale projects, and fostering greater innovation in housing design, we can create a future where affordable housing is truly accessible to all—regardless of income level or location. Only then can we address the full scope of the housing crisis and begin to build stronger, more resilient communities across the country.
