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Capital subsidies for building affordable housing developments overview

Capital subsidies cover a portion of the costs of developing a rental or for-sale property, thereby improving its affordability and economic viability.

Because a capital subsidy does not need to be paid back, it reduces the amount that must be borrowed or obtained through an equity investment by a private party to develop a rental property. Lower debt service levels allow a project to charge lower rents and still be economically sustainable.

The Low Income Housing Tax CreditA dollar-for-dollar tax reduction against federal tax liability, provided to developers based on the criteria set out in the states' qualified allocations plan. It is the primary source of funding for increasing and preserving supply of affordable rental homes. (LIHTC) is one type of capital subsidy (in essence, it provides dollars that do not need to be paid back by the project), but additional capital subsidies are often needed even for properties that receive LIHTC awards. While the equity raised by syndicating LIHTCs covers a substantial share of development costs, in many cases, the LIHTC equity plus the debt supportable by rents at the target level are insufficient to fully cover all development costs. In these cases, additional capital subsidies are needed to serve as “gap financing” to supplement the equity provided through the LIHTCs and enable a project to be economically viable.

Additional Resources

Administering agencies

Varies depending on the source of the subsidy, but may include the housing finance agency (LIHTC or general obligation bonds), the local department of housing and community development (for HOME and CDBG or housing trust fund proceeds), or the local administrator of a tax increment financing district.

Policy objectives

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