Governments Race To Create Incentives for Developers To Build More Affordable Housing

By Franco Faraudo

We are facing a severe housing shortage in America. Current projections indicate a need for approximately 7 million additional homes to meet population growth and address the housing affordability crisis. This requires a significant increase in multifamily development. In the previous year, roughly 1.54 million homes were built in the US, with 450,000 of those being multifamily units. While this might seem like a small percentage of overall housing starts, it represents a notable 22% increase from the prior year. But, the current high-interest rate environment is hindering the launch of large multifamily projects, putting us on track to build fewer houses this year compared to last.

Inflation and rising housing costs have become major political concerns. Government officials are seeking innovative ways to incentivize the creation of new housing, especially affordable housing, to relieve the burden on their constituents. Several federal and state programs have a significant impact on multifamily housing development. These programs aim to facilitate financing, encourage sustainable practices, and improve the accessibility of affordable housing.

The Inflation Reduction Act (IRA) offers a variety of financial incentives to reduce the cost burden of residential building projects. This act expands the New Energy Efficient Home Credit, which now allows a tax credit for new or substantially reconstructed multifamily homes that meet ENERGY STAR or Zero Energy Ready Home Program standards. Credits can range up to $5,000 per dwelling unit, depending on the energy standards achieved and compliance with prevailing wage requirements. In addition, the Energy Efficient Commercial Buildings Deduction has been broadened under the IRA to include multifamily buildings over three stories, offering deductions for installations that improve energy efficiency by at least 25 percent, with the potential deduction increasing with greater energy savings.

The IRA also introduces enhancements to the Energy Credit, which provides tax credits for the installation of energy generation and conservation equipment, such as solar panels and geothermal systems. When projects meet certain labor standards, the credit increases to 30 percent of the installation cost, encouraging higher standards of building and compensation. Moreover, the IRA offers the Low-Income Communities Bonus Credit Program and substantial rebates for energy-efficient upgrades through state-administered programs, supporting affordability in energy consumption for lower-income tenants.

Also at the federal level, the USDA Multifamily Housing Program provides support through loans, grants, and guarantees aimed at developing and rehabilitating housing for low-income, elderly, and disabled residents in rural areas. This program facilitates the provision of affordable, safe housing while ensuring that properties can maintain their viability and service to the community through ongoing financial and structural support.

On the state level, innovative programs are tailored to meet specific local needs. For instance, California’s Multifamily Housing Program (MHP) provides low-interest, long-term deferred-payment loans for the construction, rehabilitation, and preservation of rental housing for lower-income households. This program is part of a broader suite of measures funded by state bonds that aim to increase the supply of affordable housing.

In New York, Governor Hochul announced a new budget that prioritizes housing development, “We’re delivering on a common-sense agenda: fighting crime, fixing our mental health system, and building more housing so people can finally afford to live in New York,” she said in a speech. The budget includes a new tax break, to be known as 485x, that could provide up to a 40-year property tax exemption for projects with an affordable housing element. It also extends the deadline for projects that have used the current tax exemption, called 421a, by six years.

Each of these programs offers unique opportunities and challenges, and a multifamily developer looking to leverage these incentives would benefit from a detailed understanding of the specific requirements and benefits of each initiative. By effectively navigating these resources, developers can significantly enhance the viability and sustainability of their housing projects, making them more attractive to investors, more affordable for residents, and more beneficial for the community at large.

Multifamily Development

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Multifamily Operators Achieve Faster Lease-Ups with Innovative Tech Solutions

Multifamily property owners and developers are embracing technology to streamline the lease-up process and attract tenants faster. This includes utilizing photo-realistic renderings for pre-construction marketing, partnering with pop-up hotel concepts for short-term furnished units, maintaining a strong digital presence through virtual tours and websites, and implementing comprehensive marketing platforms. These strategies bring in early revenue, provide an enhanced resident experience, and accelerate the leasing process in a competitive market.


🏘️ Experiential application: VTS has launched a new resident experience tech offering, VTS Activate Multifamily, with leading players like Lendlease and Habitat already on board.

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