How Virginia developers use tax credits to build affordable housing
Local leaders can't force developers to build affordable housing, even as communities around the nation grapple with an affordability crisis.
Affordable housing doesn't make as much money as other projects for developers and governments don't have the funds to purchase increasingly expensive land to build homes.
Instead, leaders rely on incentives that make affordable housing more lucrative to developers, like the federal Low Income Housing Tax Credits program, or LIHTC.
The project has helped develop more than 3.5 million affordable units since its creation in 1987.
And in Virginia, the program funds 5,500 affordable units each year. Gov. Glenn Youngkin has even pushed a state version of the federal program.
What is a Low Income Housing Tax Credit?
The LIHTC is a way for the federal government to help pay for the development of affordable housing.
The IRS gives tax credits to developers before they start building an apartment project.
That tax credit is exactly what it sounds like: whoever’s holding that credit come tax time gets a dollar-for-dollar discount on their taxes.
So developers take these tax credits and then turn around and sell them to big investor institutions like banks.
The banks get an investor’s stake in the project and a discount on their taxes. There’s also a 1977 law that requires financial institutions to invest in low-income communities. The banks get credit for that with LIHTCs.
The developers get cash from selling the credit to the banks, which they use to build the project. About $28 million worth of LIHTC were issued for projects in Virginia this year, according to data from Virginia Housing.
Different versions of the program will offset costs for different numbers of affordable units. Some projects are fully subsidized and every unit is income-restricted, other projects have a mix of affordable units subsidized by the credits and market-rate units.
How do these credits translate to housing for people with low incomes?
There are several strings attached to the tax credits.
Developers commit to keeping rents low on their units for, in most cases, at least 30 years. They have to rent to people making low- to median-incomes. For instance, a family of four making more than $59,400 would not qualify to move into a LIHTC project in Hampton Roads.
Steve Lawson is the chairman of Lawson, a Norfolk-based development firm. Over the last few decades, the company has pivoted to work almost exclusively on LIHTC projects.
Lawson said selling the tax credits for cash up front is exactly what allows developers to afford to keep rents low long-term.
It’s like buying a home - the more cash you put down up front, the less mortgage you need. The smaller a mortgage, the less your monthly payment. And the sale of the tax credit gives the developers the additional cash to work with up front.
When a developer can fund less of a project with a mortgage loan, their monthly costs are lower. That translates to being able to charge lower rents each month to residents and still come out ahead, Lawson said.
“One of the reasons it works so well, that's the long term nature of it. The tax credits are over a period of ten years, so we are beholden to the investor,” Lawson said. “We build, develop, build and manage these communities for the long haul.”
Why doesn’t every developer do this?
There are two tax credits - a 9% one and a 4% one.
Virtually any development can claim the smaller tax credit, though that means less money upfront and less affordability, with many of the same strings attached.
But there are only a certain number of the larger tax credits available each year, which developers compete for.
According to documents from Virginia Housing, about a quarter of the projects that applied for this year’s round of tax credits in the state went unfunded. Other state data from 2021 says the number of unfunded applications in previous years was roughly one-third.
Lawson said the projects are more complex and difficult to execute than a market-rate project and there’s not a ton of incentive to do a LIHTC project “unless you’re a glutton for punishment like we are, if you like banging your head against the wall and reading tons and tons of regulations.”
Another challenge: the “not in my backyard” mentality that too often leads to homeowners flooding planning commission meetings to fight multifamily housing proposals.
Lawson said people have an impression of what affordable housing looks like and part of the project becomes winning over neighbors. It can take a lot of time to move through local approval processes when neighbors are unsupportive, which also costs money – not to mention the cost of hiring lawyers and other specialists to get a project through an approval process.
What do these projects look like and where are they?
Inside and out, the vast majority of these projects look just like any newly built apartment building. There’s no way to tell it was income-restricted until someone pursues renting a unit.
Lawson has built LIHTC projects near Virginia Beach’s resort area and overlooking the Elizabeth River in Campostella. The latter, called The Retreat at Harbor Point, has a sweeping waterfront boardwalk and a pool with a river view.
Lawson’s most recent project, Market Heights, is a 164-unit apartment complex located on Tidewater Drive near Brambleton Avenue that opened earlier this summer.
Austin Pittman, Lawson’s senior development manager, notes the company has also built an on-site food pantry and permanent on-site services for residents with disabilities at Market Heights.
“That's not a requirement of the tax credit program. It's something that's important to us as an owner and as a developer to ensure that we meet the needs of the families living in the project,” Pittman said.
The only difference between these projects and the latest market-rate apartment complex going up in hot neighborhoods in Norfolk or Virginia Beach is how they get funded and who can move in.