The affordable housing shortage continues. Today, nearly one in three U.S. households spends more than 30% of their income on housing. Among extremely low-income families, 70% pay more than half their monthly income in rent. And nationwide, only 34 affordable homes are available for every 100 low-income renters.

While the shortage provides potential opportunities for commercial real estate property owners, investors and developers, addressing the need for affordable housing isn’t always an easy option. Developers face profitability concerns, complex financing structures and long-term property management challenges. As a result, many commercial real estate developers opt to focus on other asset classes.

With a nationwide gap estimated at 7.3 million affordable homes, federal, state and municipal governments are tackling the issue by extending or implementing incentives aimed at commercial real estate investors and developers. The goal is to provide tax credits and reduced financing requirements that make investing in affordable housing projects more appealing.

Federal Incentives: Proposed LIHTC Enhancements

At the federal level, the pending Tax Relief for American Families and Workers Act of 2024 includes two key provisions related to affordable housing that are particularly relevant to commercial real estate property owners and investors:

1. A 9% increase in the Low-income Housing Tax Credit (LIHTC) ceiling for 2023 through 2025. The increase would restore the LIHTC allocation that was in effect from 2018 until 2021. The higher credit allocation is designed to make affordable housing projects more frequently achievable by offsetting investors’ federal income tax liability.

2. Lower bond-financing thresholds – from 50% to 30% – for projects financed by bonds issued before 2026, aiming to increase the supply of affordable housing projects.

However, while the Tax Relief Act passed the House of Representatives in January 2024, it is stalled in the U.S. Senate. As time passes, it is increasingly likely that the Act will be delayed for the next Congress to address after the November 2024 elections.

State Incentives: Implementing Measures to Close the Gap

State governments are also taking action to incentivize affordable housing projects. To date, 27 states have established LIHTC programs to supplement the federal incentives. Similar programs are pending legislative approval in additional states. While the objectives are the same, the state-level programs also incorporate provisions aligned to specific regional market factors and needs, including:

• New York: The state’s 2025 budget includes two new tax exemption programs aimed at addressing the housing crisis in New York City. The Affordable Neighborhoods for New Yorkers Program, known as 485-x, offers 10- to 40-year property tax exemptions for projects that include affordable housing units. The length of the exemption is tied to the number of affordable units based on a percentage of the area median income (AMI). The tiered system also sets wage requirements for construction workers and limits rents.
• California: Created in 1987, the state LIHTC incentive acts as a supplement to the federal program. It provides qualifiers with state tax credits for affordable housing development, as well as rehabilitation projects. Since 2020, the state budget has allocated an additional $500 million in state LIHTCs for new construction multifamily affordable housing development.
• Colorado: The state recently expanded its Affordable Housing Tax Credit program, which provides developers and investors a credit against state income tax or insurance premium tax liability for direct capital investment in affordable housing projects. The expansion adds millions of dollars in additional state credits each year through 2031. It also enables qualifying investors to claim their credits at a more accelerated rate.
• Tennessee: Passed in May 2024, the Tennessee state LIHTC will provide additional tax incentives to projects that qualify for the federal LIHTC. The intent is to boost the development of affordable housing, particularly in the state’s rural areas. Tennessee’s LIHTC may be applied against state premium, franchise and excise taxes. Any unused credits may be carried forward for up to 25 years.

In addition, New York will offer an Affordable Housing for Commercial Conversions program, which provides partial property tax exemption when existing commercial buildings are converted for residential use. Like 485-x, the program defines requirements based on the number of affordable housing units and AMI.

Municipal Incentives: Expediting the Development Process

Many city governments offer a range of incentives to encourage local affordable housing development. Most are aimed at streamlining processes and creating savings for projects that include affordable housing, such as:

• Density bonuses and zoning variances that allow more units to be built or other exceptions to existing land use regulations
• Reduced parking requirements that help lower land or construction costs by requiring fewer spaces to be provided
• Expedited development approval and environmental review processes
• Tax abatements and reduced or waived development fees
• Technical assistance to help developers navigate the process and access funding sources.

The dedicated commercial real estate experts at CBIZ can help you explore affordable housing incentives, navigate tax exemption programs and maximize your potential savings. Connect with a member of our team and gain access to more resources here.

This article includes input from Alvin Yeung, Managing Director at CBIZ Marks Paneth, and Bruce Merrill, Managing Director at CBIZ Somerset. Alvin and Bruce play key roles in commercial real estate and multifamily housing engagements at CBIZ, including their expertise in financing, auditing and applying for low-income housing tax credits.

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