The national housing crisis manifests in many forms, but most impactful is the severe shortage of affordable housing units. In the absence of meaningful federal action in recent decades, and uncertainty regarding current federal priorities, state and local municipalities are increasingly taking action to build and preserve affordable housing.

Localities are deploying a wide range of tools and investments: tax abatements and exemptions, tax increment financing, payments in lieu of taxes, public land contributions, low-interest loans, voucher programs, and more. Most of these tools are effectively public subsidies to private developers or landlords, designed to incentivize the creation or preservation of affordable housing. Little analysis, however, has been done to understand 1) which tools make the most sense in which localities and housing developments, 2) how much these incentives are truly “worth” to developers, and 3) how much public entities should require in return (e.g., number of affordable units, level of affordability, duration).

The Challenge This Tool Solves

Often, existing incentive programs either provide excessive benefits to the private sector, generating insufficient social return for the cost, or offer inadequate incentives, resulting in no uptake and therefore no new affordable housing units. Such discovery is difficult for public entities that may not have robust financial underwriting teams and may distrust the analysis of the private developer, who is effectively sitting opposite them on the negotiating table. There is a need to bring a clearer understanding to the tradeoffs the public sector is making when offering incentives for affordability. While every locality is balancing different financial and policy variables, the underlying financial underwriting fundamentals remain relatively consistent. A select few localities have developed and refined financially sophisticated programs that generate affordability, offer the private sector sufficient incentives, and have guardrails against unfair deals.

Types of Communities That Could Use This Tool

Tax incentive programs are applicable across localities throughout the country. While specific mechanisms vary by location, the fundamental underwriting considerations remain consistent. Likewise, many communities across the country are suffering from shortages of quality, affordable housing, especially in income segments that are less covered by federal incentive programs. The proposed Underwriting Model offers geographic and income-level flexibility but could be especially effective in communities where political and fiscal conditions allow trading potential property tax revenue in favor of increased housing affordability.

Expected Impacts of This Tool

By highlighting best practices from across the country and providing a framework and shared language for the public and private sector’s understanding of project underwriting, we aim to help states and localities implement new tax incentive programs, strengthen public-private trust, and improve execution efficiency across both new and existing initiatives.