The development of towering, lackluster, public housing projects has thankfully come to a stop. It turns out that multifamily development and design wasn’t the government’s strong suit. Thankfully, lawmakers created programs like Section 42 to empower private developers to build affordable housing. Transitioning to privately built affordable housing has resulted in buildings that are designed better, managed more effectively, better located, and more cost-effective.

Section 42 Basics

Section 42, is also known as the Low-Income Housing Tax Credit (LIHTC) program. Developers apply to receive tax credits to reduce the down payment costs. In return for accepting Section 42 tax credits, the newly developed apartment complex can only accept tenants who fall below certain income levels; rents are also capped. These affordable restrictions run with land and typically last for 30 years.

Better Use Of Government Funds

Providing affordable housing is a core mission for the government, but its track record as a developer is poor. Ballooning construction costs and long completion timelines were common. When your construction project has the backing of the US government, there is no need to pinch pennies. On the other hand, private developers need to operate efficiently to make a profit. Cost overruns and long construction delays could spell disaster for their bottom line. It’s this dynamic that lawmakers recognized when they decided to put affordable housing development in the hands of private developers.

A Better Resident Experience

With Section 42, the developer is investing their own equity into the deal, and they are the long-term owner as well. This incentivizes them to build high-quality, fully amenitized apartment buildings. These properties typically have underground parking, fitness centers, community rooms, the whole nine yards. As the owner of the property, the developer is also incentivized to maintain the property well, and manage it professionally.

Government-built housing projects were often developed and managed with no such thoughtfulness. These buildings commonly had small apartments, too few elevators, no balconies, and zero amenities. Their property management and maintenance were poor as well. The Pruitt-Igoe housing complex in St. Louis, MO is an infamous example of poorly built and managed public housing. Built in 1954, the 33 buildings totaled 2,870 units. Badly designed and managed, the entire complex had to be demolished within 20 years.

Well Located Affordable Housing

We all want the residents in affordable housing to thrive, yet government-built housing was often built in C locations. Section 42 on the other hand, can be found in A, B, and C locations. Since they’ll be the long-term owners, developers of Section 42 projects choose their locations carefully. Their top priorities match those priorities of the tenants: transit availability, low crime, parks, and nearby employment.

Final Thoughts

The shift from public housing to privately owned, income-restricted housing through programs like Section 42 represents a pivotal moment in the pursuit of affordable housing solutions. By empowering private developers with tax credits and incentives, lawmakers have not only optimized the use of government funds but also ensured the creation of higher-quality, better-designed housing options. As the long-term owners of the properties, private developers are motivated to invest in amenities, maintain properties diligently, and select better locations, to the benefit of the tenants.

Ben Michel - Principal
Ridgeview Property Group

Market News

Three Midwest Markets Surge to Record Highs

In parts of the Midwest, rents are climbing. The median asking rents hit their highest levels since March 2019 in three Midwest cities: Indianapolis (up 4.5% annually to $1,334), Milwaukee (up 3.8% to $1,671), and Minneapolis (up 2.5% to $1,529). Driving higher rents are below-average unemployment rates and the slow pace of new multi-home construction.

Realtor.com (2024, May 22nd). "National Rents Drop Again, But Three Midwest Markets Surge to Record Highs” https://mediaroom.realtor.com/2024-05-22-Realtor-com-R-April-Rental-Report-National-Rents-Drop-Again,-But-Three-Midwest-Markets-Surge-to-Record-Highs

Tips & Tricks

Terms:

Tax Credit: A tax credit is a dollar-for-dollar reduction in the amount of income tax that a person or business owes to the government. These tax credits are offered to developers through a competitive application process.

Fully Amenitized: Describes a multifamily complex that features all of the common amenities: fitness center, community center, outdoor lounge space, bike storage, etc.

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