A report by Abt Associates analyzed data from more than 2,500 Low Income Housing Tax Credit (LIHTC) projects developed and placed into service between 2011 and 2016. The intent of the analysis was to discern the factors affecting development costs. Overall, the report found that location, project and unit size, and project type were all strongly correlated with development costs. LIHTC development costs grew by about 8.4% from 2011 to 2016, like the average growth of all construction costs nationally.
The researchers measured costs using per-unit total development cost (TDC), which is the total development cost for a project including land divided by the number of units. Overall, they found that the median per-unit TDC for LIHTC properties was $164,757. One of the major findings was the effect of location on per-unit TDC. Units produced in the Middle Atlantic, New England, and Pacific regions of the country had, on average, higher per-unit TDCs. When land costs were removed, these regions still had the highest per-unit TDCs. While land cost may not directly affect construction cost, it is likely to be indirectly related because higher land costs may require denser development with higher-cost construction features. The researchers also found that construction wages contributed significantly to development costs, though differences in wages did not appear to fully explain variation in TDC across locations.
The study found a strong positive relationship between per-unit TDC and being located in a principal city in a metropolitan area. Projects located in Difficult to Develop Areas (DDAs) and Qualified Census Tracts (QCTs) had higher costs than projects in other areas. As identified by HUD, QCTs are census tracts with high concentrations of low income households, while DDAs are areas that have high development costs. Project size was another factor correlated with per-unit TDC. Projects with more units were less expensive, likely due to the fact that fixed costs can be spread over a greater number of units. An increase of 10 units was associated with a $3,000 decrease in per-unit TDC. For projects with an average bedroom size of more than two, per-unit TDC increases as the number of bedrooms increases.
A number of other factors were also significant when analyzing per-unit TDC. Developing new projects was more expensive than rehabilitating existing buildings, and projects developed with 9% LIHTC credits had higher per-unit costs than projects developed with 4% LIHTC credits. In addition, most projects financed by nonprofit developers had higher costs than ones financed by for-profit developers, likely due to the fact that nonprofits often provide more support services and are willing to take on projects with higher land costs. Per-unit TDC was also highest for units in projects targeting people with special needs and the homeless, and lowest in projects for the elderly.
Variation in Development Costs for LIHTC Projects is available at: https://bit.ly/2O59wQp
Information about the LIHTC program is on page 5-30 of NLIHC’s 2018 Advocates’ Guide