Workforce Housing
What is workforce housing, and why is it necessary?
America’s young professionals, public employees, and other middle-class workers have started to be referred to as the “missing middle” in the housing market. The “missing middle” represents the gap between market-rate properties and low-income housing where there is a shortage of affordable housing options. People in this middle group do not qualify for affordable housing units because they bring in too much income, but their income is not enough to afford luxury, market-rate apartments.
To attempt to remedy this issue, municipalities have begun constructing workforce housing. In this article, we’ll explain what a workforce housing unit is, its purpose, and what real estate investors need to know about this type of housing.
What is Workforce Housing?
Workforce housing units refers to properties that serve people who do not qualify for affordable housing assistance but cannot afford market-rate rent prices in their area. Workforce housing can be any kind of building, whether it be single- or multi-unit structures or apartments, but the term generally refers to affordable housing for people who cannot afford housing in reasonable proximity to their workplace.
Unlike affordable housing, workforce housing isn’t dependent on government subsidies, making it a more flexible option for those in the middle-income bracket. One increasingly constructed form of workforce housing is mixed-income developments.
Mixed-income developments combine market-rate and middle-class units in one building, so developers can utilize Low Income Housing Tax Credits (LIHTCs). These credits are granted to units whose rent averages to less than a certain percent of the area median income, or AMI. The ability to utilize this tax break incentivizes builders to keep rent prices low and accessible for the lower and middle classes.
For example, a recent project in Cincinnati, Ohio rehabilitated 13 previously abandoned historic buildings to create 67 mixed-income apartments, simultaneously preserving affordable income housing while providing new options for the middle-income tenants in the area. This project and others like it in America’s metropolitan areas can be considered workforce housing since it caters to various income levels that require affordable housing near their workplace.
Funding and Investment Opportunities
Participation in a workforce housing program not only benefits middle-income renters—investors in low, mixed- and middle-income housing projects can experience certain tax incentives by participating.
Low-Income Housing Tax Credits (LIHTCs)
Low-Income Housing Tax Credits (LIHTCs) provide a tax incentive for investors in affordable rental housing for low- or middle-income households who construct or rehabilitate structures that serve these communities. State housing agencies grant tax credits to private developers and investors, who then can claim LIHTCs for a ten-year period. There are certain parameters to qualify: for example, at least one of the following must be true for the project to pass the income test and qualify for the credit:
- At least 20% of the tenants earn 50% or less of the area median income (AMI), adjusted for family size.
- At least 40% of the tenants earn 60% or less of the AMI.
- At least 40% of the tenants’ income averages 60% of the AMI or less, AND no tenant’s income is more than 80% of the AMI.
Opportunity Zone Investment
Another incentive that encourages investment in moderate-income projects is the Opportunity Zone initiative (You can read more about this program in our article about it here). Opportunity Zones are communities that have become economically distressed as defined by the U.S. Treasury. Opportunity Zones encourage both private and public investment into these underserved areas by providing various tax benefits to investors.
If investors have prior gains invested into a Qualified Opportunity Fund (QOF), they can defer taxation on those gains until the investment is sold or exchanged if they participate in Opportunity Zone investment. There are other requirements that could further reduce taxation on gains from your QOF investment during its holding period. To fully embrace the benefits of the Opportunity Zone program, continue your research on the specific requirements set forth by the HUD.
Other Investor Benefits
Grants for low-income housing development, though limited for pure workforce housing, allow income averaging in tax credit projects for rent level flexibility. Options for specific workforce housing funding via grants or other HUD sponsored avenues are published each year on affordable housing online sites like the HUD’s website.
Workforce Housing Development Models and Strategies
As an investor, to successfully implement workforce housing development models and strategies, you need to prioritize attainable housing solutions that enhance affordability through innovative approaches. Consider strategies like building smaller units or increasing density on land tracts to reduce costs per unit. Efficient land acquisition in low-income neighborhoods can streamline development timelines, as can innovative approaches like modular housing manufacturing.
By simplifying design and construction processes, you can expedite workforce housing projects. This approach fills the increasing demand for housing options that cater to those who earn too much for standard subsidies but can’t afford luxury options.
Importance and Role
Workforce housing plays a crucial role in providing a middle ground between luxury accommodations and traditional affordable housing. It caters to individuals who earn too much for subsidies but can’t afford high-end options. By offering housing options tailored to the needs of middle-income earners, it ensures that a vital segment of the population has access to decent and affordable housing.
Workforce housing programs are increasingly essential in sustaining the economic vitality of communities by supporting the workforce that drives local economies. Investing in these initiatives not only benefits individuals but also contributes to the overall stability and inclusivity of neighborhoods, making them vibrant and sustainable places to live.
Conclusion
Workforce housing plays a growing role in providing affordable living options for middle-income individuals and families.
By bridging the gap between luxury and affordable accommodations, workforce housing initiatives help create a more inclusive and sustainable housing market.
