August 12, 2025 by Jon Banister, Taylor Driscoll, Billy Wadsack and Noah Zucker

'Affordable Housing Is An Oxymoron': Why Homes For Low-Income Renters Are Far More Expensive To Build

For developers trying to finance an affordable housing project, the process is like putting together a jigsaw puzzle — but every piece comes with a fee to take it out of the box and requires attorneys and consultants to advise on how to place it.

The biggest piece of that puzzle for the vast majority of new construction affordable housing is the Low-Income Housing Tax Credit, which costs the U.S. government more than $14B each year — a number set to rise in the coming years.

But the way the LIHTC is administered dramatically increases the cost of building affordable homes, a dynamic that has made closing the nation's widening housing shortage more difficult.

Photo: Pixabay/qimono

In markets from Massachusetts to California to Chicago to D.C., projects using the tax credits routinely cost more than $800K per unit to build, and in some cases more than $1M. Market-rate apartments, by contrast, typically cost less than $500K per unit. 

“It’s not unusual for an affordable housing project to cost twice as much as a market-rate project,” said Shawn Whitney, the head of the tax credit financing group at law firm Polsinelli.

The One Big Beautiful Bill Act that was signed into law last month gave the LIHTC its biggest expansion in 25 years, but it didn’t address the issues with the program that drive the cost of government-subsidized, income-restricted housing far beyond that of typical apartments. 

Because states cap the portion of a project that the tax credits can finance, developers must piece together several public and private funding sources that often come with their own mandates and fees. The process requires hiring attorneys and consultants to navigate, all of whom get paid out of the project budget. 

All of that adds up to soft costs — those not directly going into construction — for many affordable projects, surpassing 25% of the budget. 

Developers typically make their money on tax credit projects via fees that are calculated as a percentage of a project's cost — often as high as 15% — an arrangement critics point out could motivate builders to keep costs elevated.

“We've got to address the core broken math of affordable housing,” said Trinity Investors Managing Partner Dan Meader, a Dallas-based multifamily developer.

The LIHTC program has been the United States’ dominant affordable housing finance tool for decades, helping build more than 3.7 million homes for low-income Americans since President Ronald Reagan signed the program into law in 1986.

The federal government allocates LIHTC funds to states, and then agencies within each state field proposals from competing developers and decide how to deploy the credits. The tax credits developers receive are often sold to banks, insurance firms and other large companies looking to minimize their tax liability, and developers use the money as equity in their projects along with other state, local and private sector funding sources.

Many states tie affordable housing funds to stricter environmental and accessibility requirements than market-rate developers must meet. And the states’ formula for awarding funds gives more points to developers that meet other priorities, like building sustainability and small business participation, but those tend to increase costs.

“LIHTC is not able to generate the number of affordable housing properties that are necessary to meet the need or demand in most jurisdictions,” said Jade Craig, a real estate law professor at the University of Mississippi.

These flaws have led some conservative politicians to paint the LIHTC as a waste of taxpayer dollars and call for it to be abolished, while there are increasing calls from the left to bring back government-built housing. 

Even its proponents are calling for reform while also maintaining that it is a vital tool for adding desperately needed affordable housing. 

"It is a huge problem right now that people are going to start to look for a new paradigm or some ways to cut the costs,” said John Cruz III, CEO of Boston-based affordable housing development firm Cruz Cos.

"The word ‘affordable housing’ is an oxymoron,” he added. “Because it's expensive as shit to provide.”

The Affordable Housing Math Problem

When a partnership between The Michaels Organization and the Housing Authority of the City of Los Angeles gained approval last year to replace a piece of the Jordan Downs public housing complex with a new, 75-unit building, the developers had to piece together six funding sources to cover the project’s total cost of $66M, or $880K per unit. 

The actual construction of the project is projected to cost $38M, and the land acquisition cost another $8.6M, according to its tax credit application. 

The document reveals how soft costs pile up for a LIHTC project. Michaels must pay the lenders $4.7M in interest, $927K in construction insurance, $605K in loan origination fees and $375K to cover the lender’s attorneys. Architects, surveyors and engineers cost another $2.3M. 

The developer also must pay the government $1M in permit processing fees, $425K in local development impact fees, $300K to HACLA for construction administration and inspections, plus $75K to the authority for an advisory fee.

The developer's profit in the deal, according to the application, is $2.2M. 

John Mimms, vice president of development at Michaels, said he is “concerned” with the trend of increasing development costs for affordable housing projects. He sees financing costs as the biggest variable driving up project budgets in recent years. 

“Every year the projects seem to cost more on a per unit basis as construction becomes more stringent and the related soft costs also grow,” he wrote in an email.

HACLA provided a statement saying development costs have “increased significantly” in recent years for both affordable and market-rate housing. 

“The cost to produce housing, in general, is higher than anyone wants it to be,” the statement said. “Cities, states and the federal government can absolutely play a role [in] reducing the cost to build.”

While project price tags are soaring across the country, the issue is particularly acute in the markets where state and local governments layer on requirements and fees that raise the cost of bringing new affordable units to market. 

Building LIHTC-funded affordable housing in California costs 1.5 times as much as building market-rate housing, according to an April study by the RAND School of Public Policy in Santa Monica. 

Soft costs were a primary factor, totaling $187 per SF for affordable projects compared to $84 per SF for market-rate projects. 

The study found that LIHTC projects in California cost four times as much as those in Texas, concluding that the Lone Star State had lower costs due to “substantially lower levels of regulation overall and state policies that tightly constrain approval times.”

But even within Texas, the study still found that soft costs for LIHTC projects were nearly three times that of market-rate projects — $60 per SF compared to $22 per SF. 

The NRP Group, one of the country’s largest affordable housing builders, started construction last year on a $77M, 288-unit LIHTC project in the Dallas suburb of Mesquite. Construction expenses totaled $45M, and the cost to acquire the land was $5M, according to its tax credit application. 

As far as soft costs, NRP paid the local government $1.2M for impact fees, $1.1M for building permits and $166K for tax credit fees. It spent $1.4M on architectural and engineering fees and $926K on legal fees.

The developer’s loan interest cost $8.1M, plus $735K for loan origination fees, $512K in underwriting costs, $350K for title and recording fees, and $100K for closing costs. 

The developer’s profit on the deal was $8.2M, or 15% of the total cost, excluding financing and land acquisition.

NRP Vice President of Development Nick Walsh told Bisnow he sees the project’s soft costs as representing “a measurable increase compared to a market-rate project where you don't have that additional red tape.”

But even with all those fees, the total cost of the $77M project equates to $267K per unit.

In Boston, a city-commissioned study last year found the average cost to build a large affordable housing project between 2022 and 2024 was $678K per unit, 43% higher than comparable market-rate projects, which cost on average $472K per unit. 

For large affordable housing projects, just 53% of the cost went toward construction, with the remainder going toward soft costs like legal and financing fees. The study also found those costs have risen significantly: subsidized buildings that started construction in 2018 and 2019 cost an average of $577K per unit. 

In the Boston suburb of Braintree, developers WinnCos. and Arch Communities pieced together a $47M budget for a 56-unit mixed-income development that is slated to open next year — $839K per unit.

In addition to rising in one of the country's most expensive markets for construction, the project faced years of delays. The team proposed it in 2020, received city approval in 2021 and aimed to break ground within two years. But the developers, who declined to comment, didn’t start construction until this January. 

“There's an average time period for a multifamily project, but you can almost double it when you're looking at an affordable project,” ULI Boston Executive Director Catherine Rollins said. "The longer a project takes, the more risk it carries and the more costly it is going to become.”

The added time and costs of building a LIHTC housing project, Rollins said, are primarily due to “the complexity of the requirements that come with the funding sources from the federal, state and local levels." 

“Each funding source is so different, it requires such strict compliance in order to mitigate risk that you need to bring in professional services to ensure that you are doing everything exactly as it should be,” she said.

Photo: City of Braintree

A rendering of an affordable housing project in Braintree, Massachusetts, that costs $839K per unit to build.

Some affordable housing deals have more than six sets of lawyers working on different parts of the transaction, and each of their bills can run into the six figures, said Moira Concannon, co-founder of affordable housing owner Elizabeth Property Group.

Labor costs are also a major factor in states like California, where many funding sources require LIHTC projects to pay prevailing wages.

Developers are often forced to build smaller projects when working with low-income housing tax credits, Concannon said, due to state caps on the amount of subsidy provided per project. A 50- to 80-unit building can’t get the same cost savings that projects with 300 or more units can realize from economies of scale.

In Washington, D.C., a pair of affordable housing projects totaling 50 and 52 units in the Adams Morgan neighborhood have run up per-unit costs of $1.3M and $1.2M, respectively, The Washington Post reported in June.

While those projects appear to be outliers, with amenities like a rooftop aquaponics farm, D.C. has continued to finance costly projects. On Aug. 1, the D.C. Housing Finance Agency announced it deployed $41M in LIHTC funds for a 108-unit project in Columbia Heights that has a total cost of $100M — $925K per unit.

“For any jurisdiction that’s funding affordable housing, it’s about how do you get the most bang for your buck?” said Matt Robinson, principal of D.C.-based developer MRP Realty. 

“Is there any way to figure out how you get these costs down? Because every dollar that gets cut is another dollar available to fund another project and more units. So instead of $1M a door, if you can get that cut in half, then you could do twice as many units.”

Some industry players criticize the way affordable housing developers make their income through a fee that is calculated as a percentage of the total project costs, saying it doesn’t give them the motivation to bring down costs that a market-rate developer has. 

“The structure of the process incentivizes the developer to have a more expensive building,” Trinity Investors’ Meader said.

NRP’s Walsh said its 15% fee on the Mesquite project is standard, and more than half of that fee was deferred and will be paid incrementally through the housing community’s operations. 

Deferring a portion of the developer fee is a common practice for LIHTC deals to help make the budget work, and Walsh said it acts as an incentive for developers to keep costs down, as they would rather have more of the fee upfront. 

“We are always trying to cut costs,” Walsh said.

Mimms said LIHTC-funded housing “is often built to a higher standard and quality than the baseline” and blamed the competing interests and goals of various funding programs for driving costs up.

“There is no structural incentive or ways the funding rewards developers for having more cost-effective projects,” he said.

Should The Program Be Reformed — Or Repealed? 

The inefficient use of taxpayer money for LIHTC projects led some conservatives to call for killing the program in recent months as Congress debated its expansion with the OBBBA. 

Rep. Glenn Grothman, a Republican from Wisconsin, released a statement in June following the Post report on the $1.3M-per-unit project, calling for an end to the LIHTC program. 

“The Washington Post article exposed what we’ve known all along: the LIHTC program is not only inefficient, it’s scandalous,” Grothman wrote, adding that the high costs lead to fewer units being built and “wastes taxpayer dollars.”

Photo: Courtesy of The NRP Group

A rendering of The NRP Group's $77M affordable housing project in Mesquite, Texas.

Chris Edwards, a fiscal studies expert at the conservative Cato Institute, testified to a House committee in May and called on Congress to phase out the program, describing it as a “complex and inefficient solution to housing affordability” that raises the cost of building. In June, The Wall Street Journal editorial board called the LIHTC program a “boondoggle” that “has failed to stimulate more construction while increasing building costs.”

But the tax law Trump signed on July 4 increased LIHTC allocations by 12.5% annually, leading to celebration from many elected officials and affordable housing industry leaders who say the program is critical to housing low-income Americans. 

Industry leaders celebrated again on Aug. 5, when the Federal Housing Finance Agency doubled Fannie Mae and Freddie Mac’s cap on LIHTC investments to $2B each. The Affordable Housing Tax Credit Coalition estimates this move will spur the development of an additional 1.2 million affordable housing units. 

Emily Cadik, the coalition’s CEO, told Bisnow the LIHTC program “is essentially the only way we build any new affordable housing at any meaningful scale anymore.” 

The creation of the LIHTC program was in part a reaction to the high-profile failures of government-run public housing in the mid-20th century, said Craig, the real estate law professor.

That included the infamous Pruitt-Igoe complex in St. Louis, which was torn down roughly two decades after it was built. Other cities like Newark, Philadelphia and Chicago also demolished public housing complexes around that time after they became concentrations of poverty and crime.

Congress effectively prevented the construction of new public housing projects a quarter-century ago with the passage of the Faircloth Amendment, a policy that set a cap on the number of public housing units a housing authority can operate at 1999 levels. Progressives have sought to overturn this policy in recent years, and Craig said he thinks public sector affordable housing authorities would be able to build at lower costs than developers using the LIHTC program.

“Investing in deeply affordable public housing, or mixed-income housing more broadly, run by a government entity that can afford to keep it low price, is a more sustainable long-term approach,” Craig said. 

But he warned that if LIHTC were eliminated or downsized without an adequate replacement, it would be catastrophic for the affordable housing sector and the low-income residents who rely on it. He said there are ways the government could simplify the LIHTC process and reduce paperwork to bring down the administrative costs and number of attorneys and consultants that developers need to hire. 

“Many of those kinds of reforms are necessary to make LIHTC work,” Craig said. 

Cadik, whose organization represents LIHTC developers and is a vocal proponent of the program, pushed back on the notion that returning to the model of governments building public housing would be cheaper. She said governments have shown a pattern of letting public housing fall into disrepair, and having private-sector entities build and manage properties with government oversight has been “a more accountable and successful model.”

But, she said, some regulations that could be “streamlined” to bring down the cost of building LIHTC projects, including “burdensome” environmental reviews.

“During this political moment where there's a lot of interest in reducing regulations and reducing barriers, we do hope there's an opportunity to address some of the challenges that affordable housing developments need to take into account as they're putting together the financing that market-rate developments simply don't have to,” Cadik said.