Affordable Housing Basic Terminology

Hard Costs

These are the “bricks and mortar” costs of construction. They usually make up the largest portion of the budget. Examples: all labor, building materials, utilities installation, site work, landscaping, and contractor overhead.

Soft Costs

These are the professional, regulatory, and administrative costs required to plan and execute the project. Examples: architecture, engineering, legal fees, financing fees, surveys, permits, inspections, insurance, and developer fees.

Operating Expenses

These are the costs to run the property once people move in. Affordable housing often requires strict budgeting due to rent caps. Examples: maintenance, property management, utilities for common areas, insurance, replacement reserves, taxes, and compliance reporting.

Net Operating Income (NOI)

This is the money left after paying operating expenses but before paying loan debt. NOI = Rent Revenue – Operating Expenses. Lower rents mean lower NOI, which is why affordable housing needs subsidies. NOI limits how large a loan the project can support.

Gap Financing

This is funding used to fill the “gap” between what the project costs and what it can support based on its affordable rents. Sources may include City or County loans, grants, tax credits, or philanthropic contributions. Affordable housing almost always requires gap financing.

Soft Loans

These are loans with favorable terms such as low interest, deferred payments, or repayment based only on available cash flow (if any). Soft loans are used by cities and states to support affordability without overburdening the project.

Low Income Housing Tax Credits (LIHTC)

A federal program operated at the state level that gives investors a dollar‑for‑dollar reduction in federal taxes in exchange for funding affordable housing. Investors buy the tax credits, and the money they pay becomes equity for the project. LIHTC is the single largest source of affordable housing equity in the U.S. In North Carolina, LIHTC is administered by the North Carolina Housing Finance Agency (NCHFA).

Developer Fee

A fee paid to the developer for managing the entire development process. This is one of the main ways developers are compensated. In affordable housing, this fee is often regulated and may be paid in installments as financing closes and construction progresses.

Permanent Loan

This is the long-term mortgage after construction is complete. The permanent loan amount depends on NOI — so lower-income projects can borrow less, increasing the need for equity and subsidies.

Construction Loan

A short-term loan used only during construction. It has higher interest but is paid off when permanent financing takes over.

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