Post on 31-May-2018
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Affordable
Housing 101Collins Capital
Group
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Why is there a housingaffordability problem?
Simply put
working poor families and individuals
do not have enough to pay whatdecent housing costs.
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Thinking about developing affordablehousing?
Consider the following:Who needs the housing?
What is the target population?
Is there a market?
Such as
Average low-income families Extremely poor families
Seniors
Homeless singles or families
Persons with mental disabilities / substanceabuse issues
Persons with physical disabilities
Is there enough demand to fill a project
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Thinking about developing affordablehousing?
Do you need to create the housing orcan you access housing that alreadyexists?
Existing housing may be cheaper to use; canyou work out a deal with the current owner?
Do you build it, buy it or lease it?
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Development Process
Find Site
Assemble Development Team
Determine Feasibility, conduct a
Market Study: is there demand? Financial: can we raise the cash
to cover our costs?
Obtain conditional financingcommitments (grants, loans,etc.)
Proceed with design planning
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Development Process
Obtain cost estimates
Revise financing plan as needed
Obtain firm commitments,
building permits
Close on financing
Construction
Lease-up or sale to homebuyer
Convert to permanent financing
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Development ProcessComponents
Financial Real Estate Acquisition
Structuring Physical Development
\ /
\ /
PROJECT|
|Legal/Organizational Structure
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Finding a Site:
Assessing Existing BuildingsThings to consider before acquiring an
existing building:
Review a copy of the last 3 years audits
Evaluate building condition; is it too far gone?
Acquisition & rehabilitation costs are typicallyhigher than new construction costs
Is it eligible for historic status?
If its occupied, what are the costs of relocationand displacement
Acquisition & rehabilitation projects need a highcontingency budget and typically progress slowly
Are there environmental concerns: Lead paint?Asbestos? Mold? Pigeons?
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Finding a Site:
Assessing Vacant Land
When visiting possible sites, consider the
following:
Cost
Lot Size Zoning & land use controls; density,
parking, etc.
Existing infrastructure and needs
Topography, soils, drainage
Environmental conditions Reputation of the area
Nearby amenities
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Finding a Site:Is this a real estate opportunity?
Ask yourself:
Why would the target population want to
live here? Would you?
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Assembling the Development Team:
Who to include?
Developer Sponsor
General Contractor Market Analyst
Architect Realtor, Appraiser
Attorney Engineer, Surveyor
Accountant Syndicator/Investors
Consultants
Lenders
Government Funders
Property Manager
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Assembling the Development Team:Who does what?
Developer
Pursues real estate opportunities,determines feasibility, takes up-front
cash risks, lines up financing,coordinates design & construction
plans, guarantees constructiondelivery
Sponsor
Non-profit entity may take on some
developer duties, advises developeron local issues & politics, marketneeds, supportive services
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Assembling the Development Team: Who does what?General Contractor
Manages construction; engages, supervises & paysub-contractors
Architect(s)
Works for owner to design the project withinbudget; inspects construction
Engineers
Civil Engineer (roads, utilities)
Surveyor
Soils testing; Environmental (Phase I)
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Assembling the Development Team:Who does what?Consultants
Assist Developer & Sponsor with thesetasks as needed, especially obtaining
public funds; liaison to funders; advisingon regulatory compliance
Attorney
Identify/create required legal structure forproject; acquire real estate including
negotiations, title review, zoning
clearance, closing; and, review &negotiate financing terms andconstruction contracts
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Assembling the Development Team:Who does what?
Accountant
Construction accounting and costcertification
Syndicator
In a tax credit project, arranges for the saleof the credits to investorsto provide
cash to the project for developmentcosts.
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4 things that can kill a project
Zoning/NIMBY issues Environmental problems
Title problems
Numbers that will never work
Consider the following:
Are any of these an issue for you?
Do you have experience with theseconcepts?
If not, does someone on yourdevelopment team have experiencewith these concepts?
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A new moderate size 3-BR housecosts $100,000-$130,000 to developand build;
A new moderate 2-BR apartmentcosts $70,000-$98,000 to build;
An existing older house in a modestneighborhood costs $60,000-$110,000 to buy; and
An average apartment costs $400 permonth just to operate.
Financing Affordable Housing: What Does Decent Housing Cost
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Financing Affordable Housing:How Much Housing Can Poor
Households Afford?
HUD says a rental household should not paymore than 30% of its adjusted gross incomefor housing expenses.
If gross income = $15,000
Monthly = $1,250 x 30% = $375
Subtract utility allowance of $100
Result is $275 net rent capacity
How much good housing is available in yourtown at $275?
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Financing Affordable Housing:How Much Housing Can Poor
Households Afford?
For homeowners, the underwriting ofloans to be sold is dictated by FannieMae & Freddie Mac.
Lenders should limit loan payments to
28-33% of gross income, but 36-40%including all debts.
If gross income = $30,000 ($2500/mo)
PITI @ 33% = $10,000 / 12 = $833
Minus taxes & insur. of $145 = $688
$688 supports $103,400 loan @ 7% with 30year amortization
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Financing Affordable Housing:How Much Housing Can Poor
Households Afford?
What if same family has $655 permonth in debt payments?
Income = $30,000; PITI was $833
40% total debt cap = $1,200 /mo.
$1,200 - $655 = $545 available
$545 - $145 tax & ins. = $400
$400 loan payment capacity supports aloan of $60,000 at 7% with 30 year
amortization
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Financing Affordable Housing:What Rent Does the Owner Need to
Charge?
Debt Service on $20,000/unit = $150/month
Add 20% cushion for debt coverage ratio
= $180/month
Add $300/month/unit operating budget =$480/month
Add 7% cushion for vacancy and bad debt =$500 total rent
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Financing Affordable Housing:Why Its Hard To Lower
The Rent Enough
Typical Apartment Operating Budget
Type of Cost Per Unit/Year
RE Taxes, Insurance 900
Owner-paid utilities 600
Maintenance 750
Admin/Personnel 400
Management Fee 400
Audit, tax return, legal 200
Replacement reserves 300Misc. 50
Total $ 3,600
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Financing Affordable Housing:How To Bring That Rent Down?
Type of Subsidy Rent Cut
$5,000 PER UNIT IN GRANTS $ 39
$10,000 PER UNIT IN GRANTS $ 78
2% LOWER INTEREST % (AHP) $ 29
4% LOWER INTEREST % (AHP) $ 59
50% TAX ABATEMENT $ 25100% TAX ABATEMENT $ 50
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Financing Affordable Housing:What subsidies make it work?
Program TypeHOME, CDBG, trust funds Grant or loan
Section 236 or RD 515 Interest rate cut
Section 202/811 Grant
Section 8 N/C, Mod Rehab, etc. Rent subsidySec. 8 vouchers, certificates Rent subsidy
Section 9 (Public Housing) Rent subsidy
Dept of Mental Health HAP Rent subsidy
Low-Income Housing Tax Credit Tax loss
Mortgage Interest Deduction Tax loss
Fed. Home Loan Bank AHP Interest rate cut
Tax Abatements Tax loss
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Financing Affordable Housing:What do these subsidies do?
Grants and deferred repayment loanssubstitute for hard debt; reduce debtservice;
Interest rate reductions also reducedebt service;
Rent subsidies make up for what thetenant cannot afford.
The owner or developer can use thiscash to: Spend more on the housing; or
Reduce rent or sale price; or Cover higher operating costs
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Interested in pursuing the developmentof affordable housing in your
community? We can help!
Contact CCG at(704) 605-0127
Executive Director:
Al Collins