Afforable Housing 101

8/14/2019 Afforable Housing 101

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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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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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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

Afforable Housing 101

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