Affordable housing developers, particularly those that are underrepresented, face financing challenges due to rising interest rates, soaring land costs and oversubscribed tax credits. At Baker Tilly's 2023 DevelUP workshop in Atlanta, panelists addressed the difficulties of navigating 9% and 4% low-income housing tax credit (LIHTC) process. In addition, they discussed creative solutions to overcome obstacles and highlighted the importance of risk awareness in uncertain economic times, particularly for young participants new to the affordable housing sector.
One of the first important decisions in affordable housing development is site selection. Katessa Archer, Senior Development Associate at Dominium, said that because she is often looking for opportunities in states or regions where Dominium doesn’t have a presence, it’s important to partner with specific local brokers in those markets who understand Dominium’s criteria for development sites. These local connections can then help her work through the development pipeline more efficiently and present opportunities to owners. She added that building trust with local public officials is “incredibly important.”
Torian Priestly, Chief Development Officer with The Benoit Group, said his organization’s approach is to create public-private partnerships with housing authorities, churches and Sec. 501(c)(3) organizations. “This puts us in a position where we're able to leverage that relationship to get tax exemptions and secondary financing,” he said, “which is essential in this market because you have a lot of obstacles and hurdles dealing with construction costs, interest rate hikes and long-term operational costs.”
Priestly noted that the basic setup with most partners The Benoit Group works with includes ownership within the project. Partners participate in the long-term cash flow and receive developer fees based on a negotiated price. Working with local housing authorities also helps The Benoit Group tap into government funds, which helps alleviate issues that many affordable housing developers have with accessing secondary financing, which is critical in closing deals.
Althea Broughton, Partner at Arnall Golden Gregory, said, “When you're looking for a co-developer, you're looking for someone who will be complimentary to the strengths that you bring.” Depending on the partner, she said, what they bring could be money, land, neighborhood relationships or governmental connections.
She noted that when she negotiates a LIHTC deal, she keeps in mind the state’s qualified allocation plan (QAP), which lays out the state’s eligibility priorities and criteria for awarding federal tax credits to housing properties. The QAP will usually require a written agreement related to a partnership that will specify not just the economics of a deal but other items such as establishing site control and the exit strategy for partners in the deal. Churches involved in a LIHTC deal, for example, usually want representation on the board related to the project, and that would be specified in the agreement.
Carmen Chubb, President, Columbia Residential, said connecting with state and city housing finance authorities (HFAs) “are critical partnerships to build, not when you need something, but before you need something.” The HFAs need to understand your company's philosophy, what you personally believe in and what you will stand behind, Chubb said.
Archer said that when developing a new affordable housing project it’s essential to get familiar with the land use attorneys in the area. Those projects will be in areas where zoning may be difficult, “so land use attorneys are some of the most critical components of our team. Oftentimes we keep them on retainer as we look at new opportunities so that we can move more quickly through various entitlement processes.”
She added that good relationships with civil engineers are also important when developing any site that has issues related to grading, wetlands or flood zones. “Those permitting processes from the local jurisdiction can take upwards of 12 to 24 months to work through.” She added that good relationships with bond councils specifically relating to 4% LIHTCs are “incredibly important … as you work through specific waiver processes or when you need to get a specific application funded by a specific date.”
Other entities where good relationships are important, Priestly noted, are city councils, neighborhood planning units and related community organizations since all may be involved in real estate developments and rezoning issues.
DevelUP session moderator Don Bernards, partner and housing practice leader at Baker Tilly, noted that because LIHTCs are oversubscribed in many states, affordable housing developers have to be aware of non-public funding options. Broughton said, at the root, affordable housing developers are always in search of cheap money, regardless of the source. “No matter what you call it, it's debt,” she said. “And when you're structuring your capital stack, you're trying to figure out how much debt your project can support and then what form of equity can fill the gap.”
“I'm on a perpetual quest for low-cost equity for workforce affordable housing,” she added.
Priestly said another source of funding is Sec.108 loans from the Department of Housing and Urban Development (HUD) which can be used for infrastructure costs. He also has looked at creative ways of working with municipalities using tax abatement or tax exemptions to help bridge the gap to closing a deal.
Although not common now, Archer said that many in the affordable housing industry are hoping that middle-income housing tax credits will become a reality to support workforce housing or senior affordable housing deals aimed at residents with incomes at 80% to 120% of area median income (AMI). Legislation to create these type of credits has been enacted in Florida and Texas, and is being considered in other states and in Congress.
Broughton noted that structuring risk is important as developers move toward closing. “All of the major financing sources for affordable housing have rules around them. Developers don’t want to get funding from sources of money with rules that conflict.” She has seen investors walk away from a deal because someone received a grant and put it in the wrong entity, which affected the tax structuring and the ability to sell credits upstream. “HUD is really particular,” she said. “You don't want to find yourself in a situation where you need a HUD waiver because that will take a long time and will knock you off your development schedule.”
Chubb talked about an issue she encountered at a redevelopment project in Athens, GA, where Columbia was converting a former HUD Sec. 8 property and reconnecting the street grid. They encountered more rock in the foundation than they expected. Because they already had a good relationship with the Athens-Clarke County government as well as the housing authority, the government has devoted millions of dollars in sales tax revenue to support completion of the project.
Chubb has also experienced issues with project costs rising in certain cities like Atlanta because of crime rates, leading to more expensive insurance premiums, less coverage and added costs related to security. Finally, Chubb said developers of mixed-income projects “cannot assume that people know how to access the things that they need to be successful in housing. So having a robust supportive service services plan and being able to fund that [is an important consideration].”
Archer said the biggest concern for Dominium is variable debt. They acquired properties when interest rates were significantly lower than they are today with the goal of re-syndicating them. The high interest rates have extended the hold periods for these properties by two to three years. She added, however, “do not sleep on the acquisitions market within the next two years. If you can raise capital … there are going to be significant opportunities to acquire assets that may be below market that otherwise you would not have access to.”
She added developers working with specific syndicators should find out who the Community Reinvestment Act (CRA) buyers are in their area. “They are active, they have needs and they have to fill these needs on an annual basis on both the federal and state credit side,” she said.
Archer also warned that developers who are using third-party management for their properties must pay close attention to their operations. “Rising [third-party management] costs and the reputation of how your development is being operated are going to be the key for you to get opportunities moving forward,” she said. “If you cannot prove that your portfolio is operating as efficiently as you promise, your lenders and equity investors will notice.” Paying attention to existing property management during a period when it's harder to find new opportunities is a good use of a developer’s time. “It's a good way to train your teams,” Archer said, “and it's an important factor to have as a part of your overall development and success with this industry moving forward.”
Priestly noted that rental subsidies have not been increasing to match increases in expenses, which creates a risk for developments. Archer echoed this concern, noting that collections and evictions were some of the highest liabilities within Dominium’s portfolio and a key reason they have not been able to transact certain deals. Dominium’s property management teams are working with local HFAs and state agencies for rental assistance and helping those tenants stay in their units.
Priestly also noted that construction costs are not likely to come down, so developers have to keep that in mind as they look to finance deals. He added that affordable housing developers face unique staffing needs compared to other developers – understanding state QAPs, the bond market and HUD requirements are unique skill sets necessary to support an affordable housing development office.
Panelists shared what they would like to be able to tell a younger version of themselves when they were just starting in the affordable housing space.
Chubb noted that when a project is finished, a developer should ask, “Did we deliver to the community what we promised?” The answers include whether residents can access the newly built housing and thrive in the community, but also whether the partners in the project got the financial outcome they expected.