Building an effective affordable housing development team that can plan, fund and develop housing while managing risk and turning a profit isn’t easy. But at Baker Tilly’s 2022 DevelUP affordable housing workshop in Milwaukee, a developer and a tax credit syndicator provided key tips for aspiring developers to become more successful, especially with their first project. The educational and networking event brought together underrepresented multifamily housing professionals, allies and advisors to learn the ins and outs of affordable housing.
Don Bernards, partner in Baker Tilly’s real estate group and leader of the multifamily housing practice, read from the Affordable Housing Investor Council’s Underwriting Guidelines, “A development team with the appropriate expertise and capacity is essential to the success of a housing credit project. Every member of the team needs to have the relevant experience and financial and organizational strength to deliver its contribution to the endeavor.”
Kevin Newell, founder and CEO of the real estate development company, Royal Capital Group, noted that when he started out, he understood real estate financing and property management from his time working at the Wisconsin Housing & Economic Development Authority (WHEDA), but he didn’t understand construction. Demonstrating his knowledge of how to mitigate risk and effectively use LIHTCs made it easier for him to enter into joint ventures with entities that could provide the construction expertise. Repeating the process successfully over several deals allowed him to build up his own balance sheet and reputation to the point where he could undertake development deals independently.
Lydia Smith, director of the Emerging Minority Developer Fund at the National Equity Fund (NEF), one of the nation's largest syndicators of the LIHTC, underscored the importance of partnerships for people starting out as affordable housing developers. She said, “the value you will get from partnering is going to far outweigh the cost in terms of the fee that you're going to receive on those early deals.” Talking specifically to the less experienced developers in the audience, she said that needing a partner to do a deal is not a barrier to accessing funds through NEF.
Panelists noted that finding the right pieces for a development team is a combination of knowing the skills and experience you have as a developer, being able to identify what you need in a development partner, and then being able to effectively negotiate the terms of the partnership. Smith said “don't undersell yourself; really speak to what your experience is. If you're new, speak to your ambition, your hunger, your growth, where you actually want to be involved.”
In addition, Smith said, less experienced developers should show up for every meeting involving a deal. “That's where the value is,” she said. “That's where you're going to learn and that will help to build your capacity and put you in a better negotiating position for this deal and future deals. And hopefully by your second deal, you'll be able to negotiate a better ownership and development fee structure.”
Newell added, “It's important to appreciate the opportunity to be a student, even for something as basic as going page by page through a 100-page operating agreement with your partners. Every deal is going to have similar language and the quicker you can get from point A to point B, the quicker you can get to the end zone.” Getting a deal done faster in a time of inflation and supply chain delays is especially important, Newell added, because deals can quickly become less profitable as the cost of funds increases.
For his projects, Newell said he has used a general contractor (GC) in two distinct ways. One is during the pre-development phase to help navigate construction pricing and other fundamentals of a project, before issuing an RFP. The developer has to carefully negotiate the fees related to help with the general conditions as well as the overall fee the GC will receive. The second approach is to use in-house expertise or informal guidance for the pre-development work and detailed construction documents and then issue an RFP. Newell said, “It's very important to come up with a defined process, but more importantly, pay attention to allowances because those allowances can derail you and make you either walk away from the deal with no money or require you to put some money into the deal.”
When looking to underwrite an affordable housing development deal, Smith noted that NEF looks closely at the GC’s LIHTC experience – projects completed, how the deals were rated, the GC’s capacity and staffing levels, its pipeline of projects, as well as NEF’s past experience with that GC. Smith said, “These deals are complex and an investor and syndicator want to know that the people who are part of the development team, which is crucial to the success of these developments, have the requisite experience to bring these projects across the finish line without any complications or incident to the investors.”
Newell noted that property management is the most underappreciated business in the affordable housing development ecosystem. Because property management is not a “profitable vertical,” Newell, as well as many affordable housing developers, relies on third party property managers. Newell added, however, that his organization created a quality control group to serve as a partner to the property management firm. The group helps the property manager with everything from trash pick-up to business office assistance.
Smith looks at property managers similar to general contractors – what is their experience with LIHTC properties? “The property manager is very important to these deals, ” she said. The property manager needs the expertise to ensure the property has qualified tenants, to continue earning the credits that it has been allocated and to prevent exposure or risk to the investor if non-qualified tenants are in place.
Baker Tilly’s DevelUP: affordable housing workshop is an event designed to help underrepresented developers conquer affordable housing, scale their business and build diversity. Through comprehensive consulting services, Baker Tilly assists emerging developers of affordable housing by helping them navigate the many steps necessary to bring a project to successful completion — from funding to project management.
For more information on this topic or to learn about services for underrepresented developers, contact our team.