Developing Affordable Housing: Key Considerations for Developers

The Affordable Housing Crisis in the U.S. 

With the affordable housing crisis persisting nationwide, there is a greater need than ever to develop affordable and low-income rental housing. While challenging, some areas of the country have successfully created affordable housing initiatives to encourage developers to take on these projects. For example, in New York City, the Housing New York initiative is expected to reach its goal of creating or preserving 300,000 affordable homes by 2026.  

The Impact on Low-Income Communities 

An “affordable unit” is defined as a unit rented or sold to an eligible tenant or purchaser whose rent is less than a purchaser’s down payment plus a 30-year mortgage payment, as well as typical carrying costs (property taxes, insurance, utilities, condo or HOA fees) of less than 30% of the maximum income level permitted.  

 While there are sanctioned, affordable houses in most cities- that does not mean they are available, and that is where one of the major problems lies. The lack of available and affordable housing makes it difficult for low-income communities to stay afloat.  

According to the National Low Income Housing Coalition (NLIHC), households spending 30% of their income on rent and utilities are defined as housing cost-burdened, and those paying 50% are considered severely cost-burdened. Based on statistics provided by NLIHC, "11.3 million severely cost-burdened renter households, 8.1 million, or 72%, are extremely low-income, 2.3 million are very low-income, 713,000 are low-income, and 188,000 are middle- or higher-income. Combined, extremely low-income households account for 98% of all severely cost-burdened renters."   

Key Steps in Affordable Housing Development  

There are four critical steps to developing affordable housing.

1. Predevelopment: In the predevelopment phase, developers need to complete a market study, secure the right location, learn the community's needs, prepare financial applications for permanent financing, and understand the resources available.  
2. Development: This phase includes buying, building, and rehabilitating the property. Organizations need to become familiar with capital finance resources when developing these properties.
3. Operations: Once the property is ready for occupancy, operation costs become apparent. These include utilities, marketing, maintenance, project management, leasing, loan debts, and employees. Although this phase has many financial elements, income also comes from operation grants, rent, and federal rental assistance.
4. Supportive Services: Once the building is occupied, several support services are available for the developer and the tenants. These services may include case management, tenancy support, resident services for community-based events, and counselors.  

Planning for Long-Term Success  

By following these four steps, developers can position themselves for success in affordable housing. In addition to these key steps, real estate organizations can leverage their property by using innovative technologies, partnering with banks and fintech groups, and utilizing different incentives, including other tax credits. Overall, creating affordable housing can have major financial, social, and environmental payoffs.   

Understanding Financial and Operational Risks  

Although developing affordable housing can be mutually beneficial, there are associated financial and operational risks. Even though affordable housing has several government assistance plans and incentives, the economy still affects operational costs. While inflation surges, operational costs increase, and profit margins may decrease due to rent restrictions.  

Navigating Funding and Incentives  

Obtaining government funding comes with compliance requirements from a state's housing agency, the Department of Housing and Urban Development, or the IRS. Accounting support can be helpful throughout this process to fulfill compliance requirements and maintain good standing each year. 

Low-Income Housing Tax Credit (LIHTC) Overview 

Affordable housing projects are made possible through government incentives such as the Low-Income Housing Tax Credit (LIHTC), grants, loans, or rental subsidies. Governed by the IRC Section 42, LIHTC properties are subject to a minimum 30-year affordability commitment: a minimum 15-year initial compliance period, plus a minimum 15-year extended use period by way of the LIHTC Land Use Restriction Agreement (LURA) placed on the property. 

This commitment limits the amount of rent that can be charged and limits the pool of potential residents to only those with income levels under applicable income limits. The QC option in IRC Section 42 allows owners to “opt-out” of the program beginning in Year 15 by requesting a release from the affordability restrictions from the State Housing Finance Agency (HFA).  

 The Importance of Professional Guidance  

The many constraints on developing and managing affordable housing can be overwhelming, so it's essential to take the time to determine long-term financial risk and operational goals before embarking on a project.  Our specialists can help guide developers through the entire lifecycle of a housing project, including: 

• Pre-development planning 
• State Housing applications and assistance in communication with state housing agencies 
• Assist with compliance aspects such as yearly audits, tax certifications, and tax credits  

Affordable housing projects are highly regulated, and the process can feel complex and ever-changing. Contact us today to hire a team of experienced professionals to assist developers in beginning their projects and guide them as they progress.  their projects and guide them as they progress.