Affordable housing - How do you make money?
Prospect here. How do you make money with affordable housing given the rent is capped? Government subsidy? Thinking about social housing funds.
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Developer Fee when initially establishing legal structure to receive tax credits or resyndication after 15 year compliance period. Last option for large windfall is disposition of the property with thought of the property becoming market rate.
Affordable housing is a fee game. Like the comment above - the developer fee. In Affordable housing the developer fee can be 10%-15% of the project cost (compared to market development where it’s 3%-5% of the project cost).
In addition to the developer fee, the developer will get a property management fee during the hold of the asset (if they do PM). At the end of the 15 years, they can re-syndicate the asset for LIHTC and get another developer fee. It becomes an annuity you can cash in every 15 years.
Or sell it.
10-15%? WTF. I’m guessing there’s absolutely no JV equity market for these projects and it’s pretty much all owner/operator and developer driven then?
There are a segment of LP's that raise money from banks and insurance companies to provide equity capital in exchange for the credits and losses. It's not traditional equity investing by any stretch.
And banks, for the most part, don't buy LIHTCs to make money but to keep regulators off their ass. Classic case of regulatory capture.
Yup, returns are generally benchmarked to the 10 yr treasury with a 200-300bp spread.
This is only partly true. Especially in a low interest rate environment, LIHTC can be a profitable investment. Between the tax credit and the depreciation, there is good risk adjusted value to be had there. The necessity of buying the credits may push rates up a little, but not much.
I used to be fairly close to the CEO of a major east coast bank. He told a small group of us the sole reason they bought LIHTCs was because when they went to purchase another bank they'd use their "investments" in low-income communities as a way to keep activist groups from going to regulators demanding the mergers/acquisitions be stopped. Also, it allowed the bank to comply with the Community Reinvestment Act without actually lending in high-risk (i.e., high crime) communities. Any profit from LIHTCs was purely icing on the cake.
There is no equity market in the sense you're thinking of it. Since there is little to no cash flow and your exit is constrained until 30 years down the road, where would the returns come from? I suppose you could look at it as if an equity partner was buying a developer's platform, and injecting equity so the developer could spend more on predevelopment or tie up more money in land loans or have balance sheet to allow for more/higher construction completion guarantees, allowing for a greater velocity of business, but because the deals themselves don't require equity there isn't a need for that part of the capital stack.
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I’m thinking about leaving affordable housing because of bureaucracy. It’s kinda ridiculous.
Right, but that's what you're being paid for - is dealing with the bureaucracy and regulations.
On a market rate development you have far less to do when it comes to financing the deal, but you have a lot of back end risk when it comes to lease up. You have effectively zero market risk on affordable, but you contrast that with a higher barrier to entry when it comes to putting together a capital stack and complying with various rules and regulations.
Some of it is a question of what kind of incentives drive you as an individual/business. LIHTC developers make ~12% on the TDC of a deal as their developer fee (spread out over the life of the deal), and have no equity in, generally (or very little). Historically, market rate rentals might throw off 5% CoC (in NYC, at least, obviously adjust for your market) with a 4% developer fee, with a chance to make huge money on a sale. But you're tying up a lot of capital and even a small expansion in cap rates means you've gone from a 25% IRR to a 5% IRR. Bigger risk, bigger reward. Some concept with condos, but blow out the risk/reward factor even further.
I've heard sort of a conspiracy theory that an affordable housing developer would build a project in subpar standards so that in 15 years it would require another rehab, giving them more fees. Obviously cynical but I wouldn't be surprised if fee developers do that occasionally.
Doubt that. State QAP and HUD do random inspections to ensure they are good condition. A bad inspection can had hamper your chances of getting funding in the future. So if have any sense don’t think you’d do that on purpose.
You aren't allowed to build to a lower quality, but it is common to resyndicate projects to address capital needs. The operating margins are generally too thin to handle the rehab without the total recapitalization.
Two ways: 1) fees, 2) eventual conversion to market rate
You can't build affordable housing profitably without tax credits, special financing, etc
so only "affordable" for 15 years? and then hope for an exit after the rent returns to market rate?
This isn't quite right. With the LIHTC program, it's a 15 year tax credit, but the compliance period extends out another 15 years. Essentially, after 15 years you can apply to do another tax credit transaction (resyndicating them, as it's known) and put the proceeds into rehabbing the property. Which would restart the clock. But if not, you have to get out to year 30 before they become market rate. That being said, there are all sorts of other reasons one wouldn't take the asset out of affordability after that point.
Not in RE so just asking out of curiosity here. Does your question apply to the affordable housing allocation required on NYC apartments? And if so are the below answers still applicable on a pro-rated basis? Zero context on this so not sure about any of it but have always wondered given all buildings I've lived in require a certain allocation to affordable housing and have always wondered how the owners compensate for it
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