Affordable Housing Struggles?
Anyone start off in or generally work in affordable housing acquisitions or lending? Ever feel like it’s so convoluted and byzantine that you just have a sense of frustration and despair? I am generally passionate about real estate and have been told by others that I’m a upper echelon worker….however, I just can’t make sense of how one can be in affordable for their whole career. A lot of the processes are archaic, the rules often times do not make sense for today’s time or are inefficient. I know I definitely don’t but I still want to make the effort to learn more and get it right. It’s definitely an intriguing space in some aspects. May sound like I’m ranting but I say that to say this - how did you guys get through your growing pains and struggles starting out in the industry? For context, I have about 2 YOE.
You want to run towards the inefficient markets not run away. You can make a lot of money being a sophisticated affordable developer.
Not saying I don’t believe but you can provide some math behind that? Most affordable dev models I see show very little annual cash flow and the developer fee, while in the millions of dollars, probably is not a whole lot after you pay overhead, salary, expenses, etc. Sure, it’s a nice amount but it’s limited due to affordable developments have tight sources and uses on top having to be compliant with eligible basis and QAP.
My data point is from a state in the Pacific Northwest. I am not in the industry but am close to someone who is. You can run a shop with 2-3 people and easily do a 4% and 9% annually which in this case, was roughly $5mm-$7mm in developer fee depending on how big the 4% deal is (40% of this fee is typically deferred on paper but they are good at estimating the costs and the unused contingency ends up going towards the deferred fee). Once the deal closes, the developer has no capital in the deal and typically has the partnership pay him cost + a market interest rate for what he was fronting. If you hang around long enough you start to recycle the deals after year 15 and start the process again.
No, there isn't much cash flow. But developer fees can be absolutely enormous. And they're guaranteed. And there is no equity at risk. So... do you want a 10% fee across the board on TDC with no money down, or do you want to make 4% on a market rate deal, underwrite to a 6 cap, and hope the market supports a promote? All while putting up serious equity and guarantees?
It's a question of risk vs reward. Affordable housing, or at least LIHTC construction, is low risk (for development, of course) and generally low reward. You're gonna hit a single or a double every time out. Market rate development is a lot riskier. Yeah, you get the occasional home run, but sometimes not only do you strike out, but that failure costs you your entire business. Look at HFZ! One project went down the tubes, and it took the entire business with it.
I have 1 YOE at a LIHTC Developer and a large BB LIHTC lender, so I’m still on a learning curve… and honestly everyday I’ll learn something new but also get really frustrated with how complicated this shit is. I feel you.
There are so many rules that differ state by state. So many sources in the capital stack. So many government agencies to deal with. Rules constantly changing.
At the same time that I’m frustrated, I am also satisfied that I am becoming more proficient and knowledgeable in the LIHTC space. It is becoming popular and it’s nice to know I’ll be a valuable player in the affordable housing sector.
I’m actually passionate about serving the low income demographic in America. The fact that it’s more complicated is an appealing aspect of the industry because it means the barriers to entry are higher and expertise is more valuable. If you don’t like it why not switch over to a multiasset class or market rate multi shop
Plan on doing this but for now want to learn more in affordable. I have been told that if you can understand affordable housing, you can understand anything. Did say before that I definitely don’t see a long term career in affordable for me.
If you can understand affordable you can understand multi, true but generally affordable lending and acq is not very applicable to other real estate. All depends on what you want but if you don’t see a long term then I’d advise jumping sooner rather than later to a better fit or somewhere less niche
Examples on how it is not applicable to other RE?
Personally I think pigeonholing is overrated and you can learn new skills/frameworks easily but it’s very common and if you have 4 years of affordable experience and try to jump to a multiclass or anything outside of multi it’s an uphill battle
Well you lend/acquire LIHTC properties for different reasons than market rate.
So why spend the next few years learning LIHTC just to switch to market rate and then brain dump half of what you learned about in LIHTC?
If you come from LIHTC to market, you can show people you can understand complex RE transactions, sure.
But…it’s not gonna make them automatically choose you over another candidate who’s been in market rate his/her entire career with same YOE.
That’s how I see it. I could be wrong.
Right, but the capital stack, the diligence process, all of that is 10x more difficult and complex than in a market rate deal. If you can build or buy an affordable or LIHTC project, then you can forget 90% of what you know and still be a top flight market rate developer.
Your argument is that learning something is stupid if you won't need it forever?
Look, the massive advantage to LIHTC development experience is that there is a super limited pool of developers, and doing those deals doesn't take balance sheet, it takes knowledge and networking. Working for an affordable developer for 10 years almost guarantees you can go out and start your own shop and have a very good chance of success.
If you get frustrated by inefficient and byzantine rules, being in affordable long term is going to be tough haha. I worked for a market rate developer and I was staffed on the two affordable deals we had for very fairly idiosyncratic reasons. I was mostly responsible for the design development and construction oversight, we partnered with an affordable developer to get us through the LIHTC and local incentive applications, but I was still responsible for overseeing their work and it took a while to be able to really get even 25% up to speed with what they were doing.
My understanding is that you need to be comfortable with the weirdness, the people I worked with were unfazed by all the left turns and random shit that was thrown our way by every jurisdiction we were under. It's just part of the job and it helps if you can recognize that and just take it. It's honestly a pretty good transferable skill because you'll have cities and counties make you do random shit on market rate jobs, too, just not to the same extent.
LIHTC development seems too complicated and stressful with many hoops to jump through. Kudos to anyone developing affordable housing. Most convoluted and arduous space to play in the real estate field.
Agree with this. I would say if you cultivate the right connections in city govt then it can be sort of easier and lucrative to a degree. But still even the best affordable developers can take 4-5 years from pre-dev to TCO on an affordable project because of all the special entitlements and regulations. Whereas the same size deal on market side would prob take 2-3 years without all the extra headaches. Look, I get it that no matter what you build you will run into issues with permitting, construction, etc. but with affordable, you run into a whole bunch of shit that can absolutely cause a prolonged delay, if not entirely kill the deal. The saying goes with more risk, comes reward but in affordable, your profit is fixed. You don’t get benefit of completing on budget, or by leasing up really fast like you would on market rate. IMO affordable dev usually attracts shops who don’t have the capital to do a conventional deal but have the smarts and connections to play around with LIHTC/city govt.
And this isn't the case for market rate? How many years does Gary Barnett spend assembling a site? How many months/years does it take to rezone or entitle a piece of land? The major is difference is you sit on a ton of equity risk on the market rate developments.
The construction period will be exactly the same. Nominally, affordable should lease up faster. So is the difference 12 months for affordable instead of 6 for market? I don't see that as a major negative.
Explain this to me. From where I sit, a 6 month delay in building a LIHTC project is bad but recoverable. Whereas on a market rate deal, where you have an IRR clock ticking and expensive debt accruing, that 6 months may absolutely kill any chance of hitting a promote. Let alone the risk of missing a good market.
Right, but you don't get much benefit from that in market rate, either. Fast lease up is not nearly as much of a boon as a slow lease up is a project killer, since your costs are fixed.
Also, most tax credit investors give significant upwards adjustors for faster-than-expected delivery of credits, so it's just plain wrong to say there is no upside.
This may be true in a sense, since you simply cannot even begin to think about playing in the space until you know what you're doing and know who to call to help move projects along. More to the point, I think affordable housing attracts shops that take a longer view of success. Most market rate developers operate on a very feast or famine mindset; you might make a mint on one deal and then nothing on the next. If you want to get rich tomorrow, build luxury condos and cross your fingers. If you think slow, steady, and safe accumulation of wealth and assets under management is smarter, you might prefer affordable.
Absolutely. It's frustrating as hell and extremely complex and even when you do everything right, you still find a tenant or an elected official or a bureaucrat who wants to throw a spanner in the works just to get their five minutes of fame, or because they don't understand development, or for any other reason.
But that's why affordable housing developers make a ton of money. It's an insanely lucrative field, and the reason for that is because it's byzantine and convoluted. The barrier to entry is so fucking high that only a few people do it. Going and building market rate MF product is something a 10 year old could do, by comparison - all you really need in that case is a rich uncle.
Moreover, there is no better way to go out and start your own shop than in the affordable space. Extremely low risk and no real equity requirement to get started means you'll get financing easily, you don't need to put up your entire net worth to do one small project, and in most jurisdictions there is plenty of land and plenty of bond cap available to do whatever the hell you want, if you're willing to bang your head against a wall for three years
lol emphasis on bang your head against wall for 3 years.
I work in NYC. We get 15% on construction and 10% on acquisition. The last development I was involved in that closed on construction, which was pre-COVID, we built an 80,000 square foot building and our fee was north of $7.5mm. If I was doing that on my own, I'd consider that ample repayment for banging my head against a wall.
Not that I think you were implying this, but the idea that anyone should be paid a ton of money to do something easy is absurd. Yeah, it sucks to watch idiots go buy crypto and turn into millionaires overnight, and then bang your head against that wall, but that's the way it should work. Yes, you could go try and raise $20mm to go build that 80,0000 sf building as a market rate rental, and you'll get a 4% fee or so, so maybe a couple million bucks, and then what? You have a shitload of leasing and market risk, you've still got to deliver returns in the double digits to even sniff a promote, and you're sitting on a ton of risk in the sense that you've probably got your entire net worth as the GP portion of the equity and a bunch of unruly investors who want their returns.
Frankly, I'd rather stick with the less risky approach of building affordable. It's a marathon, not a sprint, and I don't need to make a fortune on one building. If I wanted that, I'd go put my money on the roulette table and spare myself the headaches of constructing a property. You do one of those deals every two years and you're making enough money to support staff and overhead and still clear a couple million bucks a year, all while building assets (because these things do trade well to be resyndicated). To me, that's a really rational career move. I don't need to risk it all on a vision for Walker Tower and make tens of millions
AH is going to be the most needed asset class going forward! Every city in the US has a housing shortage, and it ain’t being solved by single family developers…
Look on any other RE forum post here, and it’s a bunch of young heads complaining about RE being dead, or gone are the days of being a billionaire. Aight, to be that person, do you need a fucking billion dollars to be happy? Regardless, you’re not going to make money or outsized returns if you aren’t solving peoples problems. Sorry, you can’t build another class A shopping center and throw a Whole Foods in there and become the next Starwood. AH is a low supply, highly in demand asset… you’re going to make money on it.
Personally, I believe AH is the best space you can educate yourself on, and dedicate your craft to. As previously stated, you’re going to be in the small pool of individuals who actually understand the terms, and how to take a deal from start to finish. There’s your personal long term, downside protection. As far as investing goes, you get a fat up front equity bump and if you hold the asset long enough, in a major metropolitan, it will retrade down the road and you’ll make more profit.
As a follow up Q, what would people recommend as far as a continuing education degree to be an AH Success story? Personally, I’ve never seen the value in going to get a masters in RE? But, for affordable, I’ve seen Public policy, urban studies, public planning. Any thoughts? Personally I think the more you can understand the political side of real estate, the more untapped your success potential.
Housing in general is needed. I'm all for more affordable housing (Section 8, LIHTC, what have you), but there isn't enough subsidy to keep up with the need. We need local politicians and zoning boards to act in the interest of greater communities and not particular constituencies and allow for more dense zoning, especially of a transit oriented nature. The only way out of the housing crunch is to build. Yes, some affordable - but it's easier to build market rate housing in bulk, and that is what is needed.
Go work at a housing agency. Real estate in general, I feel, gets far less reward from a higher degree, since the "path" isn't as defined as in banking on consulting, where short detour for an MBA at a great business school is an acceptable substitute, or even superior to, experience.
If you live in, say, Philadelphia, and want to go into affordable housing, you're time and effort will probably yield greater results by working for a few years for the Pennsylvania Housing Authority than going to Wharton. You'll learn more, what you learn will be applicable and have context and not information in a book, you'll network with all the people who you'd want to hire you, and as an added bonus you get paid to do it (though probably not much) instead of paying to be in school!
At least in NYC, the only place in which I can speak to with even the slightest bit of knowledge, there are a bunch of executives at private companies who were former City government officials. And the ranks of project managers on the for-profit side are absolutely packed with former agency folks. People work for several years at the housing agencies and then leave and get paid a lot more on the private side, and it's an easy transition because the developers know those folks because they worked hand in hand with them while they were on the public side. Very smooth process
Spot on with the state housing finance agency comment. I am currently on this path, and I just hit the two year mark. Looking to make my exit, and there is definitely interest from developers. I was getting looks and interviews at the 1-1.5 year mark, but two years is kind of the sweet spot IMO.
Just be a broker for AH, less headache..more $
As a general rule, brokers make way less than owners.
I know this discussion is over a year and a half old at this point but OP, are you still in the affordable space or did you already leave?
Just reviving this because i may be getting some exposure to this space, really want to know if things still hold. I read through some of the more detailed responses here and it definitely seems like a space with steady money and lower risk, but navigating the process with the associated jurisdictions seems like it can be quite arduous.
Can you pm me?
The moment I get a chance to leave affordable housing development, I’m out. My experience compared to market rate has been tumultuous. Now that’s most states are oversubscribed in for 4% bonds, the path to do it on your own just got a lot harder. Yes, legislation passed for increase of 12.5% and 30% test instead of 50%, but only last till 2025. This new legislation allows forlook back to fund deals that have funding gaps.
The lack professionalism in the older guard is terrible. Great practitioners but horrible managers of people and mentorship. I’ll say this again like I’ve said in other threads older guard and millennials that have good footing their career be better mentors and manager to the next generation of professionals. END RANT.
Did you work in market rate development? This post sounds like someone who is currently upset that their job got harder than it used to be, and assumes it is easier everywhere else.
Here is a newsflash: it isn't. Affordable housing is way more complex and regulated, and so is harder from that perspective, but is a lot steadier than market rate development, and involves less stress.
The work has actually been relatively easy once you learn it. Yes it’s complicated but honestly it’s not rocket science. The issue has always been the personalities. You’re obviously a prime example of the problem. I don’t know how long you’ve been in the industry but you’re obviously knowledgeable. We all see your posts, but if I had to work for someone like you I’d end up slapping you. You’re obviously in a position to be helpful from all that you know and experience but you choose to bag on people anonymously in this forum a majority of the time with young folks that have no clue. I really hope your in person persona is more pleasant than what is represented on WSO. Like I said as part of the old guard DO BETTER FOR THE NEXT GENERATION OF PROFESSIONAL Go ahead and write your long response but I won’t have time respond. Your perspective is not the only one worth hearing.
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