Affordable vs Market Rate

As a real estate developer, is there any financial benefit/ advantage to developing affordable housing versus market rate multi family?

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Comments (34)

Jun 7, 2021 - 9:33am

Not in affordable but have been exposed to a few deals through jv network, any experts out there please feel free to correct me if I'm wrong. Pros to affordable:

- reimbursed by govt for up to something like 80% of soft costs

- tax credits are sold to LTD partners to cover equity requirement

- depending on if its 4% or 9% deal, you can use tax exempt bonds

- FAT developer fee paid over the first couple years

The biggest draws are a) its virtually risk free once developed b) it requires next to no equity from the sponsor

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Jun 7, 2021 - 11:36am

I don't work in affordable, but have interviewed with a couple firms and had a professor in my MSRE who moved into the affordable space and everything stated here ^ is accurate to my knowledge. As my MSRE professor said, "Affordable development is a fee business." You're essentially providing a service to the government by building affordable housing for them and they reimburse you the costs and pay you a fee. The limitation is that the govt only allocates a certain number of tax credits a year, so you need to pitch your affordable housing deal to them and beat out other affordable projects. As with anything when dealing with the govt, I imagine a lot of red tape, bureaucracy, and paperwork

Jun 7, 2021 - 8:31pm

^this. Much more fee oriented and requires dealing with a ton of red tape, similar to HUD but another layer. Fee's are great but not a promote/merchant build it with the 15 yr lockouts. We are mostly market rate but have a few LIHTC deals in pipeline only because we can do them, stumbled upon in a market we know and are doing other things in.

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Jun 7, 2021 - 12:57pm

I've never done work in California but for example, some things you might get from your local city/municipality/state:

- Expedited permit timeline

- Reduction in certain fees

- Tax exemptions once occupied

- Attractive financing (low/little recourse, low rates, etc.)

I have also heard of situations where you have 2 sites, you agree to build social or affordable housing on site A, and request for an increase or transfer of unused density from site A to site B, where Site B is a market building.

Jun 7, 2021 - 1:18pm

I work for a multifamily developer that builds both market rate and affordable buildings. 

Benefits of building affordable housing:

Probably the biggest benefit to building affordable housing is very little (sometimes zero) sponsor equity is required to do a deal. Between permanent financing, tax credits, and some sort of local subsidy, the project is largely/fully funded. And while the cash flow an affordable property generates is much smaller than market, it is still profit. I could put up effectively $0 to earn $300k/yr. once the building is stabilized and developer fee is paid off.

Another benefit is developers could possibly structure a deal where they bring in a non profit partner, which would exempt the building from real estate taxes. There's also less lease up risk, rents are AMI restricted so you have a good understanding of how much income your getting. And affordable buildings fill up quickly because there's such a demand. 

Building affordable housing helps your reputation in the eyes of city officials as a for profit developer. You really are doing good work- there's a huge shortage of affordable housing, especially in major metros. Some existing inventory is god awful, run by slum lords. 

Buildings are also easier and cheaper to construct, however, now that the cost of lumber is so high this benefit is being chipped away. 


You basically need tax credits and subsidy to make a deal pencil. For profit developers would not tie up $5M+ to do an affordable project, not an efficient use of capital. Getting credits is competitive- 9% credits are very limited and difficult to obtain. Also eligible basis is capped, this limits the number of units you can build with 9%. 4% credits are not as competitive, but still hard to obtain. If your deal needs subsidy, you need to negotiate with the city to give you the funds you need. Very hard to get your full ask. 

Since affordable housing requires government involvement, it is key to have strong relationships with elected officials in your submarket. Dealing with public sector is another potential downside. Gov. generally works a lot slower than the private sector. Very hard to get public sector employees to push towards a deadline. Developers also need to know how to work around bureaucracy red tape. 

Jun 7, 2021 - 4:10pm

One of the big downsides I haven't seen anyone mention is that once you apply for your credits your construction budget is capped. If you bust it through change orders you can't make up for it by raising rents, that's just coming out of your fee. 

Which is one reason a lot of affordable GCs have made such an insane amount of money over the years - you build in a ton of contingency and often get the benefit of it when you're done.  Back in the day a 30% margin wasn't unheard of

Jun 7, 2021 - 5:16pm

They have limits on that now (max 14% margin, which is still an absurd amount of profit) and audit all your expenses afterward. If you don't spend what you anticipated you just don't get the credit for that anymore, so affordable projects never go under budget, they find a way to spend the money haha. Definitely was in response to what you're referring to. 

Jun 7, 2021 - 9:10pm

While people have stated the benefits, I have to add that probably the #1 impediment to the affordable business is the regulation involved. It's not just dealing with government agencies to obtain financing, permits, tax exempt bonds, etc. But also, your rents are capped for pretty much the next 30 years. Rents are determined by HUD every year. Typically, you only see a 2% increase in rents but expenses increase at a higher rate than that. You won't benefit from natural appreciation and rising rents like market rate properties do. So yeah the cash flows are consistent, but also your rents will always be at least 20%+ discount to the market. 

Jun 7, 2021 - 9:34pm

Answer is no to both. You enter into a covenant with your limited partner and the local housing authority or financing agency. I believe the earliest your LP will allow you to sell is 15 years after completion of project because that is when the initial tax compliance period is over. Remember the LP usually owns 99% of the equity in the project so they will have a say on things like disposition. So you're basically stuck with the property for at least 15 years. But 99% of affordable sponsors don't use that strategy because it's just ineffective to predict how much you can sell it for that far in the future. Plus you'd also have to sell for a sizable discount because the next sponsor can't grow GPR by raising rents and has to deal with regulating agencies for as long as the property is in his/her possession. 

Jun 8, 2021 - 8:00am

Where did you get these impressions? Regulations are the backbone of keeping housing affordable, not sure how that's a downside since it's kind of the point. Also, capping rents does not mean you will always be 20%+ below market. That's just wrong. There are plenty of times when your maximum LIHTC rent is near the maximum achievable market rent for a given submarket because the submarket does not have the economics to pay rent at 100% AMI. If you are going to get the same rents whether you build market or affordable, it obviously makes sense to build affordable.

Jun 8, 2021 - 8:53am

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Jun 8, 2021 - 8:02am

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