Explain Affordable Housing?

I've been reading up on LIHTC/Muni bond financed housing projects built by Affirmed Housing and the like. can someone explain how these work, and what the incentives are for the developers and investors? i.e. tax credits, cheap financing, speedy approvals, depreciation, etc...Are there any downsides to this type of housing on the broader market? Why aren't more people doing this? Why hasn't the govt pushed these types of public/private housing solutions vs. trying to build their own? Thanks.

 

short take...

Developers get tax credits, density bumps, and other benefits to rent units at cheaper prices. In some cities, allocating some units to 'affordable' is just part of the requirements to get entitlements.

The reason everyone doesn't do it, especially with programs like LIHTC, is that there are limited amounts of allocations that get awarded by each state, it's super competitive. And taking the gov't comes with tons of strings (like the ability to sell/refi sometimes) and paperwork. If you mess up, it can be very costly.

The net result is that it makes this area a specialty in most markets.

 

just adding to this at a high level. One of the reason's it's so difficult is because you essentially have to make the stars align perfectly. You need community buy-in and planning/zoning approval, which is hard to get without the various sources of funding and credits lined up and ready to go. It's hard to get your various sources of funding and credits lined up without community buy-in and planning/zoning approval. It's the chicken and the egg.

This challenge is true for market-rate development as well. But with affordable housing specifically, which can be a sensitive topic for most neighborhoods/communities (despite how "progressive" those neighborhoods/communities claim to be), there are many more layers of funding/regulation with short fuses and if one group pulls out the whole house of cards topples and you are back to square one, which hurts your reputation and abilitiy to be successful on the next attempt.

 
redever:
So true, everyone says they are in favor of this until its proposed next door to them. Go look up the 'poor door' controversies in NYC!

That isn't really what the poor door was about, nor were the "poor door" projects financed with tax credits (with some extremely limited exceptions). But that's neither here nor there.

Tax credit projects are undertaken for basically two reasons - you have essentially zero lease up risk, and some refundable pre-development costs aside, no equity requirements.

So if I am a tax credit developer (newsflash: I do work for a LIHTC developer), I have incentive to do this both on the downside (no market risk, not putting my own money on the line), as well as because fees tend to be higher than normal. In New York, fees for a tax credit project average out to ~12%. In a high cost environment like New York City, this means even smaller projects are generating millions of dollars of fee income.

Obviously there are some downsides. No long term upside, for one! But also as others have said, LIHTC financing is incredibly competitive, especially for 9% credits. It also comes with tons of strings attached in terms of regulation and oversight. And yes, if you screw up, it can expensive to cover budget overruns or to get a downward adjustor on tax credits which require an equity infusion. Even applying for the credits/bonds is a complex process that requires navigating several housing agencies. And again, not pissing off community activists is key, because unlike with a regular project where the community can rail against the entitlement process but only has one lever, here you have the additional pressure of having your financing in the hands of politicians who are far more responsive to public opinion than a bank or even planning department is.

At the end of the day it's a difficult industry to break in to, because it requires a certain level of relationship/trust from the public sector and a reasonably detailed understanding of the regulatory requirements, both of which are only really achievable by being in the industry for a while. At least in the Tri-State area, it's why you see very few new players in the space; the same 5-10 firms do the vast majority of affordable housing here (a fact the City has been desperately to change with little success). It's also not an attractive model for lots of would-be real estate moguls. I read a quote where a developer said they hit lots of no-risk singles, but never a home run. And I'd argue that whatever people say, most up and coming developers want to do a Walker Tower deal and make a shitload of money despite the risk, rather than a Via Verde which requires a LOT more time, patience, and energy, for a lower pay day.

 

Developers (GP) partner with tax credit syndicators (LP) (most of the time a bank), LP contributes capital to the partnership and is allocated the tax credits which it then sells to corporations or uses to cover it's own taxable income. Developer makes money on development fees, compliance fees and other misc fees it's allowed to charge the partnership plus a related-party property management company is almost always used. As explained above, it's a competitive process to build affordable housing as states are allocated a certain amount of money from HUD and your proposal has to compete with others to win approval.

On top of that there are various HUD & state compliance you have to deal with that are completely alien to market rate developers.

It's such a complicated mess that if a market rate developer wants to get into this, they would need to hire at least a couple of experienced lihtc development professionals, mistakes can be very expensive.

 
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