Affordable

Housing 101
Collins Capital
Group
 Why is there a housing
affordability problem?

Simply put…

working poor families and individuals

do not have enough to pay what
decent housing costs.
Thinking about developing affordable
housing?
Consider the following:
Who needs the housing?
What is the target population?
Is there a market?

Such as…
 Average low-income families
 Extremely poor families
 Seniors
 Homeless singles or families
 Persons with mental disabilities / substance
abuse issues
 Persons with physical disabilities
 Is there enough demand to fill a project
Thinking about developing affordable
housing?

Do you need to create the housing or

can you access housing that already
exists?

 Existing housing may be cheaper to use; can

you work out a deal with the current owner?

 Do you build it, buy it or lease it?

 Development Process

 Find Site
 Assemble Development Team

 Determine Feasibility, conduct a

Market Study: is there demand?
 Financial: can we raise the cash
to cover our costs?
 Obtain conditional financing
commitments (grants, loans,
etc.)
 Proceed with design planning
 Development Process

 Obtain cost estimates

 Revise financing plan as needed
 Obtain firm commitments,
building permits
 Close on financing
 Construction
 Lease-up or sale to homebuyer
 Convert to permanent financing
 Development Process
Components

Financial Real Estate Acquisition

Structuring Physical Development
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PROJECT
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Legal/Organizational Structure
 Finding a Site:
Assessing Existing Buildings
Things to consider before acquiring an
existing building:
 Review a copy of the last 3 years audits
 Evaluate building condition; is it too far gone?
 Acquisition & rehabilitation costs are typically
higher than new construction costs
 Is it eligible for historic status?
 If it’s occupied, what are the costs of relocation
and displacement
 Acquisition & rehabilitation projects need a high
contingency budget and typically progress slowly
 Are there environmental concerns: Lead paint?
Asbestos? Mold? Pigeons?
 Finding a Site:
Assessing Vacant Land
When visiting possible sites, consider the
following:

 Cost
 Lot Size
 Zoning & land use controls; density,
parking, etc.
 Existing infrastructure and needs
 Topography, soils, drainage
 Environmental conditions
 Reputation of the area
 Nearby amenities
 Finding a Site:
Is this a real estate “opportunity”?

Ask yourself:
Why would the target population want to
live here? Would you?
 Assembling the Development Team:
Who to include?
Developer Sponsor
General Contractor Market Analyst
Architect Realtor, Appraiser
Attorney Engineer, Surveyor
Accountant Syndicator/Investors
Consultants
Lenders
Government Funders
Property Manager
Assembling the Development Team:
Who does what?
Developer
Pursues real estate opportunities,
determines feasibility, takes up-front
cash risks, lines up financing,
coordinates design & construction
plans, guarantees construction
delivery

Sponsor
Non-profit entity may take on some
developer duties, advises developer
on local issues & politics, market
needs, supportive services
 Assembling the Development Team:
Who does what?
General Contractor
Manages construction; engages, supervises & pays
sub-contractors
Architect(s)
Works for owner to design the project within
budget; inspects construction
Engineers
 Civil Engineer (roads, utilities)
 Surveyor
 Soils testing; Environmental (Phase I)
Assembling the Development Team:
Who does what?
Consultants
Assist Developer & Sponsor with these
tasks as needed, especially obtaining
public funds; liaison to funders; advising
on regulatory compliance

Attorney
Identify/create required legal structure for
project; acquire real estate including
negotiations, title review, zoning
clearance, closing; and, review &
negotiate financing terms and
construction contracts
Assembling the Development Team:
Who does what?

Accountant
Construction accounting and cost
certification

Syndicator
In a tax credit project, arranges for the sale
of the credits to investors—to provide
cash to the project for development
costs.
4 things that can kill a project…
 Zoning/NIMBY issues
 Environmental problems
 Title problems
 Numbers that will never work

Consider the following:

Are any of these an issue for you?
Do you have experience with these
concepts?
If not, does someone on your
development team have experience
with these concepts?
 Financing Affordable Housing:
What Does Decent Housing Cost

 A new moderate size 3-BR house

costs $100,000-$130,000 to develop
and build;
 A new moderate 2-BR apartment
costs $70,000-$98,000 to build;
 An existing older house in a modest
neighborhood costs $60,000-
$110,000 to buy; and
 An average apartment costs $400 per
month just to operate.
 Financing Affordable Housing:
How Much Housing Can Poor
Households Afford?

 HUD says a rental household should not pay

more than 30% of its adjusted gross income
for housing expenses.

 If gross income = $15,000

 Monthly = $1,250 x 30% = $375
 Subtract utility allowance of $100
 Result is $275 net rent capacity
How much good housing is available in your
town at $275?
 Financing Affordable Housing:
How Much Housing Can Poor
Households Afford?
 For homeowners, the underwriting of
loans to be sold is dictated by Fannie
Mae & Freddie Mac.
 Lenders should limit loan payments to
28-33% of gross income, but 36-40%
including all debts.
 If gross income = $30,000 ($2500/mo)
 PITI @ 33% = $10,000 / 12 = $833
 Minus taxes & insur. of $145 = $688
 $688 supports $103,400 loan @ 7% with 30
year amortization
 Financing Affordable Housing:
How Much Housing Can Poor
Households Afford?
 What if same family has $655 per
month in debt payments?
 Income = $30,000; PITI was $833
 40% total debt cap = $1,200 /mo.
 $1,200 - $655 = $545 available
 $545 - $145 tax & ins. = $400
 $400 loan payment capacity supports a
loan of $60,000 at 7% with 30 year
amortization
 Financing Affordable Housing:
What Rent Does the Owner Need to
Charge?

 Debt Service on $20,000/unit = $150/month

 Add 20% cushion for “debt coverage ratio”

= $180/month

 Add $300/month/unit operating budget =

$480/month

 Add 7% cushion for vacancy and bad debt =

$500 total rent
 Financing Affordable Housing:
Why It’s Hard To Lower
The Rent Enough…
Typical Apartment Operating Budget
Type of Cost Per Unit/Year
RE Taxes, Insurance 900
Owner-paid utilities 600
Maintenance 750
Admin/Personnel 400
Management Fee 400
Audit, tax return, legal 200
Replacement reserves 300
Misc. 50
Total $ 3,600
 Financing Affordable Housing:
How To Bring That Rent Down?

Type of Subsidy Rent Cut

$5,000 PER UNIT IN GRANTS $ 39
$10,000 PER UNIT IN GRANTS $ 78

2% LOWER INTEREST % (AHP) $ 29

4% LOWER INTEREST % (AHP) $ 59

50% TAX ABATEMENT $ 25

100% TAX ABATEMENT $ 50
 Financing Affordable Housing:
What subsidies make it work?

Program Type
HOME, CDBG, trust funds Grant or loan
Section 236 or RD 515 Interest rate cut
Section 202/811 Grant
Section 8 N/C, Mod Rehab, etc. Rent subsidy
Sec. 8 vouchers, certificates Rent subsidy
Section 9 (Public Housing) Rent subsidy
Dept of Mental Health HAP Rent subsidy
Low-Income Housing Tax Credit Tax loss
Mortgage Interest Deduction Tax loss
Fed. Home Loan Bank AHP Interest rate cut
Tax Abatements Tax loss
 Financing Affordable Housing:
What do these subsidies do?

 Grants and deferred repayment loans

substitute for hard debt; reduce “debt
service”;
 Interest rate reductions also reduce
“debt service”;
 Rent subsidies make up for what the
tenant cannot afford.
 The owner or developer can use this
cash to:
 Spend more on the housing; or
 Reduce rent or sale price; or
 Cover higher operating costs
Interested in pursuing the development
of affordable housing in your
community? We can help!

Contact CCG at
(704) 605-0127

Executive Director:
Al Collins