AFFORDABLE HOUSING 101 Jimmy McCune - OCCH Tim Swiney Wallick Communities Roy Lowenstein Lowenstein Development
Affordability in Housing Defined Generally refers to housing affordable to those who earn below the area median income (AMI) for their county. Public programs use 30% of gross income as the standard for what a household can afford to spend on rent and utilities. If you have to pay more than 30% to get decent housing of adequate size, you have an affordability problem.
Franklin County Example The median income for counties and metropolitan areas is calculated annually by the U.S Dept. of HUD. 4 Person Median Household Income: $74,500 Family size 50% AMI 60% AMI 1 $26,060 $31,260 2 $29,800 $35,760 3 $33,500 $40,200 4 $37,200 $44,640
How do we make housing affordable? Conventional rental housing is about 25% equity and 75% debt-financed. Payments on the debt drive up the rents the owner must charge. The objective of affordable housing programs is to reduce debt service to reduce rents or to provide a rent subsidy, through a variety of strategies.
How do we make housing affordable? Reduce debt service with lower interest rate or longer amortization; example: HUD 221d4 loan Reduce debt amount by providing more equity or deferred repayment debt; examples: tax credit program, HOME grants or loans, AHP Support debt by subsidizing rent at market rate; example: HUD section 8
Developing Affordable Rental Housing
Rental Housing Low Income Housing Tax Credit(LIHTC) program is the primary financial tool to build affordable housing in the U.S. Section 42 of the 1986 IRS Code. The program creates a tax incentive for private investment in affordable housing, largely bypassing HUD. Administered at the state level
Low Income Housing Tax Credits Responsible for nearly 90% of all affordable housing built or renovated in U.S. Over 46,000 units 3 million housing units 110,000 units annually since 2015 Source:https://www.huduser.gov/portal/datasets/lihtc.html
Low Income Housing Tax Credits State housing agencies (OHFA) get a per capita allocation of credits. For Ohio, it is about $260M annually in credits. OHFA is tasked with prioritizing needs and procedures. Qualified Allocation Plan (QAP)
Low Income Housing Tax Credits Credits awarded to developers whose projects best reflect QAP objectives. Investors typically purchase tax credits through a syndicator like OCCH by providing equity to build project. Syndicator guarantees the investor a return (%) on investment in the form of tax credits and deductions.
Low Income Housing Tax Credits Equity generated from LIHTCs can finance 65% to 80 % of total project costs Hard debt & gap financing pay the rest. Many housing types can be developed: Senior Housing (55+) Family Housing Permanent Supportive Housing Single-Family Lease Purchase Acquisition/Rehab of Subsidized Units
Gap Financing Sources State and National Housing Trust Fund Community Development Block Grant HOME (State and Local) Federal Home Loan Bank Affordable Housing Program (AHP) Foundations Developer s own funds
Low Income Housing Tax Credits Rents must remain affordable and be occupied by households at/below 60% AMI Often deeper set-asides are required. Must remain affordable and in compliance for 30 years Franklin County Rent Limits Studio $ 781 1BR $ 837 2BR $ 1,005 3BR $ 1,161 4BR $ 1,296 5BR $ 1,429
Low Income Housing Tax Credits Source/Use Summary Sources Amount Per Unit First Mortgage $ 1,918,200 $ 38,364 Member Contribution $ 100 $ 1 Deferred Developer Fee $ 57,785 $ 1,156 LIHTC Equity $ 5,224,736 $ 104,495 Total $ 7,200,821 $ 144,016 Uses Acquisition $ 2,350,000 $ 47,000 Construction Costs $ 2,863,963 $ 57,279 Developer Fee $ 722,144 $ 14,443 Professional Fees $ 200,000 $ 4,000 Financing Fees $ 369,187 $ 7,384 Capitalized Interest $ 233,608 $ 4,672 Soft Costs $ 203,900 $ 4,078 Reserves $ 258,019 $ 5,160 Total $ 7,200,821 $ 144,016
Smaller rental development Tax credits work best for larger projects Smaller markets, smaller sites and niche housing can be done by layering sources without tax credits Projects meet community needs but are not nearly as profitable to develop
Example of small rental project 6 units, 1- & 2-BR, for mixed population Gross rents at $500-$725; 2 sites Sources of Funds Uses of Funds Donated Land $ 50,000 Land $ 65,000 OHFA HDGF 500,000 Construction 715,000 FHLB AHP 250,000 Financing Costs 15,000 State DODD grant 100,000 Professional & soft costs 60,000 FF pre-dev grant 30,000 Developer fee 125,000 Bank hard debt 80,000 Reserves 30,000 Total $1,010,000 $1,010,000
Rental Assistance
Rental Assistance Rental Assistance pays the difference between market rent and what tenant can afford to pay (30% of income) Tenant eligibility determined under rules of HUD or USDA Can be project-based sec.8 or tenant-based (housing choice vouchers)
Types of Rental Assistance Owners with project-based RA contract with HUD/USDA for block of assisted units Public Housing Authorities allocate tenant-based vouchers; high demand Renters can take voucher to any property where owner agrees to accept them, including LIHTC projects HUD sec. 811 and Medicaid subsidy
Affordable Homeownership A subsidy is needed to fill either: The development gap (difference between total cost and what buyer can afford to pay; or The appraisal gap (difference between total cost and what the house appraises for due to low value in the area) Or, both
Affordable Homeownership Example: Sources of Funds Uses of Funds Buyer s Mortgage $125,000 Acquisition $ 2,000 Appraisal Gap Subsidy 25,000 Construction 175,000 Devel. Gap Subsidy 56,000 Professional Fees 3,000 Developer Fee 15,000 Closing Costs 3,500 Sales Fee (6%) 7,500 Total: $206,000 $206,000
Affordable Homeownership
The Development Process
How do you do it?
How do you do it? Create a project concept that meets funding priorities, find the location Discuss with local government & partners Secure site control for sufficient period Pre-development design planning Market study: is there demand for this housing at this price at this location? Possibly survey or other engineering Environmental Phase I Does zoning permit the project?
How do you do it? Assemble qualified development team Examine financial feasibility What rents will meet the market? What will the project cost to develop and operate? What resources can we anticipate? Can resources cover costs both to develop and operate? Confirm interest by funders
How do you do it? Apply for all competitive funding Complete pre-development activities Close on equity and debt financing Construction Lease-up and Operations Do it all over again!
Risks and Benefits Risks Lose start-up $ Public opposition/ NIMBY Run over budget Lose money while operating project Tenant issues Risk Mitigation Limit up-front spending Smart site selection and skill with local politics Experience, strong team Realistic budget, don t over-leverage; reserves Good housing & manager
Developer Benefits New housing tangible results; mission Serving selected target populations Choose housing type and design Earn development fees Potential for management fees Potential cash flow Ownership potential Publicity/enhance reputation in community
Questions