In the Appalachian mountain town of Brevard, N.C., a 21 percent jump in construction costs forced The Affordable Housing Group of North Carolina (TAHG) to trim the size of its latest affordable housing development by eight units.

Completed in July 2006, the 40-unit apartment complex cost $5.4 million to develop, including $4 million in hard construction costs. Even though the land for the project cost just $70,000, getting the seven-acre site ready for development required $1 million.

“Even if you can get land cheap, your construction costs don’t go down just because you’re out in the middle of nowhere,” said Kathy Stilwell, TAHG’s director of real estate development.

Affordable housing developers in the Southeast are increasingly grappling with some of the same challenges faced by developers in dense, heavily populated urban areas such as New York and Chicago. On top of that, they face bigger risks from storm and wind damage, and are being hit with higher insurance costs as a result.

Rising land, development, and construction costs are making projects more expensive to build, while impact fees are chewing up bigger bites of developers’ budgets, and soaring insurance premiums add yet more weight to the expense side of the ledger. At the same time, in lower-income areas, developers are having a tough time making projects pencil out because prospective residents can’t afford rents high enough to make them economical.

“We’re finding it almost impossible to fill the [financing] gap in South Carolina because incomes are so low that the only way you can make [low-income housing] tax credits work in South Carolina is to be in a high-income metro,” said Stilwell.

Especially along the coast and in larger urban areas of the Southeast, land costs have soared over the last few years.

In Northern Virginia, the condo boom, coupled with a lack of available land, has pushed prices so high that there’s no competition for tax credit reservations anymore because it’s so difficult to make deals pencil out, said Thomas M. Johnston, vice president of development at S.L. Nusbaum Realty Co. in Norfolk, Va.

“All you have to do is get in line,” he said. “It’s first-come, first-served.” Oftentimes, the only way to make affordable housing deals work is to get municipalities to donate the land, said Johnston. “We’re having to do things like acquire trailer parks and dilapidated rental housing in rough locations to get a multifamily site.”

Farther south, developers are facing the same problem. “The closer you get to the coast, the more expensive land becomes, and it’s a very steep increase,” said Michael Maloney, owner of Quinnco Cos., an affordable housing developer in Bluffton, S.C. In this coastal county, land that was selling for $90,000 an acre three or four years ago now goes for $350,000, and prices can go as high as $1 million an acre, he said.

“If you go inland in South Carolina, probably a matter of 30 miles, the land costs are probably a third as much,” he said. “However, as that pertains to apartment development and affordable housing, you need to bear in mind that you have other pressures on the financial model, because the rents a developer is able to obtain in those areas have gone down dramatically.”

Plus, fees to hook up to the water and sewer system, called “tap fees,” average about $4,000 per unit, said Maloney. At one 40-unit property in Iredell County, N.C., tap and impact fees combined are running about $300,000, said Stilwell of TAHG. On top of that, insurance costs have tripled or quadrupled in the last two years or so at coastal properties, according to Maloney.

At the same time, in some areas, property taxes are also causing a big hit to developers’ budgets. North Carolina, for instance, has no provisions to trim taxes for tax credit properties, instead leaving assessments up to local governments, who evaluate the properties on a case-by-case basis. “I have a 48-unit property paying $42,000 a year in property taxes” in North Wilkesboro, said Stilwell. “They assess it as a market-rate property based on its condition, and it’s taxed at its full taxable value.”

It all comes down to the math, said Maloney. And in a growing number of areas in the Southeast, it’s getting harder and harder to make the numbers add up.