Adobe Stock/surasaki

While getting affordable housing deals to the finish line is never easy, it’s been particularly challenging lately as rising interest rates and construction costs keep adding to the development budget.

In these times when project plans may need to be reworked to move forward, several industry leaders offer their ideas for restructuring a deal.

1. Partnerships

TWG, a major affordable housing developer with properties in 16 states, has typically liked to start construction on a development shortly after acquiring a site rather than land-banking a parcel. However, the timing doesn’t always work out. To help, the Indianapolis-based firm has recently teamed with different nonprofit groups aligned with its mission to provide affordable and mixed-income housing. During these days when the design, financing, and permitting process can take longer than to finalize a land purchase, these alliances have been very helpful. In some cases, the partner can bring additional financial backing to purchase a property prior to having the permits and the full financing in place. “That has been instrumental in keeping us competitive to build our communities,” says J.B. Curry, president of development. “It has allowed us to continue focusing on high standards and also bringing in the best financial partners for the long term as we move through the predevelopment process.”
In addition, nonprofit organizations often serve as strong advocates for affordable housing while working with local communities, Curry says.

2. Utility Allowances

Undertake a utility allowance (UA) analysis with a third-party consultant to determine the site-based UAs for the specific property being developed, based on the rehab/construction scope of work and systems to be installed, says Richelle Patton, president of Collaborative Housing Solutions in Decatur, Georgia.

“I have found that the UAs in these reports typically result in ones that are far lower than the published UAs that developers may typically use to calculate their net rents, such as a local public housing authority’s Section 8 voucher program UAs and/or a state housing finance agency’s published UAs,” Patton says. “Those agencies’ UAs are typically based on existing, often older, properties with less energy-efficient systems than the ones that a low-income housing tax credit (LIHTC) developer will be installing. I have found that state agencies, the Department of Housing and Urban Development (HUD), investors, and lenders are often willing to use the site-based engineered UAs, and doing so can usually result in higher net rents, leading ultimately to a higher net operating income to service a larger first mortgage.”

3. Average-Income Model

One option that some developers may consider when structuring or restructuring a deal is the average-income option under the LIHTC program, says Eric Paine, CEO of Community Development Partners.

The industry may begin to see more of these deals now that the Internal Revenue Service has released updated regulations that are expected to ease developer and investor concerns that led to a recent pause in the program’s usage by many developers.

In general, the option allows some units at a housing credit property to serve residents earning up to 80% of the area median income (AMI) so long as the average in the project remains at 60% or less of the AMI. This set-aside can help projects maintain financial feasibility while allowing for greater economic diversity among residents, and it can help over income tenants remain at existing properties.

4. Tax Abatements

Seek a property tax partial or full abatement. This can help a deal, but it may mean partnering with a public housing authority or a nonprofit organization, Patton says.

5. Workforce Housing

While technically not traditional affordable housing, some developers should consider repositioning projects specifically geared toward workforce housing in the 80% to 120% AMI range,” says Evan Blau, a partner at the Cassin & Cassin law firm. “Generally, these tenants suffer from the same housing shortages and increasing rents. There are favorable loan products available from Fannie Mae and Freddie Mac that offer pricing incentives for these dedicated workforce housing projects. This, coupled with an endless supply of renters, could make these restructurings viable options in certain markets.”