The housing development process can be broken down into three phases:
2. planning/negotiation; and
PHASE ONE: CONCEPT/FEASIBILITY
to popular belief, there are an awful lot of housing opportunities in
low income target areas. Recognizing opportunities and then evaluating
them against a set of objectives is what Phase One is all about.
Define Your Objectives
you begin identifying opportunities, you must define your objective.
You are not going to be effective if you try to do too much. Know your
capacity and clearly define and prioritize your objectives.
example, it costs a lot of money to put vacant buildings back into
housing. The people that you want to serve, however, may not be able to
afford the finished product. For this reason you need to be clear about
your objectives or else you may end up being an agent for
- Be honest about it. If your
objective is to get operating money, be honest with yourself. Don't say
you are developing affordable housing if that is not your true
objective. It is very important for a community development
organization to get its board of directors to spell out its objectives.
step is also called "opportunity identification". Here the developer
identifies the opportunity, concept or idea that he or she wishes to
We are living in a time of unprecedented
opportunities for a well organized, technically capable CDC. There is a
very large market made up of a people who need affordable housing.
There are a large number of market segments. Once you identify the
market that you are going to serve, respect that market. It is a shame
to use public resources to do something tacky.
In looking at opportunities, there are opportunities that have been created
legislatively that have not been used as best that they could. Tax
credits have not been used as best they could.
Don't keep looking at the same old opportunities. Look for new ones, for example:
Federal Low Income Housing Tax Credits, you can go to the Florida
Housing Finance Agency and get an allocation of credits. Then you can
structure your project as a "limited partnership" and sell ownership
interests to corporations interested in using the tax credit.
2. Modular housing
Once you have selected a potential opportunity you will need to do a concept paper on it that includes the following pieces of information:
1. who will you serve? (income range)
2. what price range/monthly costs?
3. is it sales or rental housing?
4. what are the market factors (amenities) or variable will you need to assess?
5. How will you finance the project? (acquisition, construction/rehab. permanent )
6. What is the time frame?
7. What steps do you need to undertake?
This leads directly into the feasibility analysis (see the section
immediately below) which involves an analysis of the costs for both
acquisition and construction (including both hard and soft costs).
After determining the profit that you want to make you can then
determine the sales price. Adding this data to what you have learned
about the market, you can then determine affordability and feasibility.
developer must first gather information concerning the proposed
project's feasibility in terms of site, market, and financing.
a. site analysis:
yourself this question: is the proposed site suitable for the project
that you have in mind. In order to determine this you must research the
i. height restrictions (if any)
vii. set back
3. soil conditions
4. cost of site
5. dimensions (size)
6. availability of utilities.
b. market analysis
1. The Developer should be aware of existing and emerging market conditions
that could influence its development. The developer should determine
who he or she is building for, what will the product cost, and what it
will be sold for.
Simply stated, market research is the
systematic gathering of information applied to a specific problem. The
developer needs to know the need in the market and how to fill the gap.
While some projects may begin "on a hunch", the developer
is increasing his risk of failure by not investigating all the facts at
hand. Unforseen events can easily torpedo a project.
Use a scientific methodology, i.e. the orderly gathering and analysis of information involving the following steps"
* identify problem
* define investigation
* collect data
* analyze data
* prepare conclusions and recommendations
The developer will need the following data:
i. Area map
ii. Local map/streets
iii. Delineate (define) target neighborhood
iv. Identify census tract and the housing and demographic data.
size of labor force
Income data by household size
What you want out of this data is to develop a profile of the
neighborhood. This might tell you that you have a high percentage of
low income or elderly, indicating a difficult time in putting
development opportunities together.
What are the Geographic boundaries barriers? Natural barriers (e.g.
rivers), political barriers, man-made barriers, and traditional (e.g.
there are neighborhoods where black people still do not live).
uses, e.g. colleges, churches, etc. Development can spread outward from
an institution. Institutional uses can act as anchors for development.
People have grown comfortable with a particular use that you can piggy
back on. A church, for example, can be an anchor of stability.
-Vacant sites- (is the ownership public or private)
-Abandoned buildings and unsafe structures-
-Areas of commercial activities-
viii Identify physical pluses and minuses of community (a lake might be a plus whereas a dump might be a minus).
ix. income of target population
x. household size
xi. who is the competition?
xii. amenities offered in housing produced by the competition
xiii level of construction activity in the market area. (check the number of building permits issued)
xiv. demographic trends (people movement)
xv. competing prices
xvi. quality of existing neighborhood.
xvii. perception of neighborhood.
population segment that you are building for (for example, if you are
building for old people, you don't need two bedrooms). In identifying
the appropriate market segment, community based organizations may wish
to start with their own target populations (e.g. "x" number of people
in the target area having below $12,000 per year income) and then
design housing suitable for that group.
2. The following are the questions you need to ask after you have surveyed the community.
i. What are you trying to accomplish?
ii. What further information do you need?
iii. Where do you get this additional information?
iv. How do you use the information in establishing development objectives?
3. Three reasons to do a market analysis;
i. a market analysis assesses the potential for success in a residential development deal at a given location.
ii. A market analysis helps you to arrive at a recommendation as to your most marketable project.
iii. A market analysis provides you with a level of pricing.
4. A market analysis will tell you the following information:
The type of buildings that you want to construct. Here you can "cheat"
a little, i.e. you can determine what you are going to build based on
what the market is currently buying. Take a polaroid pictures of other
developments; talk to the developer, this way you will know what the
cost of construction will be.
ii. The market analysis will tell you the price that your market will be willing to pay.
a. What is the income of your target market (i.e. will your proposed units be affordable, will you need a subsidy)?
b. What is the competition charging for a comparable product.
c. The trouble with market studies, however, is that they are historic i.e. they don't take into account changing trends.
iii. The type of financing that you will need.
iv. The number of units.
The absorption rate that you can expect, i.e. how fast you can sell
them. This information will help you to minimize carrying costs.
5. Marketing Preferences:
People are not buying stucco and brick, they are buying something
deeper, they are buying a "home". It is not necessarily design or
location. A home means something deeper. CDCs can not get lazy. We
should be anti- "cost containment". We don't want to see an eight
person family cramped into a three bedroom 900 square foot house.
preference involves a concept of "home" that you are trying to cater
to. Home ownership is creating a "social franchise" for low income
persons. The family can use ownership as collateral for future loans.
use the term "low income housing" because it stigmatizes the buyer. Use
the term "affordable housing". There are persons at different income
levels and a CDC can produce housing that is affordable to different
feasibility objective here is to identify the total estimated cost of a
development project. The total cost should then be divided by the
proposed number of units in order to determine the projected selling
price. You then take this figure and check it against the market, i.e.
check your projected selling price with the price being charged by the
competition and the price that your potential customer can afford.
There are two approaches to this feasibility analysis. the developer can either:
start with the average family income of your target market and then
determine the maximum cost per unit that can be affordable, or,
start with the estimated cost per unit of the project that you have in
mind and then determine the average income necessary for a family to
afford that unit.
You can go through a process of determining whether a particular
opportunity is affordable for your particular target market. An example
of this type of analysis is outlined below:
Assumptions for this example:
1. family of 5
2. income $15,000 per year.
3. down payment 5%
4. affordable housing is where housing costs (PITI) = 25% of income
model 1: 1st Mortgage= state affordable housingprogram (3%, 30 years)
2nd Mortgage = Surtax program
model 2: 1st mtg. = HFA at 8.5% for 30 yrs.
2nd mtg = surtax
model 3: 1st mtg. = Barnett Bank, 10.5% for20 years.
2nd mtg. = surtax
housing allowance is $15,000 x .25 = $3,750 per year. The monthly
allowance is $312.50 for PITI. Rule of thumb for taxes and insurance is
$50.00 per month. This leaves $262.50 to pay for principle and
interest. You then subtract $25 per month for the surtax payment, this
leaves $237.50 for the first mortgage.
We use a business
calculator to determine the amount of first mortgage that the family
can afford. These calculations produce the following result:
model 1, the family could afford a $56,332.47 1st mtg. which when added
to the $30,000 that the surtax program would likely be able to loan,
means that the family could afford a house selling for $86,332.47.
model 2, the family could afford a 30,887.74 1st mtg which, when added
to the $30,000 you would likely be able to get from the Surtax program,
means that the family could afford a house selling for $60,887.74.
model 3, the family could afford a 1st mtg of $25,963.68 which, when
added to the $30,000 you would likely be able to get from the Surtax
program, means that the family could afford a house selling for
"GO - NO GO"
completing the feasibility study, the developer analyzes the
information and draws conclusions. It is helpful at this stage to make
an outline of the proposed development opportunity. The outline might
contain the following pieces of information:
1. Type of deal
2. Market factors
3. Cost to build/rehab
Profit margin expectation: Just because you are a non-profit entity
does not mean that you are not trying to create a profit. There is a
profit margin in each deal. The only difference from the for-profit
developer is that the profit does not go into someone's pocket.
Time: Consider the time implications of opportunities. Funders are
always asking "what have you produced lately?" What can you deliver on
quickly. You have to establish your credibility. You want to
"un-complicate" the deal.
6. CDC capacity: If you haven't done it before, don't come in believing that you can pull off a particular opportunity.
7. Opportunity cost (by taking up a particular deal you pass up an opportunity to do a different deal)
9. Available resources (types-tie in)
Social and other objectives: Social objectives are why you were
created. CDCs have other objectives, for example, credibility, and
being able to go the next step as an organization.
the information contained in this outline, the developer has the
information before him with which to make a decision on whether or not
to go forward with the project.
The Development Program
result of all of this analysis is the development program. The
development program is a product definition. This includes the number
of units, the kinds of units, the prices or rents to be charged, what
kind of financing, what amenities will be offered, and how long it
should take to do all of it.
The development program should
be reduced to writing in a document called a preliminary development
proposal. The proposal should include a narrative describing the
concept, the market, site analysis and financial analysis. It should
also included a "development pro-forma" showing the cost of
construction or rehabilitation, and if it is a sales project, a "sales
pro forma". If it is a rental project, there should be a "operating
pro-forma" showing the rental and other income, the operating expenses,
debt service, and cash flow. Examples of these pro-formas are found in
PHASE TWO: PLANNING/NEGOTIATION
Site Control Strategy
developers must come up with a plan on how they will gain control of
the site. Their strategy might include purchase, gaining the property
through gift or bargain sale (see "bargain sale" in Appendix B), option
contract, or contingency contract.
developers must come up with a plan for selling or renting the housing
units that will be produced or rehabilitated. A sales project can be
marketed by a method as simple as placing a billboard in front of the
units as they are constructed saying something like "Coming Soon, 4
bedrooms, $58,500, Call the following telephone number......etc.". In
the alternative, the units could be pre-marketed, e.g. the developer
could put an advertizement in the newspaper to see who would be
interested and then take applications and pre-qualify the prospective
Packaging the financing
financial plan will include a combination of mortgage financing and
equity contribution. The developers now look for funding. In order to
keep the housing affordable for low income residents, the developers
must keep down costs and use what subsidies there are available in a
creative manner. There are a number of methods that can be used to
accomplish these objectives. Some of them are listed in Appendix B.
PHASE THREE: IMPLEMENTATION
matter what role the CBO plays, any housing development venture will
need "seed money". These may be needed for: attorney's fees
(organizational); fees for incorporation; fees for site control
(options, sales agreement); engineering fees (boundary and
topographical surveys, soil tests); retainer for the housing
consultant; fees for the preliminary architectural sketches; and travel
expenses for the sponsor.
These expenses are usually nominal
(under $15,000) and reimbursable; and the other hand, this is high risk
money which may not be returned to the group if the housing does not
get off the ground.
Sometimes it is possible to avoid
these preliminary expenses altogether by negotiating money-free land
options, especially from public bodies, and by deferring professional
fees or finding professional consultants who are willing to provide
their services on a speculative basis at the preliminary stage.
the project is a joint venture, it is possible to have the private
developer partner put up these funds. Also, Community Development Block
Grant fund or other grants may be used.
Organizing Yourself for Development
The following is an outline some of the tasks involved in the development process.
* - Site identification
* - Site Analysis
* - Market Analysis
* - Design and cost estimates
* - Economic feasibility
* - Go/No go decision
* - Acquisition
* - Reconfirm cost (including architect/engineering)
* - Finals on Zoning/Platting
* - Permits
* - Contractor Move-in
* - Site Preparation
* - Contractor/subschedule
* - Contractor meetings
* - Loan draw schedule
* - Delivery of units
* - Construction process (daily)
* - Employee verification
* - Security checks (should be builder's responsibility)
* - Disbursements/Completions
(for rental housing as a way of using tax credits for low income
housing). SEE APPENDIX "B" FOR INFORMATION ON THE TAX CREDIT PROGRAM.
Shares in the limited partnership are marketed by a "syndicator" who keeps part of the proceeds as his fee.
limited partners play no part in the day to day management but are
allowed to deduct a portion of the depreciation and other deductions
and take credits on their individual tax return thereby sheltering
their other income and paying less overall taxes.
General partner(s) are allowed to keep a substantial "developer's fee"
for their efforts. The remaining funds reimburse the front money that
has already been expended and to subsidize the costs of the project.
MARKETING AND SALES
- Marketing Plan
- Brochure and collateral materials
* Preliminary reviews
* Credit checks
* Escrow Accounts
Fiscal Management Plan
* operating budget
* check-balance system
* banking disbursements
Physical Management Plan
* preview maintenance schedule
* inspection schedules
* replacement schedules
* tenant section 8 certification check
Administer Management Plan (reporting)
* tenant association
* tenant relations progress
* rent agreements
* purchase and sales agreement
* codes, covenants and restrictions (tenant rules)
identifying these tasks you need to identify who is responsible for
carrying out each of these tasks and the time frame for accomplishing
this. This should be done on a flow chart wherein the tasks are listed
in the left hand column and responsibilities are indicated in a
separate column immediately to the right of each task. To the right of
the "responsibilities" column should be additional numbered columns
indicating months. Lines and symbols can be placed in or across these
columns to indicate when each task should be accomplished.
between the "tasks" and "responsibilities" columns, you can have
additional columns for "key variables" and "secondary resources".
is computer software that can assist with this process. Using a
computer is helpful because your chart will need constant reworking and
THE "DEVELOPMENT TEAM":
WHAT ROLE DOES EACH MEMBER PLAY?
Success at housing development depends on the participation of a number of different actors.
* - developer (owner)
* - architect
* - attorney
* - general contractor
* - consultant
WHAT IS A "DEVELOPER": The developer is the project's sponsor.
The developer starts with an idea, packages that idea, and then makes
it into a product that is marketable to some target group".
developer carves a nitch out of a market that is otherwise hard to
crack. The developer seeks out gaps in the market and tries to provide
an affordable housing product.
The job is much more
difficult in low income neighborhoods. Bricks and mortar cost the same
whereever you go. Somehow the developer has to hold down the costs of
the housing or the financing in order to make its housing product
affordable to these types of residents. Community-based development
corporations (CDCs), working in cooperation with government and
intermediary organizations, are in a position to take on this challenge.
OF DEVELOPER (In General): The architect designs it, the builder builds
it, the banker finances it, so what does a developer do? The
developer's job is to coordinate and manage the production of the
POSSIBLE ROLES FOR A CDC DEVELOPER
CDC, if it has some experience, can take on a project as the sole
developer (rather than associating with a private developer in a joint
A CDC that wants to go it alone must make sure
that it has some one on its staff with the expertise to plan,
coordinate and manage the development process.
alternative, it may be possible, in some circumstances, for a CDC to
retain the services of a capable consultant willing to provide them
with extensive assistance on a project by project basis.
CDC also must have funds to pay for pre-development expenses and a net
worth that will satisfy cautious lenders and investors who are
concerned about the organization's capacity to complete the project.
it lacks any one of those resources, it should consider joint venturing
with a developer who is capable of filling the gaps in the CDC's
Co-Developer (Joint Venture) -
a CDC does not have the experience or capability to be a sole
developer, it can enter into a joint venture with a private developer.
CDC can use this experience to increase its capacity and experience so
that it can produce and manage housing in the future without the need
to enter joint ventures with private developers.
words, a joint venture can act as "on the job training" wherein the CDC
can learn the fundamentals of housing development.
When the CDC determines that it lacks the experience to be a formal partner, it may wish to "facilitate" a development venture.
is an informal role that includes monitoring and oversight. For
example, the CDC's role could include attending meetings with
architects, contractors, or subcontractors, in order to discuss the
progress of the project, changes in design, delays, etc.
This role could also include meetings with the market analyst, lender, engineers, architects etc.
goal is not only to have some control over project development but to
acquire the knowledge and experience that would be needed to act as an
independent developer on future projects.
WHAT THE ARCHITECT DOES FOR YOU:
Site plan and product design.
includes an "elevation" which is a drawing of what the building will
look like; a typical unit layout; and, site plan.
Design Development - - - an elaboration of the schematic including an outline of the specifications
Working Drawings - - - or construction documents that contain every detail of development (i.e. the detailed specifications).
architect may subcontract some of his work to an engineer. You want the
architect to supervise the engineer. The engineer surveys the
dimensions and topography, plats the sewers, tests the soil, etc.
the work of the general contractor by inspecting and "signing off" on
the work completed prior to the contractor being allowed to draw down
on the construction financing.
WHAT TO LOOK FOR IN AN ARCHITECT:
Has he done other deals? If so, what kind of deals?
Are his ideas compatible with yours? (take a picture to the architect and say "this is what I want to build, etc.)
WHAT WILL HE CHARGE?
Usually this is quoted as a percentage of development cost.
For Single family sales projects, however, architects sometimes charge on a per unit basis.
Sometimes architects charge a flat fee.
architects will want their money up front (meaning that the developer
will have to add this to the amonnt of pre-development "seed" money
that will have to be raised). Some socially conscious (or hungry)
archtects, however, will "buy into your dream" and agree to get their
fee from the construction loan (i.e. after they have done their design
WHAT TO WATCH OUT FOR:
You have to watch the architect carefully so that he doesn't blow the budget.
tell the architect what you can afford for construction before he begins his work.
WHAT TO LOOK FOR IN A CONTRACTOR:
has the contractor built this kind of product before?
How many years has he/she been in the business?
What is the contractor's financial status?
WHAT IS A "DRAW DOWN"?:
The contractor has to pay for materials at the beginning of construction.
money does not come from the lender until later in a "draw down" i.e.
the bank pays for work in place ... until there is work in place, there
is no draw down.
WHAT THE CONTRACTOR DOES:
COST ESTIMATES (in coordination with thearchitect).
If you can avoid it, don't bid the contract out because you want the architect and the contractor to be a team.
Estimator: As an alternative, when a government agency requires that
the contract has to be bid out, the developer can retain the services
of a cost estimator who can do the same type of estimating that the
contractor can do.
Usually the architect sub-contracts for this service (but the developer would want to be there when the estimate is made).
Usually the cost estimator is paid an hourly fee. The job should last a maximum of 10 hours.
if you have to bid the contract out, if the developer has a
relationship with a contractor, he can go to the contractor and say "I
have to bid this contract out, but why don't you go and give me an
estimate, I will have to disclose your involvement but if that's ok
with you its ok with me".
You can get a rough estimate of
cost through valuation services but a cost estimator or contractor is
more reliable. Two such services are Dodge Valuation Service and
Marshall Valuation Service.
general contractor subcontracts directly with all of the service trades
that are needed to complete the project (e.g. masons, carpenters,
electrical, plumbing, etc.)
As an alternative, the developer may choose to use a construction manager.
A construction manager does the same thing as the general contractor, i.e. organize the sub-contracts.
The difference between the two is as follows:
general contractor contracts directly with the various contruction
trades and is therefor held responsible for cost overruns
a construction manager is used, the various trade contracts are made
directly with the developer (and not with the construction manager. As
a result, the construction manager is not responsible for cost overruns.
In order to assure performance the developer usually requires the
general contractor to provide a bond. There are two types: a
performance bond and a payment bond.
A payment bond guarantys
that all of the subcontractors and materials are paid for. The amount
of the bond (e.g. 100%? 25%?) is negotiable. If all of the
subcontractors are bonded the developer may not need a general
contractor and he may be able to get by with a construction manager.
A performance bond requires a third party to come in and complete construction after a default by the general contractor.
the contractor can not put up a bond. Instead, the developer may let
the contractor put up 10%-15% of the construction costs plus a letter
of credit from a bank, or, the developer my require a "retainage".
a retainage, the developer holds back on the draw to cover risk of
potential unexpected costs at the end. For example, the developer (or
lender) might hold back 10% on each draw up to the first 50% of the
total draws, then 5% on each draw thereafter.
The construction draw schedule is developed at the closing of the construction loan.
the first draw is made, the "interest clock" begins to tick. For this
reason it is important for the contractor to complete the project on
time because the developer has budgeted for only a certain amount of
"soft costs" (when budgeting, it is best to add some months onto the
contractor's estimated time for completion).
Orders: If the contractor encounters something new that is not in the
specifications, he submits a "change order" (either a "plus" change
order or a "minus" change order). If the change is the architect's
fault, he pays (the architect should have insurance for this).
As further protection against overruns, many general contractor agreements have liquidated damage clauses.
attorney is required at the beginning of the project to set up the
organizational structure. This would include such tasks as:
- setting up the CDC (if this had not been done already),
- creating a for-profit subsidiary (when necessary)
- forming a general partnership (i.e. a joint venture agreement), or
- creating a limited partnership (for tax credit deals)
he or she will assist in the negotiation and preparation of all of the
contracts and agreements that will be needed to cement the
relationships of the various parties together (e.g. loan agreements,
land conveyances, and contracts with architects, contractors,
consultants, foundations, etc.)
- Throughout the project the developer will require legal assistance:
- in dealing with government agencies.
or her prime responsibilities are to see that all phases of the project
are implemented in proper sequence and to keep the developer informed
of options available at various stages.
The developer should, however, be aware that all policy decisions are his or her responsibility, not the consultant's.
SECTION TWO: NEGOTIATING A JOINT VENTURE PARTNERSHIP AGREEMENT
the CBO chooses to go the partnership route, they should choose a joint
venture partner that has sufficient expertise and financial strength to
successfully complete the joint venture project. The CBO should also
determine if such a partner is compatible. Many projects encounter
difficulty when the partners are unable to get along.
1. Negotiating Strengths of Each Party
The partnership agreement should be structured so as to take advantage of the strengths of each party.
Typically, the non-profit partner's strength lies in such areas as;
i. Community organizing
ii. Community planning
iii. Access to public agencies and funding,
The private developer typically is strong in certain areas which include:
i. An established relationship to private lenders.
ii. An established relationship with an architect.
iii. An established relationship to a building contractor
2. Role for the Community Based Organization
some CBOs have more housing development and property management
experience than others, it is possible for any organization to carve
out a role for itself in a joint venture. A CBO should assess its
capabilities and, when negotiating the partnership agreement, should
press firmly for appropriate roles and responsibilities and appropriate
percentages of the partnership benefits.
possible tasks and duties for which it night be responsible, each CBO
would analyze all phases of the development process and select services
that they can possibly and reasonably provide. These services might
include, without limitation, the following;
(a) Providing market analysis of the housing project area.
(b) Identifying and selecting eligible sites and properties.
(c) Putting together financial packages
(d) Obtaining financing or funding from governmental or foundation sources.
(e) Selecting or assisting in the selection of contractors, subcontractors, and others required in the development process.
(f) Obtaining needed zoning changes or approvals.
(g) Complying with any federal, state or local displacement rules.
(h) Complying with any environmental impact regulations.
(i) Acquiring the site and any improvements thereon.
(j) Actively assisting in planning and designing the improvements consistent with the data provided in the market analysis
(k) participating as a contractor or subcontractor
(l) obtaining governmental permits and approvals such as building permits and certificates of occupancy.
(m) Marketing units in the housing project.
(n) Operating and managing the project once it is completed.
Providing ongoing home counseling to tenants especially regarding the
care of their apartment units so as to minimize maintenance expenses.
3. What the CBO Can "Bring to the Table"
contemplating possible joint ventures, each CBO should understand that
a private developer has little incentive to joint venture unless the
CBO can provide services or make contributions that the developer needs
and cannot easily get himself. Therefore, each CBO must thoroughly
analyze its ability to make contributions during any or all phases of
For this reason, The CBO should attempt to
perform as many services prior to obtaining a joint venture as it
possibly can. For example, the CBO could develop an economically
feasible housing concept and obtain control of the site and any
property located thereon, especially if it is county or city owned.
Thus the CBO would be able to obtain control of valuable property that
a developer otherwise might not be able to acquire. The CBO could also
obtain a feasibility analysis of the project and begin arranging
financing with lenders and government agencies.
idea is for the CBO to carry the project idea as far as it can without
spending much money. It should then seek a joint venture partner when
it can go no further on its own. the farther the CBO takes the project
on its own, the more control and money it can demand from its joint
4. Items To Be Included in the Partnership Agreement
agreement should be in writing as to the duties, responsibilities and
obligations of each partner and the allocation of economic benefits. It
should include provision for;
a. How much capital contribution.
b. Project concept and selecting the development team.
c. Management of project development
Financial liability. Each partner is normallyequally liable to outside
parties. The CBO may ,however, negotiate to receive indemnification
fromthe private developer limiting its potential liability.
e. Making additional capital contributions it needed.
f. Profit split
g. Deciding how the tax deductions will be divided.
h. Management of the completed project
issue of who manages the property or who hires and fires the management
agent can be difficult to negotiate. Cbs are naturally concerned about
the long term role of the project in the community whereas the partner
and lender are concerned about the possibility of foreclosure should
the rents not be paid on time.
Even if the CBO has no
management experience, it may insist that one of its staff persons
receive "on the job training" in management skills.
i. Splitting the cash proceeds if and when the completed project is ever sold.
APPENDIX A: COST REDUCTION AND SUBSIDIES
1. Reduce acquisition costs;
a. Bargain Sale;
sale of property at below fair market value. The seller can take a tax
deduction for the difference in the selling price and the actual fair
market value if the buyer is a "501 (c)(3) tax exempt organization.
b. Outright gift;
Private donors can take a tax
deduction for the value of property given to tax exempt organizations.
Also, government agencies will often donate property so that the
property can be put into productive use and back on the tax rolls.
c. Neighborhood assistance program;
has a state tax credit for donations to qualified Non-profit community
development organizations (for example, the donation of free
d. Acquiring property at Distress Sales;
i. tax sales
ii. mortgage foreclosures
2. Reduce the amount of funds that need to be borrowed.
a. Inject equity funds from private investors through "limited partnership" syndication. (see the relevant section, above)
b. Joint venture (general partnership), see the above section.
State and local programs have been used creatively. For example
some cities and states require private developers pay a fee for the
right to develop. These funds are used to underwrite the costs for low
income housing. Also, some localities have tax increment districts
where an incremental increase in tax revenue due to development
activities can be dedicated to a particular purpose (such as affordable
i. "Social Investment Funds" from insurance companies. For example,
Prudential has a $50 million fund. Travelers, Aetna, Equitable, and
Metropolitan also have similar programs.
The Ford Foundation has an "Emerging CDC" program that has funded
between 20 and 40 new community development corporations. Ford also
offers "program related investments".
2. Many oil companies have sizable foundations. These include; Amaco, SOHIO, Atlantic Richfield.
3. Levi Strauss and others too numerous to mention.
5. The Rockefeller Foundation makes grants to community development organziations.
iii. Financial Intermediaries
Inner City Venture Fund; run by the National Trust for Historic
Renovation, gives both grants and loans. Is interested primarily in
2. Cooperative Assistance Fund (Washington D.C.); Organized to pool the resources of a number of smaller funders.
Consumer Cooperative Development Corporation. Affiliated with the
Consumer Coop Bank. They are particularly interested in mutual self-
help housing and other types of coops. They also finance commercial
4. Trust for Public Land; Has recently received a "program related
investment" from the Ford Foundation to finance land acquisition when
critical to the success of eligible development activity.
National Rural Development Finance Authority. Provides "bridge
financing". Is interested primarily in Job creation business
development but also does some housing.
Foundation (Columbia, MD.); The purpose of the Enterprise Foundation is
to create and preserve housing affordable to the lowest possible income
groups. The Foundation works to achieve this goal by working
exclusively with neighborhood based development organizations.
The Local Initiatives Support Corporation (LISC): LISC is a national
nonprofit lending and grant making institution founded in 1980. Dade
County's LISC program provides technical assistance and low interest
loans to CDC sponsored ventures in the areas of housing, business, and
industrial development. LISC's participation in a CDC's project brings
local banks and other private sector lenders into each investment.
National Association of Treasures of Religious Institutions; an
organization of the treasurers of the various Roman Catholic orders.
2. United Methodist Church Board of Local Ministries; interested in both business and housing development.
3. Campaign for Human Development; U.S. Conference of Catholic Bishops.
4. Presbyterian Church - Self Help Housing Fund.
3. Reduce Interest Rates
Tax Exempt Financing; The Florida Housing Finance Authority issues tax
free revenue bonds which provide low interest 1st mortgage loan funds.
b. State and City financing
Dade County Documentary Surtax Program which obtains funds by charging
a fee on all corporate documents filed with the county (deeds etc.) and
uses the money as follows:
* - Rental Housing: these are 3% loans to CDCs only.
* - Single Family Housing: provides low interest 2nd mortgage funds for the purchasers of single family homes:
Developer's Pool: Developers can apply for an allocation of permanent
financing for the purchasers of houses that they intend to build.
CDC Pool: There is separate fund set aside for CDC projects (including
CDC joint ventures). There are specific guidelines for "who is a CDC".
All CDC joint ventures must pre-qualify through the joint venture
review committee coordinated by the county's Department of Community
and Economic Development. .
- Lottery: Individuals can
apply for Surtax loans. Periodically the Surtax program has a "lottery"
to choose who will get the limited amount of these loans that are
PROGRAM: A state funded program for low interest loans for rental
housing. Contact the Florida Housing Finance Agency for information.
APPENDIX B: FEDERAL AFFORDABLE HOUSING PROGRAMS
Federal housing assistance is labyrinth of overlapping programs. Making
matters even more confusing is the fact that many of the programs that
are legally still in existence no longer receive funding.
This article is an attempt to bring some order to the chaos by
presenting an overview of the significant federal programs that can be
of assistance to community-based housing developers.
article is designed for persons who know little about federal housing
programs. The article does not attempt to give detailed specifics on
Up until the 1960's the federal rental housing program was public housing.
Beginning in the 1960's, thanks to the growing political clout of the
homebuilding industry, there began a trend to provide federal subsidy
to private developers.
Such assistance now takes seven
broad forms: (1) low-interest guaranteed loans, (2) direct loans, (3)
housing assistance channeled through local governments, (4) rent
subsidy to the tenant ("Section 8"), (5) tax credits for developers,
(6) providing a "secondary market" for mortgages, and (7) transfers of
foreclosed property at lower than fair market value.
2. LOW INTEREST, FHA GUARANTEED MORTGAGE LOANS
There are many HUD insured mortgage programs. Some are active some have
been defunded (but are still on the books). Some of these programs are
strictly for single family homes. Others are for multifamily projects.
Below is information on programs that have an actual potential to be of
benefit to non-profit corporations which are developing affordable
A. Section 221(d)(3) Below Market Interest Rate Program
Started in 1961, this program provides 40 year, 3% guaranteed mortgage loans to private developer.
B. Section 236 Program
in 1968, this it replace the earlier 221(d)(3) program. It was very
similar to its predecessor except it provided interest rate reduction
payments to private lenders rather than purchasing market rate
C. Rent Paid by Tenants under both the 221(d)(3) and 236 Programs
both programs the developer was required to enter into a Rent
Regulatory Agreement with HUD. These agreements restricted the rents
that could be charged and specified the qualifications of the tenants
for the length of the mortgage (the agreements also limited the amount
of project generated cash that could be distributed each year).
amount of rent charged is not based on the income of the tenant.
Instead, the maximum amount of rent that a landlord can charge is
determined by a formula reflecting the project's debt service and
Only "low income" tenants (with an
income less than 80% of the area median) can be given leases. With
Section 236, however, tenants whose income grows to exceed the 80%
maximum can remain in the project. These higher income tenants,
however, must pay the lesser of 30% of their income or the "market"
rent (calculated at the level required to amortize the loan at the true
D. New Opportunities for Non-Profit Developers Through the National Affordable Housing Act of 1990.
recently, owners of Sections 236 and 221(d)(3) projects could pre-pay
their Mortgage loans after 20 years without HUD approval and thus free
themselves from the rent and other restrictions. Thus much affordable
housing was being lost each year.
National Affordable Housing Act of 1990 places restrictions on the
ability of project owners to buy out early. In doing so, non-profit
organizations are presented with new opportunities for assuming
ownership of subsidized projects.
The Act establishes a
"mandatory preservation program". Owners of these types of units can no
longer pre-pay their mortgages without HUD approval. The new Act
establishes standards and procedures for such pre-payments. The first
step is for the owner to file a notice of intent at least two years
before the pre-payment eligibility date. Owners are given three
options: (1) they may elect to pre-pay and to terminate the mortgage
insurance (this option must be specified in the notice). HUD will only
allow this if the owner's proposal will not create an "economic
hardship for the current tenants"; (2) the owners can choose to remain
in the program in exchange for substantially increased federal
financial benefits; or (3) the owner can choose to sell the project to
a qualified purchaser (including non-profit corporations) who will keep
the project in the subsidized program with the aid of similar federal
Non-profits who agree to maintain the
affordability restrictions are considered "priority purchasers" and
thus are given the inside track in those cases where the current owner
chooses to sell (option 3). "Priority purchasers" have a 12 month right
of first refusal after the owner gives notice of his intent to sell.
Assuming Congress appropriates the money (possibly a big "if"),
"priority purchasers" may receive the following financial incentives:
(a) an insured mortgage for 95% of the purchase price under the Section
241(f) program, (b) grants equal to the present value of 10 years worth
of Section 8 subsidy, and (c) reimbursement for transaction fees
associated with the purchase.
3. DIRECT LOAN PROGRAMS
A. Section 202 Rental Housing for the Elderly and Handicapped:
in 1959, the HUD Section 202 program provides direct loans to not for
profit sponsors of rental projects for the elderly and the handicapped.
Loans may be for as much as 100% of the development costs. The interest
rate is pegged at the cost of Treasury obligations plus an
administrative fee for HUD. The money may be used either for new
construction or substantial rehabilitation. Projects are generally
limited to efficiencies and one bedroom units. Section 8 rent subsidies
(see below) are usually packaged with the loan.
B. FmHA Section 515 Rural Rental Housing
this program, the Farmer's Home Administration (FmHA) is authorized to
make market rate loans of up to 50 years for rural rental housing. If
the sponsor is a not for profit corporation and the rent structure is
low enough the project may qualify for project-based Section 8 rental
subsidy (see below). These loans are not available in "urban" counties.
C. Section 312 Rehabilitation Loans
will make loans directly to property owners for the rehabilitation of
single family and multifamily residential, mixed-use, and
nonresidential properties. Loan funds are to be used to bring the
properties up to local rehabilitation standards in CDBG target areas.
The loans have a below market rate of interest. There has been no new
funding appropriated for this program since 1981. Since then, the
limited amount available for lending has come from loan repayments and
recovery from prior year commitments.
4. SECTION 8 RENTAL ASSISTANCE
8 of the Housing and Community Development Act of 1974 was a major
shift in federal housing assistance policies. Unlike the 236 and
221(d)(3) programs, Section 8 did not provide private developers with a
direct subsidy in the form of low interest loans. Instead, the Section
8 program provided rental subsidies to the tenant.
eligible, the tenant must earn less than 80% of the area's median
income. The tenant never pays more than 30% of their adjusted as rent
with the balance of the "contract rent" being paid by HUD.
the fact that the subsidy does not go directly to the developer,
Section 8 was turned out to be a tremendous incentive to for the
construction of affordable rental units. (especially the "project
based" rental subsidies described below)
B. Project-Based Rental Subsidies
love project-based Section 8 the rental subsidies. This type of Section
8 subsidy is tied to the particular apartment unit rather than being
attached to a particular tenant. With project-based Section 8 if an
eligible tenant moves in, he or she gets the rental subsidy. If he or
she moves out, the subsidy is lost and it goes to the next eligible
tenant to occupy that unit. Compare this with the Section 8 Existing
Housing Program (see below) where the subsidy is attache to the tenant
who is free pack up and leave and take his Section 8 certificate with
Project-based Section 8 makes it much easier for
developers to get the construction and permanent financing for their
projects. Lenders have more confidence in the developer's ability to
repay these types of loans because they know that the developer will be
able to collect full market rent from his tenants (with the help of the
subsidy from the federal government).
To get the
project-based Section 8 subsidy, the developer enters into a Housing
Assistance Payment (HAP) contract. Under these contracts developers are
guaranteed a specified "contract rent" for all of the units occupied by
income-eligible tenants. The rent actually paid by the tenant is very
similar to the rent paid by public housing tenants. The tenant never
pays more than thirty percent of their adjusted income as rent. HUD
pays to the landlord the balance of the "contract rent" and (like with
public housing) a utility allowance to the tenant.
Financing for the construction of these types of projects come from a
number of different sources including conventional loans, bonds issued
by state housing finance authorities, or FHA-insured mortgage programs.
Below are listed the five main types of project-based Section 8.
i. Section 8 New Construction
program is now extinct (i.e. no new projects have been authorized since
very early in the Reagan years). Many projects built in the 1970's are
still in existence and are still enjoying Section 8 rent subsidies.
Non-profit corporations now have new opportunities to take over these a
certain number of these projects using the new National Affordable
Housing Act of 1990 (see paragraph II(D) above)
ii. Section Substantial Rehabilitation
program is now extinct (i.e. no new projects have been authorized since
very early in the Reagan years). Many projects substantially
rehabilitated in the 1970's are still in existence and are still
enjoying Section 8 rent subsidies.
iii. Section 8 Moderate Rehabilitation
program has very recently become extinct. It survived the Reagan years
(but with significant funding cuts). The program was killed by HUD
secretary Jack Kemp after the famous HUD scandals of the late Reagan
years (i.e. well heeled and high paid Republican lobbyists were able to
obtain undue and unfair influence in project selection.
iv. Section 8 (with Section 202 Housing for Elderly)
who apply for and obtain a Section 202 loan to build housing for the
elderly and handicapped automatically obtain a Section 8 rental
assistance HAP contract.
v. Section 8 (with Section 515 FmHA Rural Rental Housing)
who apply for and obtain FmHA Section 515 loans for the construction of
rural rental housing are automatically entitled to a Section 8 rental
assistance HAP contract.
C. Section 8 Existing Housing Program (a/k/a "vouchers")
the project-based Section 8 described above, the Existing Housing
program is not much of an incentive to private developers. The reason
for this is because it is not tied to a particular apartment building.
The tenant is free to move take the subsidy with him. The landlord thus
loses the benefit of having and assured rental income.
way that the program works is that HUD, working through local housing
authorities, provides eligible families with "portable" certificates to
supplement the rent required for housing on the private market. After
being awarded a certificate, the prospective tenant is told to go out
into the community and find a qualifying apartment or single family
rental unit. The landlord then signs a contract and a HUD approved
lease and begins receiving the rental subsidy directly from HUD.
with all Section 8 programs the tenant never pays more than thirty
percent of their adjusted income as rent. HUD pays the balance of the
contract rent along with a utility allowance to the tenant.
5. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS
A. Community Development Block Grants (CDBG) and HOME
the CDBG program (founded in 1974) the federal government makes grants
to local communities. CDBG funds are to be used for community
development activities that primarily benefit the low and moderate
income persons. Priorities are set at the local and not the federal
Larger cities and counties (under the so called
"entitlement" program) receive a yearly grant (as a matter of right)
directly from the federal government.
communities (under the "small cities" program) the federal government
makes grants to the states. Local communities must then apply to their
state government for CDBG funds. Unlike the "entitlement program",
smaller localities must apply to their state government and compete
each year for funds. There is no assurance, in other words, of year to
CDBG is not exclusively a housing program.
Since, however, affordable housing is one of the largest unmet
"community development" needs CDBG funds often end up providing subsidy
for the development of affordable housing. Typically the local
government will use CDBG funds for such things as writing down the
interest cost of bank loans, providing loan guarantees, purchasing land
for housing development, providing pre-development grants, providing
low interest loans, and providing operating money for not for profit
community-based development corporations.
Cransten, Gozalez Affordable Housing Act of 1993 ("HOME") program is
similar to CDBG in that the Federal Governement makes grants to local
jurisdications either directly to larger cities or through state
governement. Nonprofits that are "CHDOs" can receive adminstrative
funding through the program. The most important CHDO criteria is board
composition. The board of directors of an organization must have at
least one third of its board composed of low income persons or
residents of low income communities.
C. Rental Rehabilitation Program
by the Congress in 1983. The program provides grants to states and
units of local government to assist in the rehabilitation of privately
owned residential rental properties.
The program provides
up to 50% of the total rehabilitation cost, with the federal
contribution not to exceed $5,000 per unit (in limited cases, a larger
amount of assistance may be provided by HUD). The remaining funds to
rehabilitate the property are supplied by the private owner. Local
governments are free to use the money for either grants or loans. If a
loan, the local government will often defer amortization for 10 years.
6. LOW INCOME HOUSING TAX CREDIT
to the Tax Reform Act of 1986 billions of dollars were invested in real
estate by passive investors who were attracted by tax write offs (these
were the so "tax sheltered investments"). In the early 1980's the
biggest tax goodie was "accelerated depreciation" wherein real property
could be depreciated over artificially short periods of time with a
large percentage of the tax write-offs being taken in the early years.
These substantial tax benefits were then sold to investors through the
sale "limited partnership" shares. As a result, many real estate
projects were undertaken not because they necessarily made economic
sense but because of the tax write offs.
The Tax Reform Act
of 1986 did away with accelerated depreciation and most other forms of
tax shelters. The 1986 Act did, however, create a new tax shelter for
investors in affordable rental housing. This was the Low Income Housing
Tax Credit Program (LIHTC).
LIHTC allows investors in
qualified rental housing to take a credit on their tax returns. The
credit spread out over a 10 year period and it can be for as much as
70% of the actual cost of rehabilitation or construction. The
apartments have to be affordable to persons earning less than 50% of
the median income of the locality. Affordability must be maintained for
at least 15 years.
Developers (including non profit
corporations) can raise capital for their affordable rental housing
project by selling ownership interests. They do this by transferring
ownership to a limited partnership and then selling shares.
1986 tax shelters were often sold to rich individuals who needed tax
write-offs to shelter their otherwise taxable income. In most cases
these investors were "passive" meaning that they took no active part in
the management of the properties. The 1986 Tax Reform Act, however,
prohibits "passive" investors from claiming deductions and credits
generated by their properties. An exception was made for corporations.
For this reason these types of limited partnership shares can only be
sold to corporations.
Both the Enterprise Foundation and the
Local Initiatives Support Corporation have national limited
partnerships which raise capital for local affordable housing projects
by marketing the tax credits.
7. FANNIE MAE
Federal National Mortgage Association (Fannie Mae) is a private
shareholder owned corporation that was chartered by the United States
Congress to help insure the steady flow of mortgage funds in the
Traditionally Fannie Mae provided funds for
residential mortgages by purchasing mortgages from lenders (the so
called secondary market). It finances these purchases by selling debt
securities to investors.
Fannie Mae is undertaking an increasing number of initiatives specifically designed to increase access to affordable housing.
Mae will now purchase tax exempt mortgage revenue bonds issued by state
and local housing finance agencies. By purchasing these bonds Fannie
Mae reduces the agency's borrowing costs thus making the mortgages more
affordable for private (including non-profit) developers.
Mae works with non-profit developers, public agencies, and lenders to
purchase mortgages made to low and moderate income borrowers
(previously these loans may have been too small to qualify for purchase
on the secondary market). These lending programs typically include a
subsidy provided by state or local government. An example is the Dade
County Surtax program. Fannie Mae has agreed to purchase many of the
relatively small market rate first mortgage loans being made by banks
in conjunction with the low interest Surtax second mortgage loans.
On a case by case basis, Fannie Mae will purchase mortgages on multifamily rental projects.
1986 (when Congress authorized the LIHTC) Fannie Mae has been
authorized to make equity investments in multifamily affordable housing
8. FORECLOSED PROPERTY TRANSFERS - FEDERAL HOUSING ADMINISTRATION (FHA)
year the Federal Housing Administration (FHA) ends up assuming the
mortgages of thousands of single family insured mortgages that have
gone into default. Most of these properties end up in foreclosure. Many
end up being owned by FHA. Under its normal procedure, the FHA cannot
re-sell these properties unless it gets close to the fair market value.
The FHA does have authority, however, on a case by case basis, to work
with non-profit developers and to transfer these properties at a lower
than market value price. The non-profit will thus be able to provide a
more affordable housing product to low income purchasers.
9. TAX FORCLOSED PROPERTY -
local jursidictions can be creative in re-capturing tax foclosed
property to recycle them to use in creating affordable housing.