Neighborhood Transformation
Neighborhood Transformation

The Housing Development Game
A Primer for Community Based Organizations
Notes Taken at a 1990 Miami DTI Training given by Tom Zuniga

The housing development process can be broken down into three phases:

1. concept/feasibility;
2. planning/negotiation; and
3. implementation.


Contrary 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

  • Before 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.
  • For 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 gentrification. .
  • 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.


This step is also called "opportunity identification". Here the developer identifies the opportunity, concept or idea that he or she wishes to pursue.

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:

1. 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

3. Foreclosures

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.

Initial feasibility

The developer must first gather information concerning the proposed project's feasibility in terms of site, market, and financing.

a. site analysis:

Ask 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 following factors:

1. zoning

i. height restrictions (if any)
ii. use
iii. density
iv. parking
vii. set back
viii. easements

2. location
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.
Population breakdown:
Elderly (62+)
young (18-)
size of labor force
Income data by household size
v. 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.

vi. 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).

vii. Identify:

-Institutional 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-

-Historic buildings-

-Areas of commercial activities-

-Transportation routes-

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.

xvii 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:

i. 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.

v. 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.

Market 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.

Don't 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 groups.

Financial/Affordability Analysis

The 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:

1. start with the average family income of your target market and then determine the maximum cost per unit that can be affordable, or,

2. 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.

Affordability Analysis: 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
5. financing

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

Monthly 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:

With 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.

With 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.

With 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 $55,963.68.

"GO - NO GO"

After 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

4. 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.

5. 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)

8. Financing

9. Available resources (types-tie in)

10. 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.

With 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

The 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 appendix A.


Site Control Strategy

The 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.

Marketing Plan

The 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 purchasers.

Packaging the financing

The 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.


Seed Funds

No 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.

If 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.

Pre Development

* - Site identification
* - Site Analysis
* - Market Analysis
* - Design and cost estimates
* - Economic feasibility
* - Go/No go decision

Site Development

* - Acquisition
* - Reconfirm cost (including architect/engineering)
* - Finals on Zoning/Platting
* - Permits
* - Contractor Move-in
* - Site Preparation


Pre-Construction Conference

* - Contractor/subschedule
* - Contractor meetings
* - Loan draw schedule
* - Delivery of units

Site Checks-Monitoring

* - Construction process (daily)
* - Employee verification
* - Security checks (should be builder's responsibility)
* - Disbursements/Completions

Syndication (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.

The 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.

The 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 Plan
- Brochure and collateral materials
- Qualifying

* Interviews
* Preliminary reviews
* Credit checks
* Escrow Accounts
* Counseling
* Maintenance
* Budgeting
* Management
* Closings


Fiscal Management Plan

* operating budget
* check-balance system
* audit
* banking disbursements

Physical Management Plan

* preview maintenance schedule
* inspection schedules
* replacement schedules
* tenant section 8 certification check

Administer Management Plan (reporting)

* reporting
* tenant association
* tenant relations progress

Collateral Materials

* rent agreements
* purchase and sales agreement
* codes, covenants and restrictions (tenant rules)

After 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.

In between the "tasks" and "responsibilities" columns, you can have additional columns for "key variables" and "secondary resources".

There is computer software that can assist with this process. Using a computer is helpful because your chart will need constant reworking and revisions.


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".

A 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.

ROLE 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 housing.


Sole Developer:

A 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 venture).

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.

As an 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.

The 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.

If 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 resources.

Co-Developer (Joint Venture) -

Where 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.
The 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.

In other 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.

Facilitating 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.

The 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.



Site plan and product design.

"Schematics": 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).

The 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.

Supervise 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.


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.)


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.

Most 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 work).


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.



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?


The contractor has to pay for materials at the beginning of construction.

The 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.


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.

Cost 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.

Even 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.


The 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:

the general contractor contracts directly with the various contruction trades and is therefor held responsible for cost overruns

When 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.

BONDS: 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.

Sometimes 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".

With 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.

When 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).

Change 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.


An 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)
  • Later, 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.
  • resolving disputes


His 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.


If 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

Although 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.

In considering 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.

(o) 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"

In 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 the project.

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.

The basic 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 venture partner.

4. Items To Be Included in the Partnership Agreement

The 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

d. 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

The 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.


1. Reduce acquisition costs;

a. Bargain Sale;

The 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;

Florida has a state tax credit for donations to qualified Non-profit community development organizations (for example, the donation of free architectural services).

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.

c.  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 housing)

D. Grants

i. "Social Investment Funds" from insurance companies. For example, Prudential has a $50 million fund. Travelers, Aetna, Equitable, and Metropolitan also have similar programs.

ii. Foundations;

1. 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

1. Inner City Venture Fund; run by the National Trust for Historic Renovation, gives both grants and loans. Is interested primarily in historic renovation.

2. Cooperative Assistance Fund (Washington D.C.); Organized to pool the resources of a number of smaller funders.

3. 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 development.

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.

5. National Rural Development Finance Authority. Provides "bridge financing". Is interested primarily in Job creation business development but also does some housing.

6. Enterprise 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.

7. 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.

iv. Churches

1. 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

a. 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

The 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 available

SAIL PROGRAM: A state funded program for low interest loans for rental housing. Contact the Florida Housing Finance Agency for information.



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.

The article is designed for persons who know little about federal housing programs. The article does not attempt to give detailed specifics on these program.

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.


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 housing.

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

Established 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 mortgages directly.

C. Rent Paid by Tenants under both the 221(d)(3) and 236 Programs

Under 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).

The 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 operating expenses.

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 interest rate).

D. New Opportunities for Non-Profit Developers Through the National Affordable Housing Act of 1990.

Until 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.

The Cranston-Gonzales 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 financial benefits.

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.


A. Section 202 Rental Housing for the Elderly and Handicapped:

Established 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

Under 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

HUD 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.


A. Overview

Section 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.

To be 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.

Despite 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

Developers 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 him.

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

This 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

This 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

This 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)

Developers 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)

Developers 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")

Unlike 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.

The 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.

As 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.


A. Community Development Block Grants (CDBG) and HOME

Under 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 level.

Larger cities and counties (under the so called "entitlement" program) receive a yearly grant (as a matter of right) directly from the federal government.

For smaller 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 year funding.

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.


The 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

Established 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.


Prior 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.

Before 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.


The 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 housing market.

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.

Fannie 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.

Fannie 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.

Since 1986 (when Congress authorized the LIHTC) Fannie Mae has been authorized to make equity investments in multifamily affordable housing projects.


Each 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.