The Financing Behind Affordable Housing

When developers of market-rate housing evaluate the feasibility of multifamily housing, they look at their return of investment from rental income, tax write-offs, and resale of the property. Nonprofit housing development corporations, on the other hand, usually begin by identifying the appropriate target tenant population and the rent affordable to that group, and work backwards to determine the "funding gap."

Funding of land acquisition, property rehabilitation, daily operations, and other activities is supported via donations, public and private grants, rental fees, land-leases, and loans as well as through revenues generated by NCLT's technical assistance service. Unlike their predecessors, today's housing developers - and particularly nonprofit sponsors - must often piece together as many as ten or twelve different funding sources to make a development feasible. Nonprofits have become extremely versatile at identifying and melding all of the financing pieces required.

Thirty years ago, when affordable housing developers went shopping for financing to fill the funding gap, everyone knew where to go. Chances were you could meet virtually all of your financing needs through the federal government's Department of Housing and Urban Development (HUD).

Since the early 1980's, HUD budgets have fallen further and further behind in reflecting the rapidly increasing need for affordable housing. Today, HUD is only one of a large number of sources of financing for affordable housing, along with banks, investors, the Federal Home Loan Bank, public agencies and foundations, among others.

A Typical nonprofit developer might combine up to a dozen different sources of funds including public agencies, a corporate tax credit investor, a loan supported by Section 8 rent subsidies, and private donations in order to build 52 units of supportive housing. Each source requires a competitive funding application, approval process and recorded legal documents, all of which added to the complexity and the cost of the development.

After the nonprofit developer had obtained a conventional bank mortgage and low-income housing tax credits, it had only approximately half of the funds needed to pay for the development. The remaining half of the development was paid for from seven different sources, with none comprising more than 15% of the total cost. The conventional mortgage represents only about 4% of the total sources.

The time and effort spent pursuing the many sources for development funds resulted in well-designed supportive housing for very low-income families. But the time and cost associated with pursuing and patching together so many funding sources could have been spent developing more affordable units.

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