Developing affordable housing a practical guide for nonprofit organizations

Chapter 1 Developing Affordable Housing in the Twenty-First Century 3 1.2 The Current State of America’s Affordable Rental Housing 4 1.3 The State of America’s Working Poor Seeking Affor

Developing Affordable Housing

A Practical Guide for Nonprofit Organizations

Third Edition

Bennett L Hecht, JD, CPA

Developing Affordable Housing

Developing Affordable Housing

A Practical Guide for Nonprofit Organizations

Third Edition

Bennett L Hecht, JD, CPA

This book is printed on acid-free paper

Copyright © 2006 by John Wiley & Sons All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form

or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/ permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts

in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002.

Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books.

For more information about Wiley products, visit our Web site at http://www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

1 Housing development—United States—Handbooks, manuals, etc 2 Housing

rehabilitation—United States—Handbooks, manuals, etc 3 Housing management—United States—Handbooks, manuals, etc 4 Nonprofit organizations—United States—Handbooks, manuals, etc I Title.

HD259.H43 2006

333.73'150973—dc22

2005058121 Printed in the United States of America

To Lynn, Eliza, and Sam

Chapter 1 Developing Affordable Housing in the Twenty-First Century 3

1.2 The Current State of America’s Affordable Rental Housing 4 1.3 The State of America’s Working Poor Seeking Affordable Housing 4

1.5 Unique Opportunities for Nonprofit Organizations: Rental and

PART TWO PROJECTING COSTS, INCOME, AND EXPENSES 33Chapter 4 Project Feasibility and Total Development Costs 35

Appendix 4B Summary of Key Federal Regulations Governing

Appendix 4C Summary of Relevant Laws and Regulations

Chapter 5 Determining Projected Income and Expenses 69

5.4 Determining Affordability as a Percentage

5.8 Projecting Expenses Where No Operating History Exists 77

Chapter 6 Raising Capital to Meet Total Development Costs 87

7.2 Sources of Loan Funds from Public Lenders—Generally 107 7.3 Sources of Loans from State and Local Governments 108

7.4 Sources of Loans from the Federal Government 128 7.5 Sources of Loan Funds from Private For-Profit Entities 138 7.6 Sources of Loan Funds from Private Nonprofit Entities 149

Appendix 7B List of Local CDFI Organizations Financing Housing 219

9.1 Creation of an Equity Fund for Housing Development 245

Appendix 9A Tax Credit Information Resources

List of State and Regional Tax Credit Equity Funds 266 Appendix 9B Partial Listing of Low-Income Housing Tax Credit

Chapter 10 Sources of Capital: Public Housing Funds 279

10.1 How Public Housing Resources Contribute to

10.2 Mixing Public Housing Capital with other Capital: Mixed Finance 286 10.3 Uses of Public Housing Funds in Mixed-Finance Transactions 288 10.4 Considerations in Mixing Public Housing Development Funds

10.5 Elements of Public Housing Development Transactions 298

Chapter 12 Developing the Project Feasibility Report:

12.2 The Feasibility Report and Financial Pro Formas 364 12.3 The Development of Affordable Housing: Six Case Studies 368

Appendix 12E Kentucky Mountain Housing Reference Information 415

PART FIVE PURCHASING AND DEVELOPING THE PROPERTY 427Chapter 13 Securing Site Control over the Property: Signing

Appendix 13A Documents Pertaining to Purchase Contracts 448 Appendix 13B Documents Pertaining to Option Agreements 457

14.5 Determining the Ownership

Entity—Partnerships 468

14.7 Establishing the Ownership Entity: Divided Ownership

14.8 Interviewing and Selecting the Management Company 477

15.1 Issues Concerning Organization’s Tax-Exempt Status 503

Appendix 15A Joint Venture Checklist 523

Chapter 16 Purchasing the Property: Settling on Acquisition 527

Appendix 16A Settlement Checklist and Sample Documents 541

Chapter 17 Constructing or Rehabilitating the Property:

Settling on the Construction Loan and Surviving

17.3 The Construction Process—The Participants and Their

Responsibilities 555 17.4 Technology in 21st Century Affordable Housing Construction

17.5 Negotiating the Construction Contract and Bidding 577

18.3 Managing Selective Rehabilitation: Formal Versus Informal

Approaches 673 18.4 Implementing a Formal Approach to Selective Rehabilitation:

18.5 Choosing A Property for Selective Rehabilitation:

18.7 Designing the Project: Work Write-Ups and Cost Estimates 679 18.8 Computerized Specification-Writing and Estimating Systems 681 18.9 Defining Methods and Materials: Performance Specifications 681 18.10 Selective Rehabilitation and Construction Management 682 18.11 Selective Rehabilitation and the Contractor Pool 683 18.12 The Role of Government Agency/Public-Purpose

18.13 Avoiding Gut Rehabilitation: Tips of the Trade 685 18.14 Improving Energy Efficiency in Selective Rehabilitation 686 18.15 Dealing With Lead-Based Paint Hazards in Selective

Rehabilitation 687 18.16 Dealing With Other Recurring Health and Safety Issues in

PART SIX COMPLETING AND MANAGING THE PROPERTY 711Chapter 19 The Project Completion Phase: Completing the

Development and Maintaining an Ownership

19.4 Developing Additional Resident Services

As Part of a Comprehensive Property Management Plan 733 19.5 Key Points on Setting Performance Standards for

19.6 Key Points on Deciding Whether to Contract for Management

19.7 Key Points on Selecting a Good Management Company 735 19.8 Key Points on Evaluating Property Management Performance 740 19.9 Financial Management of Rental

19.10 Converting the Property to Homeownership for Residents 754 19.11 Managing and Budgeting for Rental or Multifamily Ownership 757 Appendix 19A Sample Documents and Disclosure Statements 763

About the Author

Bennett Hecht is an experienced nonprofit executive, author and social neur He founded One Economy Corporation in 2000 to bring the power of the Internet and the economic mainstream to low-income families living in afford- able housing across the country In five years, One Economy has earned the sup- port of America’s leading foundations and corporations, brought high speed Internet to $2 billion of affordable housing and helped more than five million low-income people to help themselves at www.theBeehive.org Immediately before One Economy, Mr Hecht was senior vice president at the Enterprise Foundation In that capacity, he led the organization’s efforts beyond housing— building well-respected programs in childcare, workforce development and eco- nomic development Under his leadership, the number of community-based organizations working with the foundation doubled from 750 to more than 1,500

entrepre-in 48 states; capitalization of the organization’s revolventrepre-ing loan fund grew from

$30 million to $200 million; and regional networks of nonprofit organizations linked by technology were born in New England and the Northwest.

Mr Hecht received his JD from Georgetown University Law Center and his CPA from the State of Maryland For 10 years he taught at Georgetown Univer- sity Law Center, and built the premier housing and community development clinical program in the country In 1992, with Congressional support, Mr Hecht founded the National Center for Tenant Ownership at Georgetown, a program facilitating affordable housing development by nonprofits and tenant groups nationwide.

Prior to his work at Georgetown, Mr Hecht worked for the public ing firm of Coopers & Lybrand in Washington and served as counsel to the non- profit National Rural Development and Finance Corporation He has been an adjunct professor of law at Georgetown University Law Center for 17 years, teaching accounting concepts for lawyers In 1997, he was awarded George- town’s prestigious Charles Fahy Distinguished Adjunct Professor Award Over the years, Mr Hecht has served on the boards of nonprofit housing organiza- tions in Portland, Oregon; Cleveland, Ohio; and New York City and on the national boards of numerous organizations He currently sits on the Georgetown Day School and One Economy Board of Directors.

account-Mr Hecht has written two other books in addition to Developing Affordable Housing: A Practical Guide for Nonprofit Organizations: ManagingNonprofits.org (2001) with Rey Ramsey and Managing Affordable Housing: A Practical Guide for Building Stable Communities (1996), with James Stockard and the Local Initiatives

Support Corporation, both published by John Wiley & Sons.

An adequate supply of such housing depends on a broad commitment to our communities and their residents Nonprofit housing developers work closely with architects, bankers, construction contractors, property managers, public officials and others Together, they are making a critical difference For nearly three decades, nonprofit housing developers have demonstrated how essential they are to the revitalization of communities They increasingly understand the relationship between the bricks and mortar they provide and the critical social and economic supports that residents of their properties need to flourish.

In the early years of the twenty-first century, challenges abound Federal funding is likely to diminish The regulatory environment that has helped bring conventional capital to communities needing a revitalized stock of affordable housing is weakening It is difficult for nonprofit developers to purchase, recapi- talize, and improve the thousands of affordable housing units that were built in the 1970s and 1980s and whose federal subsidies are coming to an end However, these are all challenges that a greatly strengthened field of nonprofit housing developers and their many allies are prepared to meet.

For over twenty-five years, the MacArthur Foundation has invested in ing Today, our interest is deeper than ever Since 2000 alone, more than $100 million in grants and loans have been committed to the development and pres- ervation of affordable housing These resources have helped nonprofit develop- ers, and the specialized financing intermediaries that support them, ensure that decent, affordable housing is available in both urban and rural communities.

hous-To be even more effective, these organizations need the kind of clear, cal guidance that can be found in Ben Hecht’s influential book It has stood the test of time, as the state of the field has changed, as development has become more complex, and as the need for affordable housing has grown I recommend

practi-it to everyone who cares about American communpracti-ities and understands the cial role of affordable housing in their success.

cru-Jonathan F Fanton President

John D and Catherine T MacArthur Foundation

This is my third edition of Developing Affordable Housing Much has changed in

the housing industry since I wrote the first edition more than ten years ago The federal government’s commitment has declined precipitously while the level of state investment has grown The idea of demolishing the most problematic public housing developments and putting new, mixed income communities back in their place has not only become a reality, but the norm The federal low income housing tax credit has become a permanent part of the rental housing landscape and expanded dramatically into the suburbs Preserving the existing stock of affordable housing, not just building new units, has been embraced by an increasing number of communities as leaders realize that lost units will never be recaptured Homeownership rates, especially for people of color and immigrants, have hit historic high levels.

The face of America and those who live in its affordable rental housing has changed as well Immigrants accounted for more than a third of all U.S house- hold growth in the 1990s In fact, the number of renter households in America would have fallen during that period was it not for immigrant and minority households These changes have been accelerated further by historically low mortgage interest rates that helped move millions of renters into homeownership Two other things also have grown over these ten plus years: the demand for affordable housing and the capacity of nonprofit organizations to develop and manage these units, when sufficient resources are made available to them Americans do not have income sufficient to afford decent, safe and affordable housing As recently as 2001, 95 million Americans had excess housing costs burdens (pay more than 30% of their income for housing) or lived in crowded or inadequate conditions In 2004, the number of people earning $32–50,000 who spent more than 30% of income on housing jumped to 4.5 million.

Nonprofit organizations, large and small, public and private, are the only entities ready, willing and able to meet this demand A 2005 study by the Joint Center for Housing Studies at Harvard found that for-profit developers are building for the high end of the market in increasing numbers Of all the rental housing units built since 2000, 43% cost more than $800 per month compared to 25% of all units built prior to that date Only 10% of the units built since 2000 rented for less than $400 a month Relatedly, a 2000 study by the Urban Institute found that many nonprofit developers substantially increased their capacity to

leveraging developer fees and shopping various funders for the most attractive terms Housing for the hardest to serve, such as the homeless, mentally ill and addicted, can be found not just in dense urban areas, but in suburban and rural communities.

My goal has been for Developing Affordable Housing to meet the user

wher-ever they are—to provide a living resource for the citizens, policymakers, profit executives and professionals who want to make affordable housing a reality in their community For the newcomer to the sector, this book provides a step-by-step analysis of the nonprofit real estate development process, from fea- sibility to long-term management including checklists and sample forms and reports, where necessary.

non-For the more experienced, the book allows you to expand your possibilities

by helping you identify relevant federal, state and local programs The book vides a description of the existing federal loan, grant, mortgage insurance, rent and operating subsidy programs (e.g., HOME, CDBG, HOPE VI, McKinney Grants) and of common state and local government mechanisms used to finance affordable housing.

pro-Users over the years have found the detailed case studies that I provide, with accompanying financial pro formas, to be one of the book’s most valuable fea- tures This edition highlights six very different affordable housing organizations and developments Each development serves a unique population (e.g home- less, seniors or families), utilizes a multiplicity of funding sources (e.g., low income housing tax credits, tax-exempt bonds, private and public grants) and now manages unique types of housing (e.g., single room occupancy, homeown- ership or rental) What these six organizations have been able to do and the way they accomplished these developments is an inspiration to me and I hope to you Many communities have skilled and committed professionals such as law- yers, accountants, bankers, architects, and financial development specialists who have never worked on affordable housing development projects but would like to do so or to help existing nonprofit organizations to do so This book pro- vides these professionals with the kind of orientation and guidance that they would need to enable them to play an active and valuable role as a development team member in local affordable housing development projects.

Finally, many state and local governments have not developed the programs

or earmarked the resources necessary to facilitate the wholesale creation of able homeownership and rental housing opportunities by nonprofits in their jurisdictions This book provides a laundry list of ways that government can pro- mote affordable housing, from providing tax relief to nonprofits purchasing or transferring property and establishing flexible “soft second” mortgage programs with CDBG funds, to providing technical assistance and HOME funds.

afford-Chapters 1 to 5 provide guidance in putting together the right development team and in helping the team through the steps necessary to determine if an affordable housing project will be financially feasible Chapters 6 to 12 highlight the various sources of capital available for affordable housing development (loans, grants, and equity), ways to reduce the costs of developing this housing, and methods for presenting the financially feasible project to funding sources, profit

contract for, purchase, and rehabilitate or construct an affordable housing project Finally, Chapter 19 takes the nonprofit housing developer through the steps needed to complete the project, sell out the units (if home-ownership developed), and manage and maintain the property including the ongoing financial manage- ment of a multifamily property, whether ownership or rental.

This third edition has been updated to reflect the latest information and issues facing the affordable housing industry Major revisions have been made to

my earlier treatment of public housing finance and “mixed finance” ties (Chapter 10), joint ventures of nonprofit and for profit entities (Chapter 15), and the case studies noted above (Chapter 2).

opportuni-Decent and affordable housing often is the foundation whereby entire borhoods or individual families achieve a sense of stability The information pro- vided in this book should help nonprofit organizations, governments, technical assistance providers, private and public lenders and foundations to work together to bring this stability to people and communities throughout the United States.

Washington, DC February 2006

This third edition could not have been possible without the work and support of

a lot of people My law clerks—Aimee Ferrer, Matthew Peed, Donald Saelinger, Helki Spidle, and Jennifer Walrath—were invaluable in helping me to collect, update, and summarize changes to housing loan, grant, and equity programs throughout the country I want to thank the law firm of Reno & Cavanaugh, Washington, DC—especially, Julie McGovern, Jaime Alison Lee, Megan Glasheen, and Lee Reno—for updating their excellent and important chapter, Chapter 10, on public housing Thanks go to Michael Sanders for permission to excerpt his fine book on joint ventures between nonprofit and for-profit organi- zations found throughout the book, including Chapter 15 I want to thank Rick Eisen, Eisen & Rome, Washington, DC; Barry Mullen, Chicago, IL; and Peter Werwath, Vice President with the Enterprise Foundation, for their contributions

to Chapters 14, 16, 17, and 18, respectively I am indebted to the nonprofit groups featured in Chapter 12 for their leadership in the field, cooperation, time, and efforts I want to thank Susan McDermott, my editor at John Wiley & Sons, for her support of this edition and her navigation of it through the production pro- cess Finally, I want to acknowledge my wife, Lynn Leibovitz, my daughter, Eliza, and my son, Sam, for all the support, love and joy that they bring me everyday.

P A R T O N E

2

Getting Started

C H A P T E R O N E

1

Developing Affordable Housing

in the Twenty-First Century

1.1 Introduction 3

1.2 The Current State of America’s

Affordable Rental Housing 4 1.3 The State of America’s Working

Poor Seeking Affordable Housing 4

1.4 Current Trends in Affordable Housing 6

1.5 Unique Opportunities for Nonprofit Organizations: Rental and

Homeownership 10

Affordable housing development came of age in the twentieth century.Many significant federal programs were created from the Federal Hous-ing Act of 1934 through the Affordable Housing Act of 1990 that stimu-lated supply and subsidized demand for both homeownership and rentalhousing By the early 1990s, these programs had helped to provide decent,safe, and affordable homes to millions of working American families Atits height, the industry was managing more than 5.5 million units of fed-erally supported, affordable rental housing By 2005, more than 33 mil-lion people had utilized federally insured mortgage programs to becomehomeowners.1

Today, the homeownership rate is at an all-time high of almost 70 cent The private sector has created loan programs that now make it pos-sible for very-low-income people, especially people of color, to buy ahome with no money down and to prove creditworthiness in manyunconventional ways such as showing 12 months of cell phone bill pay-ments.2 In fact, these innovations have helped whole segments of thepopulation who historically have been shut out of homeownership to do

per-so in record numbers For example, Hispanic homeownership increased

1 www.hud.gov/offices/hsg/fhahistory.cfm.

by almost 20 percent from 1993 to 2004 due to increasingly flexibleunderwriting and outreach.3

The same type of robust growth cannot be found in affordable rentalhousing Today, less than 4 million of the more than 5 million units avail-able in the 1990s still exist The last major piece of housing legislationwas enacted more than 15 years ago No new major initiatives areexpected in the coming years Despite the fact that almost 100 millionAmericans are in need of affordable housing, resource constraints man-date that the industry focus on how to preserve the units still remainingand how to get the most out of the shrinking pool of resources available

to build new ones This chapter helps the nonprofit housing developer tounderstand the current state of the affordable housing industry It high-lights the trends that are likely to shape and impact development in thisfirst decade of the twenty-first century

RENTAL HOUSING

America’s affordable rental housing stock is dwindling According to theU.S Department of Housing and Urban Development (HUD), as of 2000,there were 1.3 million units of public housing, 1.8 million units madeaffordable through rent vouchers provided to tenants, and 800,000 unitsdeveloped through the low-income housing tax credit Many more unitsare inhabited by low-income people; however, they often provide sub-standard shelter or are made affordable by crowding multiple familiesinto a single unit

The single largest funding source of funding for new rental housing

is the low-income housing tax credit (LIHTC).4 Approximately 1,300 newprojects, adding 90,000 new units each year are funded through this pro-gram In contrast, less than 50,000 units were built in the entire decadefrom 1990 to 2000 using every other federal program such as public hous-ing, Section 8, and other federally insured loan programs.5

AFFORDABLE HOUSING

While the supply of affordable rental housing shrinks, need continues torise Simply put, Americans do not have income sufficient for decent, safe,and affordable housing As recently as 2001, 95 million Americans had

3 Id.

4 See Chapter 9 for a full discussion of this important source of equity.

excess housing costs burdens (paid more than 30 percent of their incomefor housing) or lived in crowded or inadequate conditions.6 In 2004, thenumber of people earning $32,000—50,000 who spent more than 30 per-cent of income on housing jumped to 4.5 million.7 Even more troubling,fully one-half of the lowest-income Americans spent at least 50 percent oftheir income on housing—leaving an estimated $161 a month availablefor food and $34 a month for health care.8 These statistics do not evenaddress the more than 2.5 to 3.5 million homeless people on the streetseach year Today, more than twice as many people face housing problems

as lack health insurance, widely considered the biggest issue facingworking class Americans.9

Immigrants account for more than a third of household growth sincethe 1990s.10 Of the 12 million foreign-born householders, 3.4 million (28percent) arrived in this country during the 1990s.11 In fact, the number ofrenter households in America would have fallen during that period were

it not for immigrant and minority households.12 If this influx continues atthis level, more than 1 million new immigrant households could beadded in the next ten years This reality has significant ramifications forthe sector First, affordable housing developments will have to be moreimmigrant-friendly That means that property management staff, tenantcommunications, unit size, and more will have to reflect the languageand culture of this customer base Second, the median income of theserenters continues to drop, meaning that even less money will be availableindustry-wide for rent payments.13

But demand is not stimulated only by the growing immigrant lation Increasingly, communities are recognizing that they cannot recruitand retain essential workers because their housing costs are prohibitivelyhigh Firefighters, teachers, police officers and service workers are beingpriced out of many markets This leaves local governments and industrywithout the workers they need This reality has led many in the industry

popu-to change the vernacular from “affordable housing” popu-to “workforce ing.” This change is important for two reasons First, it speaks directly topublic and private sector leaders because it is their inability to attract aworkforce that will engage them in housing issues Second, it betterframes the issues surrounding affordable housing as ones about real

working people, like teachers that you know and trust, not theoreticalwelfare recipients.

(a) The Rise of the States and the Decline of the Federal Government

The role of the states in financing affordable housing continues to growespecially as federal programs and funds become more scarce The stateshave become increasingly important players since the enactment of thefederal Low Income Housing Tax Credit (LIHC) in 1986 Unlike prior fed-eral housing programs that were largely managed and approved by HUD,the LIHTC delegated awarding of these credits to the states Since 1986,each state, usually through their housing finance agency, has determinedthe best way to allocate the credits In the process, each state has devel-oped its own affordable housing expertise, development priorities (forexample, homeless, rural, disabled) and, in many cases, their own statefunded housing programs In short, the increased professionalism at thestate level has led to a much more sophisticated and more highlyfunded response to affordable housing issues in that state For example,

a number of states, such as California and New Jersey, have created grams to preserve affordable housing units in their states that were devel-oped originally under federal housing programs but that are now at risk

pro-of loss.14

This growth of state action in affordable housing is in contrast to thedecline in federal support over the past two decades Federal supporthas shrunk in every category Funds for housing rehabilitation fell 60percent from 1992 to 2002 Section 8 rent subsidies were reduced from

$32 billion to $16 billion during that same period At the time that thisbook went to press, it appears that this trend will continue for Fiscal Year

2006 Tenant-based rental assistance is expected to remain about $16 lion ($15.53 billion) However, Home Ownership Partnership (HOME)funds are scheduled to drop $41 million to $1.9 billion; CommunityDevelopment Block (CDBG) funds are expected to fall $250 million to

bil-$4.2 billion with most other programs staying at or about 2005 levels(homeless programs $1.346; public and Indian housing $6.8 billion; hous-ing for people with AIDS $285 million, and elderly housing programs

$741 million) A big question mark for 2006 remains the comprehensive

14 California, Colorado, Iowa, Massachusetts, Maryland, Minnesota, Michigan, New sey, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin have all taken actions to utilize state resources to preserve their affordable housing stock See State Housing Finance Agencies: Developing Programs to Preserve Affordable Housing,

Jer-public housing redevelopment program, HOPE VI The president andthe House propose to eliminate the program for 2006 Experts believethat it will be salvaged but funded at low levels, possibly for the last time

in 2006

(b) The Shift to the Suburbs

The LIHTC has not only shifted power to the states, but it has alsobrought affordable housing to the suburbs in record numbers Prior tothe LIHTC, approximately 76 percent of all federal housing funds wereinvested in central cities Since the inception of the LIHTC and its admin-istration by the states, housing investment in the suburbs has increasedalmost 75 percent A recently published Brookings Institution study foundthat approximately 42 percent of all LIHTC developments have beenbuilt in suburban locations.15 This trend is significant given the fact thatmost affordable housing built today is built with the LIHTC Moreover, it

is likely to continue as power bases in many states shift from largely ocratic urban central cities to largely Republican suburban and rural areas

Dem-(c) Emerging Role of Affordable Housing As a Platform for Bringing

Individual Economic Development Opportunities to Low-Income Residents

Five years ago, Rey Ramsey and I started a new nonprofit organization,One Economy Corporation, in order to use affordable housing as a plat-form for connecting low-income people to the opportunities provided bythe Internet Our goals were: (1) to change state housing finance policies

so all units financed with the LIHTC provided free or low-cost high-speedInternet access to residents, and (2) to build a “self-help, self-sufficiency”destination online that residents could use to find a better job, qualify forhealth insurance, help their children with homework, or learn how to savemoney

In January 2004, we launched the Bring IT Home campaign with theU.S Senate majority and minority leader as co-chairs and underwritingfrom housing giants Freddie Mac and Fannie Mae and support fromtechnology and telecommunications companies such as Verizon, Qwest,SBC, Bell South, Yahoo!, eBay, Google, Cisco, Intel, and Microsoft Overthe campaign’s first 18 months, more than 33 state housing finance agen-cies changed their LIHTC requirements to require or incent affordablehousing developers to bring affordable high-speed access to each resi-dent in the privacy and dignity of their own homes

Mayors, governors, and other elected officials have embraced thisapproach enthusiastically They see affordable housing as a cost-effectiveway to insure that low-income people have the means to take advantage ofeconomic opportunities available through the Internet These opportunitiesinclude continuing education, workforce training or retraining, applyingfor and receiving public benefits, and finding new markets for microen-terprises One Economy’s online portal, the Beehive (www.thebeehive.org)has helped make these possibilities a reality The site, now localized toserve 26 different cities and states, serves more than 150,000 people amonth in English and Spanish.

(d) Fall in Rental Housing Supply Overall

The United States has seen an extraordinary boom in homeownershipover the past ten years This boom, in many ways, has been to the detri-ment of the rental housing market Fewer rental units are being built, andmore and more existing units are being lost from the housing stock Over-all, rental housing production fell from 275,000 units in 2002 to 262,000units in 2003.16 Unlike rental housing built prior to 1990, today’s rentalunits are being built for higher-income people Nearly half of the rentalhousing units that have been built since 1990 have rents greater than $750.Only one-fifth of new rentals during this period were targeted to the bot-tom income tier This is in stark contrast to the rents at units built prior to

1990 Only 29 percent of those units had rents at the $750 level or above.17

In many areas of the country, new units barely replaced the number

of units lost to the housing stock From 1992 to 2001, for every three newunits added, two existing units were removed.18 In the Midwest, moreunits were lost than were added over this period The Northeast addedonly 100,000 more units than were lost.19

Nationwide, many LIHTC developments are at particular risk ofbeing lost from the housing stock because their initial 15-year use restric-tions are expiring While the LIHTC was enacted in 1986, the programdid not begin producing units at any level of scale until the early 1990s.Thus, many of these projects reach their 15-year anniversary in the nextfew years As noted above, state housing finance agencies are waking up

to this reality and developing programs to preserve these units for thelong term

17 Id at 23.

(e) Fundamental Transition in the Industry to Fewer, Longer Term Owners

In many ways, we have seen the nature and character of the affordablehousing industry change dramatically since the 1990s Federal policiesfrom the 1950s to the 1970s were focused on stimulating the supply ofaffordable housing These policies brought an array of for-profit devel-opers into the emerging sector with the promise of making money by shel-tering profits from federal taxation, generating considerable fees fromfinancing, construction and management activities, and the later con-version of these developments into for-profit housing in no more than

30 years

As time passed, federal policy turned from stimulating supply tosupporting demand (rent subsidies) As noted above, more than 50 per-cent of HUD’s budget is dedicated to rent subsidies currently Moreimportantly, the ability to use rental housing as a way to shelter incomefrom federal taxation was all but eliminated by tax reform in 1986 Thesechanges have had dramatic impacts on the sector First, many of thedevelopers who were in the business simply to shelter income and for thequick fees are long gone They left once their primary reasons for keepingtheir capital in affordable housing were no longer available to them Sec-ond, the exodus of the opportunistic many has left the committed few.That means that the industry now is primarily populated by entities thatare in the business based on its inherent economics, cash flow from rents,not short-term fees and tax benefits

This evolution has led many of the remaining owners, policymakersand funders who work with them, to look more to the long term Inmany ways, this is bringing a new, holistic discipline to the sector His-torically, programs and policies would veer from focusing exclusively onsupply or on demand Now, many are focusing on how to stabilize and

grow the sector by insuring that new and existing developments are

structured financially so they will both remain in the housing stock forthe long term

(f) Broad Embracing of Mixed-Income Communities

The federal government’s emphasis on supply from the 1950s to the 1970shad another unexpected outcome: extreme concentrations of low-incomepeople in a limited number of neighborhoods Troubled “projects,” such

as Cabrini Green public housing in Chicago or HUD-insured GenevaTowers in San Francisco, became the face of federal housing policy Bythe late 1980s, policymakers began looking for alternatives to this “ware-housing of the poor.” The Affordable Housing Act of 1990 authorized

of low, moderate, and even high incomes Although the federal programthat initiated this approach, HOPE VI, has had its detractors, the reality

of building or rebuilding neighborhoods as mixed-income communitieshas become the norm Today, many of the most successful “new commu-nities” across the country are composed of inhabitants with incomes fromacross the spectrum

(g) Increased Scrutiny of Government-Sponsored Enterprises

(Fannie and Freddie)

Fannie Mae and Freddie Mac are two government-sponsored enterprises(GSEs) that were created in the 1960s and 1970s to buy home mortgagesmade to low- and moderate-income households by financial institutionsaround the country Fannie and Freddie buy home mortgages of low- andmoderate-income households that financial institutions otherwise wouldhave had to hold for 15 to 30 years, thereby freeing the capital up earlierand enabling the lenders to make more homeownership loans Thisapproach has not only increased homeownership dramatically but alsocreated two incredibly profitable companies that enjoy the perceptionthat their activities are guaranteed by the full faith and credit of the fed-eral government

In the past decade, the GSEs have come under sharp attack by many

on Wall Street who believe that Fannie and Freddie, as for-profits, enjoy

an unfair advantage because of their special federal relationship Criticsalso argue that the market no longer needs the GSEs because there noware many other players who do the same work as Fannie and Freddiewithout the implicit federal guarantee

Pressure on the federal government to act on the GSEs has increased

in the past three years as they both have been found to have had ing improprieties Congress is considering legislation that could result ingreater focus on and increased investment in affordable housing

ORGANIZATIONS: RENTAL AND HOMEOWNERSHIP

As a whole, these trends point to unique opportunities for nonprofit nizations as we turn to the second half of this millenium’s first decade

orga-(i) Homeownership. The increased pressure on Fannie Mae and FreddieMac is forcing them both to focus more on their missions of serving theunderserved They both have raised the visibility and support of initia-tives to help minorities and people of color to become homeowners.Moreover, a number of proposals pending before Congress suggest that

the two GSEs use a portion of their profits to establish a fund that willmake resources available for affordable housing.20

(ii) Rental Housing. Most opportunities, however, are likely to be found

in the developing of rental housing for a number of reasons One, the tor has shown that it can attract and allocate tax credits efficiently andeffectively The private sectors interest in investing more than $5 billion ayear in housing through the LIHTC has strengthened this tool in the eyes

sec-of everyone, most importantly, elected sec-officials These successes not onlyhave made affordable housing advocates of the American business com-munity but also have laid the foundation for possible expansion of theLIHTC or the creation of new tax credit initiatives The establishment ofthe New Markets Tax Credit in 2000 is an excellent example of this.Second, government, financial institutions, and philanthropic organi-zations now acknowledge the need to both preserve the existing afford-able housing stock and continue to build new stock This realitycombined with the third factor, that the public and private sector has anenormous amount of confidence in the nonprofit housing developmentsector, means that nonprofits are poised to play an ever-increasing role inthe future Nonprofits now have a 20-year track record of taking on trou-bled developments and turning them around in communities big andsmall Nothing succeeds like success

C H A P T E R T W O

2

The Real Estate Development

Process for Nonprofit Organizations: An Overview

2.1 Nonprofit Organizations and

the Real Estate Development Process 13

2.2 An Overview of the Real Estate

Development Process 14

2.3 Addressing the Specific Needs

of a Community and a Specific Project Site 17

ESTATE DEVELOPMENT PROCESS

Any organization, regardless of profit motive, that is interested in oping housing must grasp the fundamentals of the real estate develop-ment process The basic steps in the development process are summarized

devel-in this chapter and detailed devel-in Chapters 3 through 19 The nonprofithousing developer, however, must know more than the basics becauseaffordability for a targeted clientele (based on special needs or incomelevels), not simply marketability, is the goal Affordable housing devel-opment requires creativity and the ability to access private and publicprograms, funds, and incentives, especially those available only to non-profit organizations For example, nonprofit housing development organi-zations are usually able to complete projects only by accessing inexpensivefunds uniquely available to them (e.g., proceeds from “501(c)(3)” bonds1)

and funds available generally to real estate developers (federal, state, or

local funds) and tax incentives available only to nonprofits (e.g., ments in lieu of taxes) and operating expense exemptions available only

pay-to nonprofits (e.g., water and sewer tax forgiveness).2

Additionally, a nonprofit housing developer must have the capability

to address problems caused by the fact that the nonprofit has a limited

track record as a developer and a limited ability to invest significantequity in any project For example, a lender of construction funds willoften require borrowers to obtain a performance and payment bond(P&P bond) prior to releasing any funds This bond is the lender’s secu-rity that funds will be available to complete the job even if the developerdefaults on its obligations Although this appears to be a reasonablerequirement of the lender, it creates a significant problem for nonprofithousing developers Generally, bonding companies will not issue a P&Pbond to developers who do not have significant development experienceand assets The nonprofit must be able to convince the lender to waivethe requirement or must provide alternative security such as letters ofcredit, compensating account balances, and so on.3

As each step in the development process is addressed, special tion will be given to problems or opportunities such as those noted abovethat are unique to the nonprofit housing developer These issues are ofprimary importance as the organization seeks to set standards for deter-mining project feasibility (see Chapters 4 and 5); for accessing financingand financial assistance from public and private sources, including funds

atten-to help defray costs of determining project feasibility, completing itation, and providing rental subsidies to tenants or homeowners (seeChapters 6 through 12); and for adhering to rigid construction lendingand bonding requirements (see Chapters 17 and 18)

DEVELOPMENT PROCESS

The real estate development process can be broken down into threephases: (a) feasibility, (b) acquisition and construction, and (c) projectcompletion

(a) Feasibility Phase

This phase, often referred to as the predevelopment phase, includes allthe tasks and studies that must be completed prior to actually settling on thepurchase of a particular property The feasibility phase is the most impor-tant phase in the development process because, in this phase, the non-profit housing developer must decide whether the project is feasible: Canthe property be purchased and developed into housing affordable to thetargeted clientele? Generally, feasibility phase activities are comprised ofthe following:

1. Tasks related to determining project feasibility and securing sitecontrol over the property for later purchase To determine whether

a project is feasible, the nonprofit housing development tion must:

organiza- Associate itself with a development team of experienced sionals who can assist in completing the necessary studies andnegotiations (see Chapter 3)

profes- Determine, with the assistance of the development team, a project’sprojected total development costs (see Chapter 4) and projectedincome and expenses (see Chapter 5)

 Estimate, with the assistance of the development team, the sources,amounts, and cost of funds that will be available to the devel-oper on a short- and long-term basis for the purchase and reha-bilitation of the project (see Chapter 6 through 12)

If a project is deemed feasible, the nonprofit organization mustexecute a written agreement with the existing property owner thatgives it “site control” or the right to purchase the property at a laterdate under specific terms (see Chapter 13)

2. Tasks that must be completed after execution of the purchase tract but prior to the organization’s purchase of the property Aftersecuring site control over the property, the nonprofit housing devel-oper must:

con- Determine whether it will take title to the property at settlement

in its own name or in the name of another corporation or nership

part- Interview and select an architect, management company, andappraiser

 Apply for and obtain commitments for financing and rent dies from sources identified during the feasibility process

subsi- Identify potential tenants from targeted clientele and market

 Develop a sales and marketing plan

All of these issues are addressed in Chapter 14 and 15

(b) Acquisition and Construction Phase

This phase includes all the tasks involved in completing the following:

1. Tasks required to complete the transfer of the property to the profit organization (see Chapter 16) To complete the transfer of theproperty to the nonprofit, the organization must:

non- Obtain title to the property.

 Record the title in the land records

 Adhere to all local provisions, if any, that regulate the operationand licensure of rental housing or homeownership entities

2. Tasks required to complete the construction or rehabilitation of thehousing on the property (see Chapters 17 and 18) To complete theconstruction or rehabilitation of the housing on the property, the non-profit organization must work with the development team to:

 Develop detailed architectural drawings, specifications, and anarrative description of the work to be performed

 Select a contractor to perform the work

 Negotiate the terms of a construction contract, including cost

 Address preconstruction requirements such as permits, als, bonds, insurance, and tenant relocation

approv- Supervise the successful completion of the work, including thesecuring of necessary government certifications

(c) Project Completion Phase

The project will be in a state of equilibrium at the completion of this phase(see Chapter 19) In this phase, the organization’s short-term loans,which were used to acquire, construct, or rehabilitate the property, will

be paid off These interim loans will be replaced with long-term or manent financing” that will stay with the property for 5 to 30 years.The use and character of the housing also will be stabilized duringthis phase If rental housing has been produced, the nonprofit organiza-tion will develop and implement a long- and short-term managementplan for the property as well as appropriate tenant services and tenant-management outreach programs If ownership housing was the organi-zation’s goal, the nonprofit housing developer will create the necessarylegal structure (fee simple, cooperative, condominium) to allow forhomeownership during this phase The nonprofit must also make provi-sions for ongoing training and legal assistance for owners and coopera-tive or condominium boards of directors