The due diligence process is critical for ensuring the success and sustainability of affordable housing projects. The margins for affordable housing developers and owners are razor thin and it is critical they have a full understanding of the projects needs to ensure profitability and achieve the highest possible valuation. However, as construction and insurance costs continue to rise, particularly for residential multi-family, owners may need a more holistic approach to due diligence now more than ever. From initial acquisition to closing, through construction and stabilization, and every other milestone along the way, every step of the development process must be vetted. Discoveries during due diligence will ultimately impact the project’s success and overall property value for years to come.
Therefore, a proactive approach not only minimizes risks but also safeguards the interests of both the owners and the residents. Here are four areas owners and developers should focus on when acquiring and preserving affordable housing projects:
Site Suitability and Sustainability
Many developers may be familiar with historic site suitability concerns, such as brownfields and amenity deserts, but more and more, locations with access to transportation and community services, and naturally buffered from climate concerns, will require just as much consideration. Changes in zoning, neighborhood wide development and restoration, and flood zone considerations, to name a few, will be equally as important to ponder.
Building Design, Functional Obsolescence
The decision between preservation versus disposition many times hinges on building design, economic life, and functional obsolescence. The cost difference between renovating and starting new must be taken into account in order to maximize the capital investment and allow for the greatest return to the community and residents.
Energy Efficiency and Property Resilience
Beyond rent, the efficiency and durability of a property will directly impact its affordability for the owners and tenants. Implementing sustainable and energy efficient design elements will produce cost savings in the long term by reducing utility costs and lowering operational costs. Property resilience measures have an immense impact on the financial viability and wellbeing of the site by minimizing potential damages to a property after a climate hazard and thus reducing downtime.
Economic Life and Profitability
The economic life of affordable properties can extend beyond typical market rate multifamily developments due to the audit and inspection requirements of most state housing agencies and/or HUD. These properties are subject to regular physical and economic inspection which require owners and managers to maintain compliance regarding physical conditions. Additionally, it’s common for owners to apply for new tax credits for renovation after the 15-year initial compliance period ends, as most properties stay in affordable programs for longer periods under extended use provisions.
Profitability of affordable developments can be difficult to quantify as it flows to ownership through multiple channels. The allocation of income from affordable developments flows to different ownership and management positions depending on the specific construction of the partnership agreement, which vary between developments. The NOI generated by the real estate, due to the limitations on income as a part of the programs, typically results in low returns as compared to market rate developments. However, the program subsidies, which can include various types of tax credits, grants, very low interest loans, real estate tax exemptions, or other financial incentives, are provided as a benefit to offset the low level of NOI return to the property.
Once the above have been thoroughly assessed, the data will need to be shared with all to make informed decisions. Building a database where vital information can be communicated will lead to corroborative reporting. This allows all parties to understand the nuances, requirements, and hurdles along the way. Consistency and partnership will allow the project to progress from conception to completion.
When it comes to preserving or producing affordable housing, because there are many daunting tasks for every stakeholder, the development groups have to leverage every resource in order to make the deal work. In the current socio-economic environment, the task has become infinitely more difficult with affordable housing based on the inherent rent restricted nature of the projects.
From the moment a project is contemplated for affordable housing, all related parties become invested in the success and maturation of that project. Federal subsidies and their strings aside, delivering much needed affordable housing to the market remains a challenge, thus the historical shortage. It is vital that everyone be onboard toward this common goal. Constructing safe and equitable modern housing will inevitably lead to quantifiable equity growth in the valuation of a once short-sold sector.
The greatest outcome is when a deal thought to be impossible comes together, and its ownership group can say they delivered a quality, affordable home for future residents and a place the community can be proud of.