You got your approvals, and you’re ready to start the actual building process! Fortunately, your development partner will likely handle most of the financing issues, but your internal team should know enough to keep up with the process. This is, again, why a housing finance expert should be part of your team. And of course, Just Homes can help talk through anything you want support with.
You could study housing development finance for years, so we’re not going to try to give you a full education here. Instead, here are a few basic concepts you need to know to sit at the table.
Every real estate development project has a list of sources and uses.
Sources are the places your money is coming from and uses are the things you’re spending it on.
Sources are almost always a combination of debt (money you have to pay back with interest) and equity (money you don’t pay back, raised through attracting investors to your project).
Uses include predevelopment costs, construction costs, paying contractors, paying down debt, etc.
When you are building affordable units, you should minimize debt. In market rate housing construction, debt is the larger part of the financing deal because the rent that future residents pay helps to pay down the debt more quickly. With affordable units, future resident rents are lower, so you can’t rely as heavily on that income for debt repayment. Financing affordable housing development is about finding low-interest/deferrable/forgivable sources of debt and reliable sources of equity.
Here are some common financing tools used by affordable housing developers in the city:
Low Income Housing Tax Credits (LIHTC, “lie-tech”): LIHTC is a federal program administered by DC and the most common tool for affordable housing development. Simply, it provides a tax incentive for investors to invest in your project, providing equity. This is typically used for projects of 20 units or more
New Market Tax Credits: NMTC is another tax credit program that operates similarly to LIHTC, but is open to more than just housing. If your development includes small business development or other mixed-uses, you could be eligible.
Opportunity Zones / Opportunity Funds: This is a brand new tax incentive added to the tax code by the 2018 Tax Reform Act. Though there are a lot of regulations still pending, Opportunity Funds could provide a source of equity for affordable housing development because they incentivize tax-free investment in certain neighborhoods. If your church sits in one of these Zones, there could be a great chance to connect with an Opportunity Fund and access new financing.
Housing Production Trust Fund: The DC Department of Housing and Community Development (DHCD) operates a pool of $100 million annually ($130 million in FY20), to support affordable housing development. This is a competitive fund, accessed through a “Request for Proposals” (RFP) process, which occurs every 9 months. Funding comes in the form of loans and grants, and will supplement other funding sources (not pay for the entire development). There is also a special Affordable Housing Preservation Fund that could help if you’re redeveloping existing affordable housing.
Oramenta Newsome Fund: DHCD recently began offering a fund specifically for pre-development costs, available ONLY to non-profits (such as churches). Pre-development costs include purchasing a property, feasibility studies, and other activities prior to construction. Applications are accepted on a rolling basis.
Once your finances are in place, you and your development partner will get to work building. You’ll mostly supervise at this point, and depending upon the relationship, you’ll monitor to make sure the vision isn’t lost in the day to day process of construction. Again, don’t be discouraged if the process takes longer than expected. Construction timelines are notoriously under-estimated, and can range anywhere from 6 months to several years, so expect to have your ground-breaking, construction timeline, and end date pushed back several times.
