Affordable Rental Housing:Development & Operation

AHS gratefully acknowledges the use of materials developed by the

Virginia Community Development Corporation(AHS has deleted slides and made minor edits on others )

The Development ProcessOverview

FOUR phases (roughly) in development process:• Predevelopment• Development• Operations• Disposition

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PredevelopmentThe Development Team

Responsible for completing development tasks

Includes range of stakeholders, both paid and volunteer:• Developer staff and board members• Design professionals• Representatives of regulatory and funding

agencies• Clients• Contractors

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PredevelopmentThe Development Team

Includes range of stakeholders, both paid and volunteer (continued):− Local building officials− Neighborhood residents− Property managers− Attorneys

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Predevelopment

Site Selection and Control

PredevelopmentSite Selection

CONSIDER TRADE-OFFS: Access / Utilities Environmental Conditions Inspections Legal / Zoning Services Timing Cost Community Need and/or

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Predevelopment

Determining the Market

PredevelopmentDetermining the Market

Market Analysis: Defining the market

− Where will residents come from? Local area only Commuters In-migration New household formation Pent-up demand

− Who will residents be? Factors may be defined by developer

Age specific Special needs Income level – maximum and minimum incomes Household size

Housing preferences Location Design

Focus on the right households

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PredevelopmentDetermining the Market

Market Analysis (continued): Evaluate all available data including:

− US Census data for Income level Household size Age Housing Tenure Employment trends Commute to work Age of housing Quality of housing “Movership”

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PredevelopmentDetermining the Market

Market Analysis (continued): Evaluate all available data (continued)

− Local data Employment trends Residential building permits by type Completions by type Neighborhood evaluation-amenities School report

Utilize local knowledge− Comparable survey

Unit size Rent Amenities Vacancy/waiting list

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PredevelopmentDetermining the Market

Market Analysis (continued): Provide an appropriate analysis of the data

− Capture Rate Percentage of qualified households necessary to fill the proposed units

− Absorption Period Amount of time expected for lease-up

− Estimate of Market Vacancy− Estimate of Market Rent

Draw conclusions− Is the project feasible− Mitigating circumstances peculiar to market or project

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PredevelopmentDetermining the Market

Typical Market Study should include: Intro/ Executive Summary – salient facts and conclusions Project Description Site Evaluation Description of the Market Area – primary and secondary Description of the area economy and market

demographics Supply and Demand Analysis

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PredevelopmentArchitecture and Engineering

PredevelopmentArchitecture and Engineering

Design Issues to Consider: Appropriateness Scale Context Accessibility Desirability Environmental Issues Cost

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PredevelopmentArchitecture and Engineering

Levels of Completion Preliminary conceptual drawings, renderings, elevations Sufficient to apply for financing Bid documents Construction Ready As-builts or post-construction

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PredevelopmentEnvironmental

PredevelopmentEnvironmental

Most projects require completion of a Phase I Environmental Assessment

In addition to typical hazards, including asbestos, lead, and storage tanks, lenders and investors are seeking clearance of mold and radon concerns

Phase I happens earlier in adaptive reuse or rehabilitation projects

Sometimes necessitates more testing

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Predevelopment

Appraisal

PredevelopmentAppraisal

Appraisals, particularly those performed by third parties, are essential in the real estate business

Establish fair market value (FMV) to be relied on by developers, owners, and third parties

Generally involves valuation based on three approaches: income, sales comparison, and cost. Typically one of these valuation approaches provides the basis for FMV

Value adjusted for restricted rents and below market financing

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Project FeasibilityThe Development Budget

Project FeasibilityThe Development Budget

Consists of all costs necessary to build the project Will be a fluid number that will become more

precise as the time of construction approaches The number should be firm before the construction

starts Stages:

− Owner’s Estimate− Architect’s Estimate / Contractor’s Estimate− Contractor’s Bid− Construction Contract

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Project FeasibilityThe Development Budget

Cost Categories Land and Building Site Work Rehabilitation / New Construction Contingency Architect and Engineer Fees Interim Costs Financing Fees and Expenses Soft Costs Syndication Costs Developer’s Fees Project Reserves

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Project FeasibilityThe Development Budget

Land and Building The cost of purchasing land on which to build a project

and/or the cost of a building or buildings to be rehabilitated or occupied as is by low / moderate-income renters

Land and building costs should be separated Look at:

− $ / Acre− $ / Unit− % of project cost− Compare with other projects

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Project FeasibilityThe Development Budget

Site Work & Rehabilitation / New Construction Separate categories for hard construction costs including:

− Off-site work− Site-work− Demolition− Abatement− New Construction− Rehabilitation− General Requirements− Overhead− Profit− Bond− FFE (Financing Fees and Expenses)

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Project FeasibilityThe Development Budget

Contingency Covers the unknown. May be required by and regulated by the lender. Can get smaller as development proceeds. Higher for rehabilitation than new construction. Discussed as a percentage of construction costs.

− 5% for new construction− 10% for rehab

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Project FeasibilityThe Development Budget

Architect and Engineering Fees Fees paid to architects and engineers for building and site

design, construction supervision, and soil testing, concrete testing, storm-water management plans, etc .

Does not include cost of construction lender’s, or other required third party inspecting architect.

Discussed as percentage of construction costs: 4%-8%.

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Project FeasibilityThe Development Budget

Interim Cost Non-construction costs incurred during the construction

period.− Construction interest− Construction loan fees− Inspecting Architect’s fees− Title updates− Taxes− Insurance

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Project FeasibilityThe Development Budget

Financing Fees and Expenses Cost of obtaining permanent financing including:

− Points (on permanent financing)− Closing costs (for permanent financing)− Credit enhancement fees− Title and recording work− Appraisal, market study, environmental− Mortgage Broker Fee

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Project FeasibilityThe Development Budget

Soft Costs & Syndication Expenses Fees that are project-related but not directly related to

construction like:− Legal− Accounting− Consultants− Tax credit reservation / application fees− Syndication fees – costs of forming the ownership entity

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Project FeasibilityThe Development Budget

Developer Fee Compensates the developer for staff time,

entrepreneurial effort, and risk. Should include fees, overhead, and profit. The developer’s major return from the project.

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Project FeasibilityThe Development Budget

Reserves Funds set-aside out of the development budget to cover:

− Lease-up expenses. − Operating losses. − Replacement of capital assets. − Debt service payments. − Rent subsidies.

May be required by the lender and/or investor May be determined by the developer to be necessary for the

financial viability of the project.

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Project Feasibility

The Operating Budget -Income

Project FeasibilityThe Operating Budget - Income

Income Sources (continued)Tax Credit rents:

− The maximum rents allowed under the tax credit program are established in the law based on: Which qualifying test is met Area Median Income (from HUD data) The size of the households occupying the

units

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Project FeasibilityThe Operating Budget - Income

Income sources (continued): Sources not directly related to the rental of low-income

units:− Market rate units− Commercial space− Surcharges

Air conditioner Parking Late charges Other

− Laundry− Other

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Project FeasibilityThe Operating Budget - Vacancy

Vacancy There are two general types of vacancy:

− Normal vacancy Market vacancy and credit losses Turnover

− Initial vacancy and lease-up expense

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Operating Expenses Costs that arise from operation of the project, rather than

from its development/construction. Expenses that are recurring and necessary for the proper

functioning of the project. Typical operating expenses include:

− Taxes− Insurance− Water/Sewer− Utilities− Maintenance− Management− Other (Inspections; Accounting; Legal; etc)− Replacement Reserves (for major capital items)

Project FeasibilityThe Operating Budget - Expenses

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Project FeasibilityThe Operating Budget - Expenses Projecting operating appropriately expenses is

critical There is little margin for error

− Rents are often fixed and regulated− Cash flow is thin− The ability to raise rents in future years is limited

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Project FeasibilityProjecting the Proforma

Net Operating Income: Cash available to pay all stakeholders (lenders get paid first – investors and owners last).

Calculated as follows: Gross Rents- Vacancy= Effective Gross Collections- Expenses= Net Operating Income

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