What Developers Should Know Before Starting HUD and Low-Income Housing Projects
“What Developers Should Know Before Starting HUD and Low-Income Housing Projects” by Don Robison, CPA | Senior Manager – Audit & Assurance
Real estate developers are always looking for new business opportunities. Two potential avenues for new development are Housing and Urban Development (HUD) and low-income housing projects.
Affordable housing projects may not be as glamorous as towering skyrises, but they can be profitable projects with special advantages that your standard project can’t offer. However, these projects can be tricky for developers not used to the ins and outs of affordable housing work, but some information, experience, and guidance can turn potential hurdles into stepping stones for success.
To start, you need some information to better equip yourself for future HUD and low-income housing projects. Here are some important details you should know about affordable housing projects before you start one.
Differences Between HUD and Low-income Housing Projects
First off, not all affordable housing projects are the same. There are some very critical differences between HUD and low-income housing projects that can change your approach and why you may want to tackle them in the first place.
HUD projects are funded by HUD insured mortgages, with a large debt service that will need to be paid off. In a HUD project, the developer may also enter into a housing assistance payment contract. The government subsidizes the difference between the true rent and the rent that a tenant can pay based on their low income.
Here’s an example: We’ll say the contract rent is $500 a month. The government will use certain calculations to determine what the tenant can afford. In this case, the tenant can only pay $50 each month. The government will subsidize the $450 difference between the two rent numbers.
For low-income housing tax credit projects, the rent is still low, but generally there’s no subsidy. These projects are funded mostly by equity and there isn’t as large a mortgage to pay off, so developers don’t need as much rent money to offset costs.
Affordable housing projects in general have more compliance needs than the usual development. HUD and low-income housing tax credit projects are regulated by federal and state agencies. Auditors will test for compliance requirements for both types of projects. Auditors look into tenant eligibility and whether you’re spending funds on the right things and properly setting up reserves.
Benefits of Affordable Housing Projects
Both HUD and low-income housing projects have certain advantages to more traditional projects. For example, there are times when developers can have trouble getting funding from conventional sources. HUD projects can provide developers with access to funding and a source of debt to help them with projects.
The tax credit projects work a little differently, but also have their perks. Low-income housing developers can earn a developer fee of about 10 percent of the total cost of the project.
Another big benefit is that developers most often sell the tax credits they earn for building these projects to an equity investor. These projects generate almost 100 percent of the cost of the project in credits over 10 years. If an equity investor puts in $10 million in capital over 10 years, they’ll pretty much get that $10 million back in credits, plus the tax benefits. The developer can essentially sell these credits to an equity investor that can utilize these credits, including banks, insurance companies, and other similar groups.
While money is almost always a huge factor in business decisions, HUD and low-income housing projects can also serve a philanthropic passion of the developer. These projects can help build up a community and provide a place to stay for people in need. That can turn affordable housing projects into both a business opportunity and a chance to give back to the community.
Drawbacks to Affordable Housing Projects
While there are some definite upsides to affordable housing development, there are downsides.
Since you’ll be working with government agencies, these projects have more compliance requirements than your average job. Each project has to follow specific compliance requirements that developers need to follow. If these strict guidelines are ignored – such as HUD’s preferred way to conduct, present, and file an audit – the project owner can be in trouble.
There are other factors that can increase the risk factor for affordable housing projects. Tenants need to be verified to see if they qualify for housing. Cost certifications need to be done at specific points in the project, which can differ if it’s a HUD or low-income housing project.
Because of these reasons, affordable housing development can be tricky without experience or proper guidance. However, with the right people in place to monitor these types of projects, developers can mitigate the risks and take advantage of the benefits.
Finding the Right Affordable Housing Project Partner
Due to all of the technical issues involved with affordable housing projects, it can be hard to find firms that regularly do HUD and low-income housing audits. The right partner can make a huge difference when it comes to compliance and project success. Plus, government agencies can show preference to developers with experience with these types of projects.
At Apple Growth Partners, we have been performing HUD and low-income housing audits for decades. Thanks to our experience with construction, real estate and affordable housing, we can get involved early on in the developmental stage of a project and help you navigate the affordable housing project process. If you have any questions about HUD and low-income housing projects, contact us today.