Under One Roof: How Does Affordable Housing Get Financed?
Real estate finance under any circumstances is complicated. When it comes to affordable housing, it’s even more so.
So to make this as simple as we can, we’re going to use Austin’s M Station as an example. The 150-unit apartment complex is right next to the Red Line tracks on MLK Boulevard.
“This is a three-bedroom apartment,” said Walter Moreau, executive director of Foundation Communities, the nonprofit that built M Station, during a tour of the complex. “All the apartments here are pretty large. This one is over 1,200 square feet, big windows, ceiling fans throughout.”
This apartment is empty right now. There’s a welcome note out for the people moving in soon.
It cost about $25 million to build the M Station complex. That money, Moreau said, paid for pretty standard stuff -- “exciting things like a high-efficient toilet, doorknobs, GFCI plugs in the kitchen” and so on.
The average rent in these apartments is around $850 a month. That’s much lower than the average for a 1,200-square-foot apartment in Austin. The rent here is that low for one reason: almost all of the costs of building M Station were already paid when it opened.
So let’s look at where that $25 million came from. There were actually 17 different sources. Let’s start with the three big ones.
David Potter is the housing development manager with the city of Austin’s Neighborhood Housing and Community Development office, often the first stop for a nonprofit looking to build affordable housing.
The money in this pot comes from three sources (nothing is simple here).
First, there’s money the city gets from the federal government. “Unfortunately, that money has been decreasing for the last five years for sure, and they’ve already told us to go ahead and expect, through the sequestration, to expect another 5 percent cut,” Potter said.
The city also has the housing trust fund, local money, part of the tax revenue generated by private developments on city land.
The city’s third source is money borrowed through city bonds. Voters last approved an affordable housing bond in 2006: $55 million. That money is all gone now. M Station got $2 million of it, about 8 percent of its total budget. It was a very important piece, though.
“Oftentimes getting the commitment from the city is the critical first step to getting the other money,” said Stuart Hersh, an affordable housing consultant. “Because if your local jurisdiction doesn’t support you financially, then there are often questions about how viable this project really is.”
So developers will leverage that city money -- that vote of confidence -- to win other money.
Back to our three pots of money: The Lola Wright Foundation is one of several charities that gave money for M Station. Their criteria for grants are pretty broad.
“We want to see that an organization is doing good work to improve the lives in our community,” said foundation President Will Flowers.
So affordable housing is often competing with a bunch of other worthy projects for these kinds of funds. After-school programs, health clinics and theater companies are all turning to these sources.
“The requests -- applications for money -- will be three times the amount we give,” Flowers said.
The foundation gave $10,384 for M Station. Some other foundations gave much more. But when you’re trying to put the whole thing together, every little bit helps.
Now with a couple smaller sources in hand, it’s time to see the big dog. Cameron Dorsey is the director of multifamily finance for the Texas Department of Housing and Community Affairs. Developers apply to Dorsey’s office for what are called low-income housing tax credits. It’s the biggest pot of money for this kind of affordable housing.
“The low-income housing tax credit provides a dollar-for-dollar reduction in the amount of taxes that someone owes,” Dorsey said.
These are federal tax credits, by the way. So a developer will apply for these tax credits, then turn around and sell them for cash. They’ll sell them to big companies with big tax liabilities, such as Verizon or Pepsi. In M Station’s case, it was Bank of America.
“Let’s say I’m going to give you $10 in tax credits each year for 10 years,” Dorsey said. That’s $100. “Well, if I’m an investor investing in this, I don’t want to give you the full hundred dollars, so I’ll give you 90 cents on the dollar.”
So the company gets the tax credit and the developer gets cash to build their property. The only problem is that these tax credits are very, very popular.
Dorsey’s office has two big metal cabinets with pink signs on the front that read “2013 Housing Tax Credit Applications.”
A completed application can cost up to $20,000 to prepare. It’s very detailed. The state wants to be sure any proposal that gets these tax credits is going to succeed.
“Out of these, how many do you think will end up getting funded?” Dorsey said. “Probably right around 50. We’ve got about 133 applications that we’ve received, and we’ll end up funding about 50. So less than half will get funded.”
Less than half. That’s for the whole state, by the way. Maybe three of those will be in the Austin area. And remember, this is the biggest pot of money out there.
M Station got more than $13 million from the tax credit program, more than half of its total budget. It was one of the lucky projects.
“That is the reason that most concepts never get to construction,” said Hersh, the consultant. Competition for all of the pots is stiff. And getting turned down by one you were counting on can be a big problem.
“I have seen organizations having to wait several years or totally abandon their project precisely because the financing doesn’t work,” Hersh said.
Even when a project accumulates money from all these sources, there’s usually still a gap. That’s where a standard mortgage comes in; perhaps that’s a fourth pot of money. Foundation Communities borrowed $5 million -- 20 percent of the total -- to build M Station. $25 million, 17 funding sources.
“I joke that you get your merit badge if you do affordable housing if you do 10 or more,” said Moreau of Foundation Communities. “A colleague of mine said it’s sort of like inviting everybody to dinner and you want to serve a fresh meal, but you have to buy your ingredients from 10 different stores. And oh, by the way, they’re only open on certain days of the week during certain hours.”
And it may get even more complicated. Just because he’s building below-market-rate apartments doesn’t mean Moreau is immune from the market. The development boom in Austin is making materials more expensive. As he looks to build the next phase of M Station, the cost is getting higher by the day.
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