At AHIC’s 2024 Fall Affordable Housing Summit, the session titled "Getting Deals Done Today: A Conversation with Developers" featured insights from leading affordable housing developers about the key challenges they are facing in today’s market. Moderated by Victoria O’Brien, Senior Vice President at U.S. Bancorp Impact Finance, the panel included Diana DiPreta, Senior Vice President of Capital Markets & Acquisitions at Beacon Communities; Kevin Nowak, President & CEO of CHN Housing Partners; Torian Priestly, Chief Development Officer at The Benoit Group; and Brian Swanton, President & CEO of The Gorman Companies.

This panel focused on issues that affect the development of affordable housing, including rising construction costs, regulatory challenges, and complex financing structures.and how developers are navigating them to maintain project viability in a challenging economic environment.

Rising Construction Costs and Labor Shortages
One of the key issues raised during the session was the significant rise in construction costs, which continues to affect the feasibility of affordable housing projects. Brian Swanton pointed out that the prices of key building materials, such as lumber and steel, have fluctuated dramatically in the past few years due to supply chain disruptions caused by the COVID-19 pandemic. These fluctuations have created uncertainty in budgeting and scheduling, which in turn complicates project planning.

Additionally, the industry is grappling with a shortage of skilled labor, which is driving up wages and causing delays. Kevin Nowak highlighted the fact that labor shortages are making it harder to maintain project timelines, as fewer skilled workers are available to complete projects on schedule. This not only affects costs but also impacts the timing of project completions, which can delay when properties begin generating rental income.

Diana DiPreta noted that these labor shortages are not likely to ease soon, as many workers who left the industry during the pandemic have not returned, and there is a lack of new entrants into the field. Developers are increasingly looking at alternative construction methods, such as modular construction, to address both rising costs and labor shortages. Modular construction, which involves pre-fabricating building components off-site, has the potential to reduce the reliance on on-site labor and speed up project timelines.

For LIHTC investors, these rising costs and labor shortages present challenges. Higher project costs can reduce returns, while delays in project delivery can affect cash flow. Investors need to ensure that developers have factored these issues into their project budgets and timelines and are taking proactive steps to mitigate these risks.

Regulatory Challenges and Local Variations
The regulatory environment for affordable housing was another significant topic during the session. Developers are increasingly facing challenges related to varying state and local regulations. Torian Priestly highlighted how different jurisdictions have distinct requirements for affordable housing, which can add complexity to development projects.

For example, Diana DiPreta shared how the regulatory environment in Massachusetts differs greatly from that in other states like Georgia or Arizona, particularly in terms of zoning laws, environmental requirements, and tenant protections. These variations force developers to tailor their projects to comply with different rules, which can result in additional costs and delays.

Zoning restrictions were identified as a particular challenge in some cities, where density caps and building height limitations prevent developers from maximizing the number of affordable units in a given project. Kevin Nowak pointed out that in many urban areas, restrictive zoning laws make it difficult to build the number of units needed to address the affordable housing shortage. He advocated for more flexible zoning policies that would allow developers to build higher-density projects in areas with high demand for affordable housing.

For LIHTC investors, understanding the regulatory environment is critical to evaluating potential investments. Developers who operate in multiple jurisdictions must have the capacity to navigate local regulations and secure necessary approvals in a timely manner. Investors should pay close attention to how developers plan to manage these regulatory challenges, particularly in markets where the approval process is lengthy or complicated.

Financing Affordable Housing Projects: Complex Capital Stacks
The complexity of financing affordable housing projects was another key theme. Rising construction costs, higher land prices, and increasing interest rates have made it more difficult to close financing gaps. The panelists discussed how developers are structuring deals with multiple layers of financing, often combining federal tax credits, state subsidies, private equity, and public grants.

Brian Swanton explained that most affordable housing projects today require what he referred to as “complex capital stacks” to be financially viable. These capital stacks typically include Low-Income Housing Tax Credits (LIHTC), tax-exempt bonds, project-based Section 8 vouchers, and other sources of public and private funding. This multilayered approach is necessary to cover the rising costs of development, but it also adds complexity to project management.

Torian Priestly noted that while federal LIHTC is a critical source of equity, it is often insufficient to cover the full cost of development, particularly in high-cost markets where land and construction costs are rising. As a result, developers are increasingly turning to other sources of financing, such as state tax credits and philanthropic investments, to close the gap.

Diana DiPreta shared her experience of working on projects that required up to nine different sources of financing. While these capital stacks allow developers to secure the necessary funding, they also create challenges in managing compliance and reporting requirements for each source. Additionally, each funding source often comes with its own restrictions, which can limit how the funds can be used.

For LIHTC investors, understanding the complexity of these financing structures is essential. Projects that rely on multiple sources of funding may offer higher returns but also come with increased risk. Investors should ensure that developers have the expertise to manage these complex capital stacks and are capable of navigating the compliance requirements attached to each funding source.

Property Management and Tenant Retention Strategies
The panelists emphasized the importance of effective property management and tenant retention in maintaining the financial stability of affordable housing projects. Kevin Nowak noted that high turnover rates and vacancies can significantly impact the financial performance of affordable housing properties, particularly those serving lower-income tenants.

Torian Priestly discussed the role of tenant engagement programs in improving retention and reducing turnover. Many developers have implemented resident service programs that provide tenants with access to financial counseling, social services, and rental assistance. These programs are designed to help residents stay current on their rent, avoid eviction, and maintain stable housing. By reducing turnover, these programs also lower the costs associated with unit turnover, such as repairs and vacancy loss.

Brian Swanton highlighted the importance of proactive property management in maintaining high occupancy rates. He explained that effective property management not only improves tenant satisfaction but also helps reduce operating costs. Properties that are well-maintained and have strong resident services are more likely to attract and retain tenants, which in turn leads to more stable cash flow.

For LIHTC investors, projects with strong property management and tenant retention strategies are more likely to deliver consistent returns. Investors should look for developers who prioritize tenant engagement and have a track record of maintaining high occupancy rates. Lower turnover rates help reduce operating costs and improve the overall financial performance of the project.

Long-Term Affordability and Community Engagement
Ensuring long-term affordability and securing community support were other key topics discussed by the panel. Diana DiPreta shared that developers often face opposition to affordable housing projects from local communities, particularly in areas where there is a perception that affordable housing will negatively impact property values or strain local resources.

Developers who engage with the community early in the development process are more likely to build support for their projects and avoid delays. Kevin Nowak emphasized the importance of working with local officials, community leaders, and residents to address concerns and demonstrate the benefits of affordable housing developments. Projects that align with local priorities, such as creating jobs or improving access to public transportation, are more likely to gain approval and move forward smoothly.

In terms of long-term affordability, Torian Priestly discussed the need to include mechanisms such as deed restrictions or public subsidies to ensure that affordable units remain affordable over time. This is particularly important in markets where rising property values and gentrification are threatening to displace low-income residents.

For LIHTC investors, projects that include long-term affordability mechanisms are more likely to maintain stable occupancy and rental rates. Additionally, projects that receive community support are less likely to face delays or opposition, reducing the risk of project disruptions.

Conclusion
The "In Conversation with Developers" session at AHIC’s 2024 Fall Affordable Housing Summit provided valuable insights into the challenges and opportunities facing affordable housing developers. Rising construction costs, labor shortages, and complex regulatory environments are making it more difficult to develop affordable housing, but developers are finding creative solutions to address these issues.

Understanding how developers manage rising costs, regulatory complexities, and financing structures will be key to making informed investment decisions in the affordable housing space.