More and more developers are building properties that mix new apartments with no restrictions on rent with housing affordable to moderate-income, low-income, or even very low-income renters.
State and federal programs provide grants, tax-exempt loans, rental subsidies like Section 8 vouchers, or even federal low-income housing tax credits (LIHTCs) to help finance these mixed-income developments.
Many developers also are tempted by property tax abatements and other incentives offered by a growing number of cities and towns in exchange for mixing affordable housing into their developments.
“You get density bonuses that are strong enough to warrant some inclusionary housing, or you get some streamlined path to entitlements that just makes it too good to pass up,” says Omar Rihani, executive vice president at Project Management Advisors, a consultant specializing in multifamily development, construction, and project management.
Know the Rules
To successfully complete these mixed-income projects, developers should make sure they understand all the commitments they have made, and the complexities of the programs they plan to use.
“You have to be on top of what the changing regulations require,” says Rihani.
Many cities and towns have created their own programs to incentivize mixed-income housing—the requirements of these programs can be different from municipality to municipality, and these requirements can evolve over time.
For example, in Los Angeles, a developer might receive a “density bonus” to build more apartments on the site or expedited zoning for a mixed-income project.
Today, those affordable units must be “indistinguishable” from apartments that have higher, unrestricted rents. But not that long ago, Los Angeles officials allowed developers to install different, less expensive finishes in affordable apartments.
“One of the most important things is to make sure that the affordable units are treated the same as market-rate units in terms of quality of finish, location of the unit, and any amenities within the building,” says Konrad Schlater, vice president of Preservation of Affordable Housing (POAH). “People tried to game those systems for a long time.”
Other jurisdictions may still allow developers to designate floor plans like studio apartments or units with less desirable views as the affordable units in a mixed-income property.
Talk to Local Developers and Managers
Talk to other developers and managers in the area who have successfully owned and operated mixed-income properties. This is important because jurisdictions negotiate and enforce agreements to build mixed-income housing in different ways.
“I am a big proponent of not reinventing the wheel,” says James Simmons, CEO and founder of New York City–based Asland Capital Partners. “Try to have conversations with other developers who are in the market.”
Most real estate markets have some organization that caters to the real estate community. “Most people like to talk about themselves,” says Simmons. “If you ask them about their path and how they successfully navigated it, you’ll save yourself a lot of time and effort.”
Housing Programs Reward Energy Efficiency
Developers can save money when they install energy-efficient appliances and energy-saving light fixtures inside apartments that are subsidized by housing programs like federal LIHTCs.
“Investments in energy efficiency can actually maximize the amount of rental income,” says POAH’s Schlater.
That’s because many affordable housing programs calculate the maximum rent a property can charge for an apartment by calculating what a tenant earning the targeted income can afford, minus a utility allowance. If the utility cost proves to be high, the property earns less rental income.
Many affordable developers choose energy-efficient light fixtures, appliances, and heating systems. “We’ll typically do a central system that’s very energy efficient on both air conditioning and domestic hot water central system,” says Schlater. “It’s a system that’s hard to submeter.”
Lower Your Expectations (for Rent)
Experienced affordable housing developers don’t set the rents for their apartments at the maximum amount allowed by housing programs like federal LIHTCs.
“We’ll take either a 5% or 10% discount off those maximum tax credit rents,” says POAH’s Schlater.
Housing programs like the LIHTC reserve each subsidized apartment for a household earning a certain percentage of the area median income.
The program also limits the amount of rent that an owner can charge for a LIHTC unit.
“If you maximize the rent, you have to find the exact person that can pay that rent and not pay more than 30% of their income,” says Schlater. “Of course that population is a lot smaller. That is definitely something that developers get wrong.”
Slightly lower rents will make the apartments available to a much larger set of potential renters. “Your lease-up will be much faster if you’re more conservative on the rent assumptions,” says Schlater. “Instead of five or 10 units per month, you might be able to lease 20 or 30 units per month.”
Developers also should not expect to earn the highest rents in the area for the market-rate units in a mixed-income property. That’s partly because super-luxury apartments often earn their high rents with eye-popping amenities, paid for by high rents throughout the building. “In spite of everyone’s best efforts to create the best property possible, a market-rate renter is going to demand some discount,” says Schlater.
Mixed-income developers who receive operating subsidies to run their projects should also make sure they know when those subsidies are likely to be paid.
“There are direct subsidies where the payment is in your account on the first of the month every month,” says Simmons. “They are government-guaranteed, and they are predictable.” That is a huge benefit because managers are not dealing with individual tenants to receive that money.”
Other housing programs provide their funding long after the fact. “There are some subsidies where you receive them retroactively,” says Simmons. “Understand the rules and the regs to have a clear understanding of how they work so that you can underwrite appropriately—particularly as it relates to the timing and receipt of funds.”
