New affordable housing developers need to master the hurdles to success

Aspiring real estate developers have to become comfortable taking risks and a 24/7 sense of urgency. Learning how to address and conquer the biggest hurdles to become successful in affordable housing development was the theme of a session at Baker Tilly’s 2022 DevelUP affordable housing workshop in Milwaukee. The educational and networking event brought together underrepresented multifamily housing professionals, allies and advisors to meet one another and learn the ins and outs of affordable housing.

Know the terms

Brandon Rule, president of Rule Enterprises, talked about the importance for inexperienced developers to understand the basic financial terms of real estate development – “What is debt? What is equity? What is amortization? What are interest only tax credits?” and to not just Google for answers but to constantly ask as many questions as possible to people knowledgeable in the industry.

Rule said “As a developer, you have to focus on debt. Debt is a commodity at this point, but right now, debt is a problem and it's ruining a ton of deals because of the interest rate environment. Understanding debt and how that affects your deal is important.”

Rule also noted the importance of equity. “My first project was underwritten in 2015, Trump came in in 2016, changed the corporate tax rate, which immediately dropped the pricing by 15%. I had a $6 million tax credit at a $1.05 LOI and it immediately went to 88 cents – I lost a million dollars in equity overnight.” The solution for him at this point was finding the right partners, getting every part of a deal in writing, and reading all the small print including the Qualified Allocation Plan (QAP) related to any tax credit for a project.

Know what you want to do

Rule also said that developers have to decide which type of real estate development they want to focus on:

• Community development, dependent on tax credits, grants, subsidies and awards to complete a project (“A capital M for mission, small P for profit,” in his words), or
• Commercial real estate (which is primarily about profit with little to no mission at all, according to Rule).

“The people on the community development side are completely different from the people on the commercial real estate side,” Rule said. “They don't really play well together at all. So you may have a commercial real estate idea in an area that needs community development financing. And you're already starting off on the wrong foot.”