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.”

Developers also have to be committed. Rule cautioned, “it is extremely difficult to be a full-time developer and have a full-time job, unless you're just signing your name on the paper just to make a couple dollars off to the side and not really learn the process. To me, that’s not for the greater good of the culture.”

Know your market

Mark McDaniel, president and CEO, Cinnaire, mentioned several hurdles aspiring developers have to consider. First, is failure, which he attributed to “not understanding who it is you want to serve, how you want to serve them and what role you will play. You can't be everything to everybody. That's because if you try to do that, you're chasing programs and dollars versus serving the people that you have decided you want to serve.”

Another hurdle is understanding the depth of the market you want to serve. This means understanding key data, like how many people are in a target market that have the income you want to serve, and how many of those people are looking to move from rental to home ownership.

McDaniel said that developers have to understand the competition in a given market, which includes existing developments and any projects in the pipeline waiting for city approval. “Those are units that you have to subtract off of the demand you think is there,” McDaniel said

McDaniel also warned developers to be careful of municipalities willing to part with large properties, like an abandoned school, for a small amount, even $1. “When you take that land for that dollar,” McDaniel said, “now you got taxes, you have to board the place up and keep it secure. You may have some hazardous materials that nobody knew about. Now that it's yours, it's your responsibility, not the person before.”

Finally, McDaniel shared a tip on how to hustle to get land for a project. “The last thing to do is look for ‘for sale’ signs,” he said. A better strategy is to talk to a local planning director or assessor to get a better idea of local market needs. If the community is considering a senior center, draw a circle of less than a mile radius from a local grocery store and start looking at properties – for sale or not – that are walking distance to the store and suitable for a senior living project.

Get the right development team

David Evans, senior manager at Baker Tilly, who moderated this session, noted that developers, as a rule, “are the most optimistic group of people I've ever met in my life.” He cautioned that aspiring developers need “conservative optimism” and the right partners, to ensure that their deals can get through all the hurdles. A key tip for new developers, according to McDaniel, is having the right development team. Too often he has seen new developers rely on friends and family to play key roles in a project. “if I've never heard of the contractor, the manager, the architect or the attorney I'm concerned,” McDaniel said. Ben Glispie, senior originator with LISC in Milwaukee, added, “having a good development team – a strong general contractor or property manager – can make up for lack of experience or lack of liquidity.”

Rule said that in the end, a new developer can’t use their team and consultants like a crutch. “You have to be really particular about how you manage your brand and how you manage your business. The best developers take a lot of pride in fully understanding the numbers, fully grasping the construction risk, fully understanding asset management on the back end.”

Learn more

Baker Tilly’s DevelUP: affordable housing workshop is an event designed to help underrepresented developers conquer affordable housing, scale their business and build diversity. Through comprehensive consulting services, Baker Tilly assists emerging developers of affordable housing by helping them navigate the many steps necessary to bring a project to successful completion — from funding to project management.

For more information on this topic or to learn about services for underrepresented developers, contact our team.