RSM Resources

A review of recent real estate industry newspapers reveals headlines such as “Foreclosures Reach New Highs,” “It May Get Worse Before It Gets Better for Housing,” and “Investment Deals Seen Dropping In 2008.”

To read these headlines one would assume that any real estate professional should be thinking it’s time to initiate a new career rather than initiate a new real estate transaction. Startling headlines aside, the current residential real estate market has clearly cooled down from its peak of a few years ago. However, a cooled residential market need not mean a lack of opportunities, particularly for the developers of affordable housing.

As market demographics have changed, some residential projects have become distressed. In many cases these transactions can still provide financial opportunity, however, by shifting to an alternative strategy of affordable housing development. Federal, state and local government entities are eager to take advantage of this soft market to increase the supply of decent, quality affordable housing in their communities.

Significant financial incentives or other public enhancements are available to the developers of affordable units. Depending upon the total development costs for a project relative to the affordability limits for units in a particular area, a combination of incentives can usually be found to fit the needs of most projects. Low-income housing tax credits, tax exempt bonds and HUD Section 8 certificates are the most commonly used tools for rental developments. Zoning density bonuses, assisted first-time home buyer loans and Community Development Block Grant funds are the most commonly used tools for homeownership transactions. For either type of transaction located in an area of close proximity to a public transportation hub, additional transportation oriented “smart growth” incentives can often be obtained.

It’s important to plan carefully for any affordable housing development with a strong team. An analysis of the viability of various product types will assist in creating the highest value mix of market and affordable units as well as rental and ownership units. To do this effectively, one must have a clear understanding of the matrix of potential public sector enhancements, as well as, the benefits and pitfalls of each. Frequently, project viability can be maximized by combining various subsidy types. However, one must be very careful to plan for potential negative interactions and to cope with often differing program goals.

If carefully planned, restructuring a distressed residential transaction as an affordable housing development can provide both a reasonable financial strategy for the developer and a benefit to the local community.

Albert A. Rodiger, is a director with RSM McGladrey Real Estate Consulting. For more information, contact him at albert.rodiger@rsmi.com.