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Non-Profit Housing Development in the United States

Non-profit housing developers build affordable housing for individuals under-served by the private market. The non-profit housing sector is comprised of community development corporations (CDC) and national and regional non-profit housing organizations whose mission to provide for the needy, the elderly, working households, and others that the private housing market does not adequately serve. Of the total 4.6 million units in the social housing sector, non-profit developers have produced approximately 1.547 million units, or one-third of the total stock.^[1] Since non-profit developers seldom have the financial resources or access to capital that for-profit entities do, they often use multiple layers of financing, usually from a variety of sources for both development and operation of these affordable housing units.

Non-Profit vs. For-Profit

Both the non-profit sector and for-profit sector are involved with affordable housing development, although missions, operations and financial and technical abilities differ. The core difference between a for-profit and a non-profit organization is that for-profit entities operate to produce returns to owners or shareholders, whereas non-profits cannot distribute gains or profits to members, directors and officers, instead profits are either reinvested into the organization and/or donated to serve the organization’s mission.^[2] Because of this difference for-profits are more likely to create affordable housing that will maximize profits, not serve the most vulnerable populations. Strategies for maximizing profits include evaluating projects from a market-based perspective and mixing market rate units in their projects to increase operating income as well as developing an exit strategy to maximize sale proceeds from their building. Conversely, non-profits are more likely to develop in distressed neighborhoods, dedicate all of their units to low-income tenants and operate projects for the long-term in order to fulfill the mission of affordability.^[3] As a result of their mission and organization structure, non-profits lack the financial and technical resources that for-profits have (ULI) and forces them to rely on multiple funding sources in order to cover development costs. Using multiple funding sources is risky because it creates complex financing which can be both timely and expensive and although for-profits do not have access to much of this funding, it is unlikely that they would take the trouble to put in the uncompensated time and effort.^[4] Furthermore, public funding does not cover pre-development or land acquisition costs, creating significant risks during the early stages of development. There is also the risk of government, foundations, corporations and individuals reducing financial support.

Issues During Pre-Development

Pre-development efforts such as acquiring land, forming partnerships, performing due diligence and gaining entitlements is the important first steps developers make before a project is launched. The major problem with non-profit developers is that their deals are thinly capitalized and they have a difficult time securing pre-development costs; these costs include architecture, engineering, site control and feasibility analysis.^[5] Non-profits also confront marketability, feasibility and financing problems that usually deter for-profit developers. Pre-development is essential for putting packaging a project a proposal, and funding is necessary to work through any issues during this time. Lack of pre-development funding can lead to weak project proposals and failure to seize opportunities to acquire land.^[6] Often, non-profits face shortfalls of income which leads to over-worked, underpaid and inexperienced staff. All of these factors increase development risks decrease the likelihood of attracting capital investors or securing loans from private banks.^[7]

Beginning in the 1980s, national, state and local intermediaries formed to improve the financial and technical plight of non-profit housing developers. These organizations improved the mobilization of capital including project and operating support and pre-development finance, and provided technical assistance for finance packaging. As a result, non-profit developers began to increase their technical competence and reduce the risk to potential public and private sector investors.^[8]

National intermediaries include organizations such as the Local Initiatives Support Coalition (LISC), the Enterprise Foundation, Neighborhood Reinvestment Corporation (NRC) and the Housing Assistance Council (HAC). These organizations help non-profit housing developers access tax-credits, corporate equity investment, secondary mortgage markets and lender commitments as well as offering training courses on real estate development and finance and community organizing and social service provision. Furthermore, these groups helped non-profits to form partnerships with each other and public and private parties, helping to foster support and funding for non-profit housing development.

Ownership

Non-profits generally form partnerships to develop and own affordable housing projects. Considerations that the non-profit evaluates before creating and ownership entity includes but is not limited to the following: the ease and speed with which decisions can be made, efficient provision of property management operations, and the number of investors required to meet equity needs and the investment objectives of the investors relative to project cash flow, appreciation, attitudes towards personal liability. Furthermore, impacts of tax considerations for the ownership entity itself as well as individual investors are also evaluated; this includes apportioning ordinary income liability and capital gains liability.^[9]

Forms of legal ownership structures that non-profits create include general partnerships, limited partnerships and limited liability companies (LLC). In a general partnership, two or more entities come together to form a new business entity where each partner is jointly and severally liable for all legal and financial obligations. Also,each member has right to participate in all partnership decisions unless specified otherwise in the partnership agreement. Partnerships are not tax entities, so all tax consequences are passed directly to individual partners, so partners agree to shares of tax consequences, as well as cash flow and appreciation of the project. Limited partnerships are similar to a general partnership except that one or more partners act as a general partner, and the rest of the partners are limited partners. Limited partners are treated differently than general partners where they are only liable for the capital invested and cannot participate in routine operations or decisions of the partnership without losing their limited liability protection. The partnership agreement defines the responsibility of each partner and how the share profits and tax consequences. An LLC combines the advantages of a corporation for personal liability purposes (liability is limited to the amount of capital invested) and those of a partnership for tax purposes (the entity is not taxed).^[10]

Financing

Federal

Low-Income Housing Tax Credit

Section 8

Project-Based

Tenant-Based (Vouchers)

Multi-Family Housing Programs

Supportive Housing for the Elderly (Section 202)

Supportive Housing for Persons with Disabilities (Section 811)

Federal Pass-Through

The following funding programs described are provided by HUD, but allocated to states and local jurisdictions for distribution to projects. Housing developers, apply for funds through the states and local jurisdictions; however, the subsidy funding actually comes from federal monies.

Community Development Block Grant

The CDBG program was established by the Housing and Community Development Act of 1974 and replaced eight federal programs which granted funds to states and local communities based on project-specific proposals and had strict regulations on how the money could be allocated. In contrast, the CDBG program allows states and municipalities to budget CDBG funds based on their consolidated plan (a mandatory plan which outlines the community’s housing needs, its 5-year strategy, and a 1-year plan focused on resources and implementation).^[11] Community participation is required when creating a consolidated plan.^[12][11] HUD then determines how the funds are distributed to the various applicant communities using a couple formulas which measure the extent of the poverty, population, housing overcrowding, age of housing, and population growth lag compared to metropolitan areas.^[12]

No less than 70% of CDBG funds granted to a community must benefit low- and moderate-income people (up to 80%

The HOME Investment Partnerships Program, another community block grant program, was created by Congress in 1990 and authorized as Title II of the Cranston-Gonzalez National Affordable Housing Act.^[11] Similar to CDBGs, a consolidated plan is required prior to distribution of HOME funds.^[14] Unlike CDBGs, HOME funds are granted to states and local jurisdictions specifically for the provision of affordable owned and rental housing for low- and moderate-income households by. States receive 40% of funds and cities and other local governments receive 60%. Allocation of funds is based on a needs based formula (similar to the CDBG program).^[11] States are eligible for the higher amount of the formula allotment or $3 million; and local jurisdictions are eligible for at least $500,000.^[14] Of the money allocated to a state or local jurisdiction, at least 15% must be distributed to community-based non-profit organizations (Community Housing Development Organizations, or CHDOs).^[11]

HOME funds may be used to assist people in buying a home, to develop owner-occupied and rental housing (including acquisition of land and demolition of existing real property to allow for a HOME-funded project; and payment relocation expenses),to rehabilitate existing homes, and to provide “tenant-based rental assistance” (or TBRA). Development projects must aimed towards households with no more than 80% AMI, and for rental projects, at least 90% of the benefiting families must have an income less than 60% AMI. For rental projects with five or more units being assisted, at least 20% of the households must have incomes less than 50% AMI.^[11][14]

Other requirements for HOME funds include the match of funds from other sources, minimum affordability terms for projects, limits on TBRA, and a time limit on when the funds must be allocated and spent by. For every dollar of HOME funds received, jurisdictions must provide a 25 cents match in non-federal sources.^[14] Newly constructed rental housing must remain affordable for at least 20 years.^[11] For owner-occupied housing (newly constructed and remodeled), acquired rental housing, and remodeled rental housing, the minimum affordability term ranges from 5 to 15 years depending on the amount of funds received in relation to the number of assisted units.^[14] Unlike Section 8 vouchers, TBRA is limited to two years and may not be used for project-based rental assistance.^[11] Finally, HOME funds must be committed (including reserving funds for CHDOs) within two years and be spent within five years.^[14]

Oftentimes, HOME funds is not enough to bring rents down to the maximum allowed based on AMI; therefore additional funding must be acquired and used in conjunction with HOME funds, such as the LIHTC. Both HOME and CDBG funds have been criticized for being unable to provide subsidies large enough to provide housing for households with incomes equal to or less than 30% AMI.^[11]

State

Housing Trust Fund

Tax-Exempt Bonds

Local

Trust Funds

Housing Levies

Operation

References