# Presentation: 177487

## Developing and Financing Affordable Housing - Home Ownership

- Native American Urban Conference 2001
- March 28, 2001
- THE ENTERPRISE FOUNDATION

## Agenda

- Before you start....
- Define and evaluate the market
- Define Product/Volume
- Define your program
- Put together the development Team
- Pre-development
- Construction Phase
- The follow-up

## Before you start - Why do home ownership?

- Increase home ownership rate;
- Improve housing conditions;
- Provide home ownership opportunities to households typically unable to purchase
- Improve ambiance
- Create new, healthy neighborhoods within larger communities
- Increase capital available to the neighborhood
- Provide opportunity for residents to increase personal wealth

## Before you start - Are you prepared

- Board and staff
- Fiscal systems
- Fiscal policies and procedures
- Record Keeping
- Government and Community Relations

## What Makes Affordable Housing Development Different?

- Lack of equity for up-front costs of development (though NAHASDA and HOME funds - if CHDO - can be used).
- Target market may not be familiar with product.
- Subsidies are required to reach target market or to create viable product.
- Longer development time line to package financing sources.
- Higher individual transaction costs.
- Requires underwriting from government and private sector and, often, more public review

## I. Define and Evaluate the market

**Two aspects to market**
*People*
*Housing*
**Sources of Data**
*Census data - www.census.gov ---> American factfinder*
*Home Mortgage Disclosure Act Data - www.rtk.net and*
*	**	**	**	**	**  **www.ffiec.gov*
*Planning Department studies *
*Community Surveys*
*Indian Housing Plan (if it includes needs of non Reservation residents)*
*Interview with Consumer Credit Agency, bankers, social service agencies, real estate brokers, and (if relevant) local employers*

## Define and Evaluate the Market:People

- What is the geographic area for your market?
** **Who (demographics) are the possible home owners (typically renters with sufficient income and decent credit, who are interested in purchasing in your target area)?
- Household size and composition
- Income
- Commute time to work
- Current knowledge of mortgages and home ownership
- typical credit history
- Amount they currently pay for housing

## Define and Evaluate the Market - People

- Based on expected market, what type of home do they desire:
- size of home
- design issues for home
- amenities in home
- amenities in community
- amount of yard/play space
- parking
- Cost of home

## Define and Evaluate the Market Housing Stock/Housing Market

- What is the vacancy rate?
- What are typical home prices and rents? What is the typical time for sales? Who are typical home buyers?
- Who are the owners of vacant land/buildings?
- Are there issues related to acquisition (eg. cloudy titles?)
*If you are looking to do acquisition/rehab/resale *Who are the current renters in single family homes, what do they pay in rent, what do they earn?
- Rehab needed to meet code/Federal funds requirements

## Define your program

- 5 - 10 page business plan is preferable
- Define design/specification/rehab standards
- Define anticipated volume
- Define required staffing/consultants
- Define acquisition strategy
- Define anticipated home buyers

## Define your program: Estimate Costs - Nonprofit Acquisition Costs

- Site acquisition
- Site evaluation
-  Legal
- Title and recording
- Back taxes/liens
- Appraisal
- Closing costs

## Define Program: Estimate Costs - Homebuyer Downpayment/Closing Costs

- Downpayment
- Closing costs
- Bank legal/search fees
- Title search and recording
- Credit report fee
- Doc Stamps
- Appraisal
- Prepaid interest
- Prepaid insurance (and taxes, if relevant)

## Define Program: Estimate Costs

- Devise design/material standards based on:
- agency and program mission - set you own standards!
- market
- building codes/zoning (if applicable)
- environmental conditions and requirements
- balance desire for higher standards with affordability

## Define Program: Estimate Costs - Development Costs 

- Soil Tests
- Environmental
- Architect/Spec. writer
- Civil/Engineer
- Survey
- Appraisal
- Pre-development loan interest
- Legal
- Market Study
- Consultant
- Insurance

- Construction supervision
- Construction loan interest
- Home Buyer training/prep.
- Marketing
- Permits and Fees
- Water, sewer, electric, cable hook-up
- Construction contract
- Contingency
- Foundations
- (if new site plan) roads
- Landscaping and Site work
- Developer’s Fee

## Define Program: Estimate Costs - Internal costs

- Fiscal systems
- Audit
- Staffing (that is typically/often internal)
- Acquisition specialist
- Development specialist
- Construction specialist (particularly if moderate rehabilitation)
- Financing specialist
- Homeownership counselor/marketing
- Management
- Training/Technical assistance

## Sources of information for costs

- Other developers
- City
- Contractors
- Architects
- Utility Company
- HUD field office
- Appraisers, surveyors, attorneys, accountants, environmental firms, insurance company/broker, credit and homeownership counseling agencies

## Define Needed subsidies

- Total Costs
*minus*
- Amount of Mortgage affordable to home owner *equals*
- Subsidy Needed

## Define Needed Subsidy

- Type of subsidy defined by four values:
- Total Development Costs
- Appraised value
- Sales Price
- Affordable First mortgage

## Define Needed Subsidy

- When Total Development Costs exceeds appraised value, a portion of the subsidies is typically a grant;
- When Appraised value exceeds affordable first mortgage, a portion of subsidy is often a (soft) loan;
- Sales price typically reflects several issues:
- Affect of price on local market;
- Appraised value;
- Lender perceptions.

## Define Needed Subsidies

- TOTAL HH INCOME
* **(including 75% of NRI, if 2-4 family home)*
*Times*
- Percent of Income to PITI
-   *typically 28% to 33%*
*Minus*
- Taxes and Insurance
*Equals *
- Amount Available for Mortgage

- TOTAL HH INCOME
* **(including 75% of NRI, if 2-4 family home)*
*Times*
- Percent of Income to Debt and PITI
-   *typically 33% to 38%*
*Minus*
- Taxes and Insurance and debt
*Equals *
- Amount Available for Mortgage

## Define Needed Subsidy 

- Amount available for mortgage
- Present value at 30 year interest rate
- Equals Mortgage

## Identify and Package the Financing“The Usual Suspects”

- HOME (Be involved in Consolidated Planning!)
- Community Development  Block Grant
- Affordable Housing Program of the FHLBank
- NAHASDA (if available from tribe)
- Individual Development Accounts
- Mortgage Revenue Bonds (reduced rate first mortgages)
- Housing Trust Fund
- Housing Counseling Program

## Identify and Package the Financing “The Unusual Suspects”

- Self-Help Housing Program
- Fair Housing Initiatives Program
- Enterprise Zone
- Youthbuild
- Section 8 for Home ownership

## Putting It Together - The Pro-FormaThe Project Phases

## Putting It Together - The Pro-FormaThe Project Phases

## Developing your pro-forma

- Puts it all together - Development costs/ mortgage affordability/subsidy required
- Method for tracking project changes and for understanding how they affect project
- Permits flow from pre-development/ acquisition to construction to permanent
- Method for communicating with funders

## Slide 27

## Pro-forma - continued

## Architect
Attorney 
Funders
Foundations/Corporations
Government 
Banks
Other Lenders

- Attorney
- Funders
- Foundations/Corporations
- Government
- Banks
- Other Lenders

- Recruit, Select, and Contract with your Development Team

## Environmental Firm
Accountant
Appraiser
Market Study Firm (if required)
Insurance Company
Home Ownership Counselor (if not from agency)

- Accountant
- Appraiser
- Market Study Firm (if required)
- Insurance Company
- Home Ownership Counselor (if not from agency)

- Recruit, Select, and Contract with your Development Team

## Pre-development

- Prepare Marketing Plan and home buyer selection criteria - train likely referral sources
- Prepare Construction Management Plan
- Role of Architect/staff
- Communication and decision process
- Define Pre-development, acquisition, construction and permanent financing sources
- Continue to refine/update pro-forma

## Pre-development

- Complete Site related work
- complete drawings and specifications and refine construction estimates
- receive zoning and building code approvals
- Financing
- receive commitments on funding subsidies
- apply for and move to closing for required financing
- obtain appraisals for lenders/funders (note - bank lender must order appraisal)
- Keep funders apprised of project movement and changes

## Pre-development

- Site control (including environmental Phase I, appraisal (if required)
-  Go to bid for general contractor
- select a general contractor and commence negotiations
- Prepare project timeline
- define wish list for unspent contingency

## Pre-development

- Continue Community Relations
- continue implementing community relations plan
- ensure mechanism for community input and involvement
- market program to immediate and larger public
- Organizational
- Ensure on-going Board committee involvement
- ensure necessary financial systems are in place for draw requests and monitoring
- ensure proper communication between contractor, architect, project manager, and funders
- Make sure you can pay your contractor on time

## Begin Home Buyer Identification and Training/Counseling

- Marketing
- Pre-screening
- Bank/Government review and approval
- Home Buyer training
- Home Buyer Counseling
- Consumer Credit Agency assistance
- Prepare Home Owner Welcoming Packages

## Construction/Rehab

- Attend bi-weekly site meetings and review minutes - be mindful of warning signs - think ahead
- Promptly pay attention to draws and change orders
- Approve Substantial Completion
- Develop Punch List Items (with home owner, preferably)
- Initiate Construction/Rehab Close Out
- Receive Certificate of Occupancy

## Construction/Rehab

- Arrange Home Buyer Closing
- Collect Manuals/Warranties for home owner
- Execute service Contracts (if relevant)
- Hold meetings with all service providers together (preferably at least a month before opening)
- Define communication between staff and service agencies
- Home Purchase
- Provide home owner and agency with as-built/rehabbed drawings

## The follow-up

- Notify Insurance Company That Property is sold
- Pay Retainage
- 5% at Certificate of Occupancy; 5% six months later is preferable
- Grand Opening/Ribbon Cutting
- Begin Home Owner Association/Advisory Council
- Make sure post-purchase counseling/foreclosure prevention process is implemented