So, you want to start your first affordable multi-family development, but you’re not sure where to start. Whether you’re new to multi-family real estate development altogether or just new to the affordable side of things, you’re in the right place.

As promised, here is Part 2 of “How to Start Your First Affordable Multi-Family Development.”

In part 2, we will do a high-level overview of financing, how to secure your tax credits and bonds, the design process, and the permitting of your project.

Keep an eye out for Part 3, the last of this series, where we’ll discuss starting the closing process, groundbreaking, starting construction, leasing, grand opening, and stabilization. That will conclude this series and provide you with the final steps to the process.

Be sure to download Part 2 of the FREE “Development Process” checklist below.

Alright, so we already talked about getting the project to the point of rezoning. Now, you’re at the point where you need to figure out your financing. Your site is zoned, and it’s ready for development. You have political support from the councilperson. And you have your pre-development investors, or joint venture partner lined up.

Step 1: Secure Financing

Now it’s time to figure out how you will get tax credits from the state agency. That’s a big piece of affordable housing development. You need to ask yourself, “how are you going to find your other funding?” Will it be from the local, city government, the state government, or the county government? Where is that other funding going to come from?

Your capital stack comprises 40% tax credits or tax credit equity, where you’re taking tax credits and selling that to investors. They’re giving you cash equity. That’s 40% of your capital stack. Your bonds or loan is 50%, and then your last 10% is what we call filling the gap.

That last 10% is critical because if you have the 10%, then you can get the other 90%. We call that 10% filling the gap because either a pilot tax abatement, home funds, CDBG funds, or local grants make up the last 10% of your capital stack.

Before you do any of this, you may find it helpful to obtain a letter of support from the council member, the state representative for that district, or even the state Senator. Even the mayor’s office, if you can.

Trying to get as many letters of support as you can is highly valuable, because when you apply for this financing – the tax credits, the bonds, and the last 10% – those letters of support will give you a leg up against everybody else. You will already have the political support you need, and you can show you have the community and its leadership on board with your project.

Now that you have that letter of support, you’re going to be looking for grants – different loans you can apply for – apply for them. You need to put your best foot forward. You need to put the best shining light you can on your project. Your grant applications will require you to talk about your project – talking about the possibility of impacting your residents, impacting the community, the number of units you’re doing, and the financing that you expect to put behind it.

You want to make the recipient of your application feel like, without their grant, your project would not happen. That is very important, and in many ways, it is very accurate, so make sure you make that abundantly clear within your project description. Also, showcase and highlight how exciting, impactful, and innovative your project is.

Different funding groups review many various applications. An application that stands out or is memorable will stand apart from the others, and that’s what you want. So make sure you’re intentional about that when you’re filling out your applications.

Step 2: Designs & Plans

While looking for these grants and applications, applying for them, and securing your financing, you should also begin designing your development. First off, you have to engage your design team. Your design team consists of your architect, civil engineer, mechanical, electrical, plumbing, structural engineer, and landscape architect.

These, plus any other consultants you may use, make up your design team. And that team is responsible for turning your vision into a reality by creating architectural construction plans. You’ve hit the jackpot if you find a price-conscious group, maybe has some affordable housing experience, aligns with your vision of the type of development you want to do, and has some experience in that type of development specifically.

That would be the best-case scenario, but here’s to hoping!

It’s also imperative that you get their feedback and include the property management company you will use on your project. Include them in the design process as well as your general contractor who’s going to build it.

TIP: Your contractor may be able to give you pricing feedback on your plans.

Be sure to include those partners who will be more on the backend, but include them on the front end of designing so you can have a successful development. Once you have your design team, you’re going to want to set your design parameters. Your design parameters include the type of development – urban vs. suburban, vs. rural or single-family, or townhome vs. multi-family. There are a lot of different options.

Now, it’s time to go back to your original development criteria. You will want to be very specific with your design team on the type of development. Giving examples of other developments that you like or that you or your partners have done in the past will be extremely helpful to your design team as well. Other things you’ll want to include are your unit mix, unit square feet, and amenities both in the unit and common areas.

A lot goes into your development and plan, so you want to have as much figured out early in the process. Being prepared will ensure your development team can dive right in and start working on the plans.

As of now, you’ve set your design parameters, goals, vision for the development, the units, and the amenities.

Moving forward, you will want to schedule weekly or biweekly calls with your architect and your engineers (your design team) to go through and tweak the plans. They will have specific questions concerning the details of the project, some that you may never have heard before. Be prepared for that. There are just some decisions that require an owner’s perspective and an owner’s direction.

Those weekly calls will help keep the process running smoothly and keep lines of communication open for the design team. This process should take roughly 3-4 months and will take you through the first step of creating the schematic design, followed by the construction design (construction plans). We refer to schematic design and construction design as SD and CD.

Once you have completed your plans, congratulate yourself because that’s a huge step!

Step 3: Permit Submittals

The next step is submitting for permits. This step is another long lead time item, so you want to continually push your design team to get the plans done as soon as possible because you’re then going to have to get the city or Metro government to review your goals and give their feedback.

There are also usually multiple rounds of comments before you get their stamp of approval. You’ll then receive permit stamped plans that you can then hand off to your GC, and that allows them to start building. This process usually takes us anywhere from 4-8 months. It just depends on the city.

Your architect will be the one that submits the plans for review, and then either your architect or another member of your design team will take over and act as a permit expediter. This person will make sure every department is signing off or has left comments on the plans and then addresses them by the design team.

You will have permit application fees, so keep that in mind as well when you’re applying. You should have permits in hand or at least in the works at this point in the process. So, you have applied for permits, you have your 10% gap financing, and you have all of your partners in place.

The main things you’re missing now are the tax credits and bonds that will help finance your project. These funds come from the state agency within your state. Each state has a state agency that awards tax credits and bonds to developers like yourself to help encourage and finance affordable housing.

At this point, you should be very clear on what their goals and priorities are. You should have read through the QAP or Qualified Allocation Plan, an annual document that each state agency puts out detailing what projects they want to do and how many points they give to each one. They will also outline their priorities for the next year as far as funding affordable housing projects is concerned.

You want to review that document enough to be very clear on what they’re looking for and keep that top of mind as you develop your project.

Step 4: Apply for Tax Credits & Tax-Exempt Bonds with State Housing Agency

At this point, you’re now ready to apply for tax credits and bonds, and this is where you’ll want to be very, very diligent. These tax credits and bonds fund 90% of your project, so you want to be very, very detail-oriented when you’re going through this process.

When you’re working with the state agency, they will be reviewing your project with a fine-tooth comb, so make sure they have all the required documents. Making sure you’re familiarized with their application process before you even apply will be highly beneficial.

It’s also never a bad idea to talk with the state agency leaders, the head of multifamily development.

By first building rapport with them and then learning as much as you can about the process and applying, you’ll be better prepared to submit a successful application. There are also usually reports and different requirements, like a market study or an appraisal. Once you know what reports you need, find the approved groups to work with that state agency and get reports done before your application.

Without that report, which could take three to four weeks to complete, you cannot apply. Also, keep in mind that different state agencies open their applications at other times of the year and involve a different process.

Example: Tennessee, where we do a lot of our developments, opens their applications at the beginning of the year every year, and it is first-come-first-served in January.

Each state does it differently. Some states do it at different times a year. Sometimes they make a rolling application, so keep that in mind.

Realistically, in Tennessee, you need to have your development application ready by December. Come January, everybody competing for the same tax credits and bonds will be pulling the trigger and submitting their projects for review. So you have to be first in line.

TIP: Ask the state agency leaders how their application process works, and become an expert at that application process.

Once you’ve gone through the application process, received feedback, and addressed any state agency’s comments about your application. You should be issued a tax credit commitment letter and a bond commitment letter.

These letters are essential because they are what you will then take to your tax credit equity investor and your lender. These are usually private companies or non-profits that you’re going to partner with, but they need that piece of paper to benefit from the tax credits and the bonds. So, whatever you do, don’t lose that piece of paper!

Step 5: Secure Your Tax Equity Partner & Debt Partner

Once you have that piece of paper, you will go to the open market, which we call it, and dial for dollars.

Dialing for dollars means you’re looking in the open market and saying, okay, these are the list of syndicators. These are tax credit equity investors looking for these tax credits, and they’re willing to give us cash or equity in return for us giving them all the tax credits.

Now, if you don’t have that piece of paper, you don’t have the tax credits, so that’s why it’s crucial. You want to share your proforma and your concept narrative with all of your potential tax credit equity investors. Then figure out which one is the best deal for you.

You’re negotiating an LOI at that stage.

Once you find the group that works the best for you, be sure to seek the guidance of your tax credit counsel or your attorney, who has done a lot of these deals. This step can be done earlier in the process when building your network – see “How to Start Your First AFFORDABLE Multi-Family Development” Part 1.

Your tax credit counsel will serve as your guide in this process. With the help of their expertise, they will be able to guide you through the process of negotiating an LOI with your tax credit equity investor.
That is the equity side. You’ll go through the same process on the debt side, except you’re negotiating the debt and the loan instead of the equity.

Share your proforma and your concept narrative with your list of lenders and start dialing for dollars. Compare which groups make the most sense based on the deal and what the deal needs for the loan. Then pull the trigger on whichever group feels best and works best financially for the deal.

Now, once you have your tax credit equity investors signed up through the LOI – a 15-page document where you negotiate the high-level terms of the deal – you want to take it to the next stage, which is called an LPA or Limited Partnership Agreement. That is usually something the equity investor’s attorneys will draft up.

The LPA is a 100 plus page document. It’s very, very lengthy. Again, which is why you must have great tax credit counsel on your team to help you understand the jargon and ensure you’re negotiating for all the points.

That LPA is essentially a partnership agreement for the next 15 years of your affordable housing development. You must comb through that and make sure you’re negotiating every critical point. As the LPA is near completion, you should simultaneously be working through your due diligence process.

Your tax credit equity investor and your lender will both have their due diligence checklists. That can be a five-to-seven-page document of all the items they need before they give you money.

Think about it, for a $50 million deal, they’re going to give you $20 million in equity and $25 million in a loan. They’re going to provide you with a ton of money, so they want to make sure every box is checked, every T is crossed, every I is dotted. They want to make sure they know that this is a good deal beyond a shadow of a doubt. They’ve done their homework on it, and so it’s appropriate for you to follow their due diligence.

They’re also likely to request their own reports, such as an appraisal and market study, a zoning confirmation, and/or a plan and cost review. They’re going to review your plans as well as your costs diligently.

Again, they’re going to pull this deal apart and look at every piece of it. That’s a very time-consuming process, but know that once you get through that checklist, you’re able to tap into that tax credit equity funding and the loan, which ultimately fund upwards of 90% of your project.

All right, guys, big step.

Now you have your tax credits and your bonds from the state agency. You have the permits for your plans, and you have your gap-filling 10% grant or loan. Now you are well on your way to getting this deal over the finish line.

As we talked about earlier, you should be including your GC in the design process.

At this point in the process, you are ready to start negotiating with your general contractors for the contract, the actual work. They should be taking your plans and taking them out to market, getting genuine hard cost bids from their subcontractors. This step is integral – the contract and the pricing are both something you will need before closing.

Each of these steps prepares you for the rest of the process.

Alright, that wraps up part 2 of this 3-part series. As mentioned earlier, the final part of this series will discuss starting the closing process, groundbreaking, starting construction, leasing, grand opening, and stabilization. So, check back next week for Part 3!

Also, be sure to check out Evan Holladay on YouTube. There, you’ll be able to find videos on this exact subject. To watch Part 1 or 2 of this series, click the link below!