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.

I’ve used this on over 1,400 units of development and our current pipeline of over 1,200 units.

In part 1, we’ll dive into setting your vision, setting your goals, building your team as well as getting your financing ready to go, getting your site under contract, and getting it rezoned. In parts 2 & 3, we’re going to talk about financing, designing, and construction, as well as leasing and making sure you get paid.

There’s a lot to cover, so let’s dive in.

Step 1

First, you’ll want to get crystal clear on the deal type you wish to pursue, why you’re doing it, what kind of impact you want to be making, who you want to be serving, and what that deal looks like to you.

We highly recommend you get crystal clear on your vision first because, without knowing the direction or the type of development you’re doing, nobody else is going to know what the vision is. We use a combination of Vivid Vision and Traction within our company, Holladay Ventures, to organize our vision and goals. We highly recommend using tools like this to help get you started.

For example: we do 200-plus unit deals, we do new construction, we do 4% tax credits, and we do some sort of public/private partnership in growing metro cities throughout the Southeast. This is how specific you want to be. You want to avoid statements like, “Oh, we’ll do any deal across the country, affordable development or acquisition.” The more specific, the better. Start with getting crystal clear on your vision, and then move on to Step 2.

Step 2

Step two is building your network. You have to gather your tribe, your network, your community, and your team. This is extremely important because you’re building something out of nothing when you’re doing these developments. You’re building something from scratch, and you will have 30, sometimes 40, different groups of individuals ranging from architects to lawyers, your investors, and city officials, amongst others. There will be multiple parties involved, touching your deal, so you have to organize your team as you start this process strategically.

We recommend getting started on that before you even have a deal in your pipeline. Start building your network, take people to coffee, pick their brains, talk to them, figure out who can be good partners, determine who fits your company culture well, and learn from people who have already done this before. Start there with building your tribe.

Step 3

Next, you want to choose your market. Again, you want to be very specific in picking your niche. When you’re getting started, select one or two markets where you are the affordable housing expert.

You know the markets, rents, income growth, job growth, and everything about that market, including the affordable housing need. You have to see the need and who you’re serving. Beyond that, who is the network that is in that market? If you’re looking at deals in Austin, Texas, think about the housing authority. Think about the city leaders. The more connected you are from the start, the better off you’ll be in the long run.

Additionally, find types of funding available in that market for affordable housing development. Let’s continue with Austin, Texas, as our example. Does Austin have a pilot or a payment in lieu of taxes? Can you get a tax abatement for 10 to 20 years? Can you get a Tax Increment Financing (TIF)? Can you get home funds or CDBG funds? Do they have local grants? Or maybe they have a land trust that gives land to affordable housing developers.

Start with Google or ask your network in that market, “What funding options are available for financing affordable housing in this market?” This information shows you how your deal works and how it will come together.

It all comes down to the financing at the end of the day. Without the necessary funding and the money to make it happen, you’ll never start development. Once you have the financing options, put together a proforma for your market. You don’t even have to have a deal yet; just put together a pro forma for your market. This is your golden ticket because once you figure out how the underwriting works for that market, then you can set your location criteria for that specific market based on the numbers.

Step 4

Now, it’s time to start your site selection process. Again, you’ll want to be very specific. Start with asking yourself, “WHY?”.

Then choose your criteria based on your market and the type of development you’re pursuing. Below is an example of our site criteria:

We want it in a qualified census tract or a problematic development area, a HUD incentive for affordable housing.

• • • We want it in a qualified census tract or a problematic development area, a HUD incentive for affordable housing.
    • We want to be on major corridors and in redeveloping or up-and-coming areas. 
    • We look for either urban deals that are two to four acres or suburban deals that are 10 to 15 acres. 
    • We look for 200-plus units and sites that are already zoned.

That’s our site criteria. This is what we give to brokers or what we look for when exploring off-market deals ourselves.

While looking for sites and your first deal, you should be determining how you’re going to pay for your project’s predevelopment expenses. Predevelopment expenses can vary.

The projects we do are 200-plus units. We spend $2 to $3 million in predevelopment expenses. Predevelopment expenses include any costs from when you start working on or put a site under contract to when you begin construction. If you’re doing a 200-plus unit deal, that’s a 12-to-24-month process over which you’ll need $2 to $3 million available to you.

Where’s that money going to come from, and who’s going to pay for it? If you don’t have that capital sitting around, you need to either raise it from predevelopment investors or find a joint venture partner who can bring you the capital and possibly some guarantee.

It may be in your best interest to find a guarantor joint venture partner who can also bring capital. This route makes doing deals like this a lot easier. If you’re interested in learning more about raising pre-development money, see How to Raise Pre-Development Capital. There, you’ll also have access to our FREE Sample Pre-Development Cost Breakdown.

Step 5

All right, you found a site that fits all your criteria, and the numbers make sense. Now, it’s time to run a pro forma on your site. Your next task is negotiating with the seller. It always comes down to negotiating price or time. Development is very time-intensive. It takes a long time to get all the necessary approvals, tax credits, financing, and all the different layers in order.

In all of our contracts, we aim to get 2-plus years on the contract. We attempt to give our sellers the price they want as long as it works with our pro forma and they give us the time. Remember, you can negotiate for both, so if you can provide them with the price, push the time as far as you can. Also, move the deposits out as far as you can.

Once you have it under contract, you should immediately start your site due diligence.

Step 1 of site due diligence is a Phase 1/ESA report. You’ll want to contact a title company to research and verify that the land and the title are under the same name.

That report costs approximately $2,500 and will inform you of any environmental or title issues before spending your pre-development money.

As you progress, you’ll need to request a civil engineering report, a geotechnical report, a landscape architect proposal, as well as a survey of the land. Bottom line, you want to make sure your site can fit the number of desired units, and any zoning requests are approved. You want to know everything about a site before it’s under contract. Even as your site is under contract, you’ll want to continue researching your site. The more you know upfront, the fewer obstacles or unknown costs will pop up. That is one of your biggest jobs as a developer – figuring out as many of the unknowns as you can. Start digging before you get it under contract and continue researching as you get it under contract.

Once you’ve run your preliminary due diligence, refine your pro forma and start creating your concept narrative. What is a concept narrative? It is a 10-to-25-page PDF presentation highlighting the site, location, market advantages, comparables in the area, any amenities you’re including, and a site plan. This narrative serves as your sales pitch and will be shared with your councilperson, the state agency to get tax credits, and your investors. It’s crucial that it’s well thought out and designed. It will be the first impression of your project.

Working with a trusted architect or a civil engineer to obtain a site plan will allow you to visualize how many units you can include and the layout of those units. You can then use that unit mix information to refine the numbers in your proforma. Remember, it’s always about your numbers. Financing rules everything.

Step 6

Finally, let’s talk about rezoning. Rezoning can be a cumbersome process. However, it’s an excellent way to add massive value to your site/development.

As an example, we had a site under contract for 1.75 million and rezoned it to allow 240 units. The land is now worth $3 million. By spending $100,000 on rezoning, the value of the land almost doubled. This gives you an equity cushion acting as an insurance policy of sorts. If something goes wrong and you can’t get the development done, you can sell the land for the value of the land after rezoning and still make a nice profit.

So, what is rezoning, and how do you get this done? First, you need to gain the support of councilmember for that district. Do this by meeting with them and learning what they want to see in their district. See if your vision aligns with their goals. They’re the gatekeepers for the community, so you will want to make sure you approach them with the community’s perspective and needs in mind. How can this be better for the community, council members, and neighbors?

Next, you’ll want to share your site plan and concept narrative with them. You want them to be excited about the project and emotionally committed to supporting its development. The more they buy into your project, the more the community buys into it, and the more excited potential partners will be.

You’ll want to hold a community meeting organized with the help of your council member. From there, your plan will pass through the planning commission. You will need their approval, and it is significantly easier if you have the council member’s support. In general, this process can be a 3-to-9-month process. If rezoning makes sense for you, be sure to include that in your budget.

This wraps up How to Start Your First Affordable Multi-Family Development part 1.

As mentioned before, be sure to check back for parts 2 & 3. There is so much more to cover, but hopefully, this has helped you understand the initial steps to starting your affordable development. We have included a FREE downloadable“Development Process Checklist,” which covers the steps mentioned in this blog. Like the blog, this is just part 1 of 3. We will be including checklist parts 2 & 3 at the same time as the blogs. So, keep an eye out for more from Holladay Ventures!