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 3 of “How to Start Your First Affordable Multi-Family Development.”

In part 3, we will do a high-level overview of starting the closing process, groundbreaking, starting construction, leasing up, grand opening, and stabilization.

This concludes the “How to Start Your First Affordable Multi-Family Development” series. Be sure to download Part 3 of the FREE “Development Process” checklist below. And lastly, be sure to check out Parts 1 & 2 if you haven’t already.

Be sure to download Part 3 of the FREE “Development Process” checklist below.

Alright, so we already talked about getting the project to the point of rezoning. Now, it’s time 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.

At this point, you should have your financing lined up, your tax credits and your grants lined up, your site location picked out, your permits, your design team configured, and your partners on board. Now, you’re marching toward closing, as we like to call it.

You’re on the final 60-to-90-day closing period, and these are all the steps you need to make sure you can close, start construction, and get your development built and filled with residents.

Step 1: Start Closing Process

First thing’s first, make sure you have a clear title. The title is what conveys who owns the land. The owner can be you (the developer), the owner of the project, or your investors. Without a clear title, anybody at any time within your development could claim ownership. The title says that you are the legal owner of the land you’re developing on and that you want that land.

You’ll be working with your attorney or your counsel, and they will often recommend somebody or an in-house title company if they have one. Together, you’ll work hand in hand with the title company.

As soon as you get your purchase agreement, which usually occurs 12 months to 2 years before closing, you’ll want to start checking the title. As you get closer to closing, you’ll want to meet all the requirements of the title. Your equity partner and state agencies will want to see the title before giving you millions of dollars of funding for affordable housing.

Next, you’ll need to get your draft 8609 documents a tax credit funding-related documents. This document comes from your state agency who gives you the tax credits to fund your project. You don’t need to know much about this document, only that you’ll need it before closing.

Work with your tax credit counsel and your state agency to ensure that the state agency is preparing this document and is ready to go at least a few weeks before closing.

Next, you want to ensure you have the entire loan, tax credits, equity, land sale, grants, and HUD documents. Any documents that need to be signed and finalized will first need to be blessed by everybody’s attorneys. Getting all necessary signatures will require back-and-forth emails between attorneys, you, and your partners. During this process, you will negotiate each point of the deal and the documents.

For these documents to be final, you’ll need to make sure every document is signed and notarized by the necessary parties at least two weeks before closing. The documents should be signed and given to the title company or the state agency. Either the title company or the state agency now has a record of all those documents. Then also, make sure you get every document you need notarized.

Again, try to do this at least a few weeks ahead of time, and you can even sign and notarize just the signature page of the entire document. Then you can continue negotiating the whole document, but at least you have that signature page ready to go. That’s key, to not scrambling the day before closing trying to get signature docs. Do anything you can to prevent delaying closing.

Drum roll! At this point, you have your signed documents, your tax credits, your 8609, all HUD approvals, your permits from the city, and you have everybody lined up. Now, you’re able to cross the finish line and close the deal.

This is a very exciting day. You’ll have a closing call about the financing with your legal team, where everybody gives one final blessing of the deal’s details. Once the deal is officially closed and funded, the first closing draws get financed.

You want to make sure you get what they call an NTP or a notice to proceed. A notice to proceed is a physical document from your GC, general contractor, yourself as a developer, or the state agency that delivers the tax credits. It’s different for each state, so ask your tax credit counsel and state agency how they’ve done it in the past. Essentially, you’ll request the letter which says that, at this point, the general contractor and the development team have the notice to proceed on construction.

Either you or the state agency can sign that document, and now it is ready to be delivered to the general contractor. From the time that document reaches your general contractor, the clock starts. They may now begin on construction which usually takes 16, 18, or 20 months. They should be sticking to the already agreed-upon schedule.

Make sure you get that done right away.

Now, you’ve closed the deal, and you’ve done all that 12-to-24 months’ worth of work. Guess what? You get paid.

One of the benefits of development: you get paid to do something you love. You should be collecting a developer fee, and either you or your investment partners should be getting the pre-investment capital back. The state agency is refunding you for any grants that you received. Then the project reimburses you for all costs incurred throughout the predevelopment process, and you get your developer fee. Congratulations!

Step 2: Start Construction & Plan Groundbreaking

You’re halfway done with the project! What you’ve just accomplished is probably the most intensive work, but there’s still a lot of work to be done, and that’s what we’re going to dive into next.

You’re diving into construction, and usually, that responsibility and the associated tasks are handed off to the general contractor. On a biweekly or monthly basis, you or someone on your team, such as a consultant or owner’s rep will check in on the GC. This is called an OAC, an owner-architect-contractor meeting.

You need to be as consistent as possible with your meetings. This is the best way to keep your eyes and ears on the project. You will, without a doubt, experience some hick-ups along the way. No matter how well you prepare for construction, there are always unknowns. Making sure you have somebody on your team that can be an owner’s rep, who has your best interest at heart and not the GC’s or the architects, will ensure you cut down on cost, time overruns, or time delays.

You may run into issues like running out of a part, learning that a piece is too expensive, or the designs don’t match the reality of the site. Things like that always come up, so be prepared and have somebody on your team to help make those decisions.

In addition, you’ll want to have those OAC meetings simultaneously and planning a groundbreaking ceremony. Groundbreaking ceremonies are essential if you’re going to continue developing affordable housing. So, if you want to make a career out of developing affordable housing, make an impact and show the community what you’re about, and maintain good relationships with your partners, both public and private, you’ll want to do a groundbreaking.

The goal of a groundbreaking serves as a thank you and metaphorical pat-on-the-back for your partners. Those partners could include city council members, community leaders, nonprofit partners, your development team, design team, finance team, the state agency, the housing authority, the city economic development, state reps, state senators, the mayor’s office, or the governor’s office.

During each step of the process, especially on the political side, it’s ideal to involve them and create an emotional feeling of happiness and resolution. Your groundbreaking is saying, “We did something amazing here – we created affordable housing out of nothing!”

That’s important because politicians run on a 2, 4, 6-year cycle and need wins like this to showcase. They appreciate when developers like yourself can put on a well-run and organized groundbreaking with great media backing. Groundbreaking is something to focus on within the first few months after closing. Make sure you do that because it will also build credibility and awareness, helping with your following deals and building deeper relationships with current and potential partners.

As previously mentioned, you’re going to be doing monthly OAC meetings or owner-architect-contractor meetings. During those meetings, you’ll figure out the completion percentage of your construction, and your architect will sign off on that.

The architect will also walk through each unit. It’s also a great idea to walk the units with them or send your owner’s rep to see, touch, and feel what you’re paying them to do and make sure everything is executed with quality. It may seem like your job is done, but you have to pay attention to the details throughout the process.

You also want to be conscious of your agreed-upon timeline. You want to ensure the construction is completed on time because your tax credit equity investor(s) will receive installments starting at 50% completion. That’s why you have to pay attention to the schedule and the percentage complete because that’s when your money will come in to pay you, your contractor, and their subcontractors.

It’s best to track this every month.

As you near the end of the cycle and start turning over buildings, you want to do one final walkthrough of each unit and building. You should bring your GC, architect, owner’s rep, and most importantly, your property management company along with you.

It’s beneficial to get your property managers excited about the property as well. You want them to lead it and take ownership of it. They’re going to want a brand-new product when they take over, and then they’re responsible for it. Do a final walkthrough of each building and unit before you turn it over to property management.

Step 3: Lease Up

At the same time, they will typically start preleasing units. Your property managers should prelease units, market online and on social media, create a brand, and build name recognition within the community five to six months before your first building is prepared for occupancy. They should also be hiring staff to help with the property. If your property is 100+ units, then they should have full-time staff on board.

All of that should be happening while you’re under construction in anticipation of those first units coming online. As your buildings are getting your certificate of occupancies, also known as a CO, you’re going to want to make sure your property management company leases up those units as quickly as possible.

That’s a no-brainer in real estate investing. You want units filled so you can make revenue on them, but there’s another component to why that’s so important in affordable housing development. You don’t start earning tax credits until you have units occupied.

If we have a 10-building development, each with 24 units, then you have 240 units total. A building doesn’t start earning credits until 100% of that building is leased up. It would be in your best interest to focus on leasing up one building at a time. You don’t want to spread residents out across buildings when you can reach 100% occupancy in one.

Delivering your tax credits is necessary for your tax credit equity investor’s returns, which you guys have agreed upon in your LPA or your tax credit LOI. Remember to deliver buildings one by one and as quickly as possible based on your lease-up schedule so you can start earning tax credits.

Step 4: Opening Ceremony

At this point, you have leased up the majority of your buildings. You’ve completed construction on the majority of your buildings, and this is the tail-end celebration as well. Just like the groundbreaking, you want to have a grand opening ceremony. You’ll want to invite a lot of the same players from the groundbreaking. It’s another celebration, and it brings good PR around your community and the work you do while also helping raise awareness of the new development. Having a public celebration can potentially help with getting the units leased.

It is also a great PR opportunity for political leaders, city leaders, your GC, design team, and property management company. It gives credit to each party involved and publicly acknowledges the great work you are doing.

We highly recommend you do that, but start a couple of months before you’re at 100% occupancy. The lead time will give you time to attract many new residents who may catch wind of the exciting grand opening news.

Step 5: Stabilization

Finally, you’ve completed the construction of all your buildings and leased up 100% of your units. You’re now about 95% done; congratulations.

This last step, however, is crucial. Stabilization is the transition between the end of construction and a fully occupied asset. Your development is stabilized when it’s over 90% occupied for 90 consecutive days.

Your tax credit equity investor typically defers their largest installment until the asset is considered stabilized. The reason is that there’s a lot of risk during the construction lease-up phase, so they want to maintain an incentive for you to get through the risky part. Once your development is stabilized, there’s less risk, and that’s when they will give you the “reward” of the final installment. You’ll also likely receive the largest part or percentage of your developer fee once the asset is stabilized.

You’ll also usually have a construction loan that is a recourse loan, which means you as an individual are signing over your assets, home, car, cash, and savings. You’re saying, “If we don’t perform, and the lender has to foreclose on us,” then the lenders can come after your assets.

Recourse is not fun, but that’s part of the construction process unless you get a HUD 221(d)(4) loan. Most lenders are going to require that you apply for a recourse construction loan. Once your asset is stabilized, you’ll want to be sure to transition to a non-recourse permanent loan. By doing this, you can start paying off the principal on your permanent loan.

To ensure things run smoothly, we recommend asking for a checklist from your tax credit equity investor, lender, and state agency six months before you predict hitting stabilization. This checklist should include requirements or deliverables they will need from you and your development team to stabilize the project.

Most investors, lenders, and state agencies determine an asset stabilized at 90% occupancy for 90 days. Also, make sure your expenses for at least the last three months, preferably the last 6 or 12 months, align with your year one proforma. Remember that 90 at 90, and make sure your OPEX or your operating expenses are in line.

If you can meet that test and provide all the documentation on their checklist, you’ll receive a letter from your lender stating that you have converted your loan and your asset is now stabilized.

At this point, guess what? You’re closed! You’ve built it, leased it up, and you’ve stabilized it. You’ve made the majority of your developer fee, and now you have a beautiful, brand-new community that provides a massive impact for the residents. You have also created numerous jobs and are impacting the community, its residents, your investors, yourself, and your family.

Give yourself a massive pat on the back if you’ve made it this far! You have accomplished an enormous feat. Now, you can start working on your next deal.

Any experienced developer will tell you that you want to have many irons in the fire. Essentially, don’t limit yourself to one deal at a time. Development is not a one-deal-at-a-time type of business because you’re not going to hit home runs every single time. You may strike out on some deals. You may work on it for six months and never go anywhere. The key is to make sure you’re working on multiple deals so that the ones moving forward pay well, and provide massive impact, offset the deals that may not move forward.

 

Alright, that wraps up part 3 of this 3-part series. Hopefully, you’ve read parts 1 & 2 and are starting to feel confident in your ability to start your first AFFORDABLE Multi-Family Development. Be sure to download the final part of the “Development Checklist” if you haven’t already.

Check out Evan Holladay on YouTube. There, you’ll find videos on this exact subject. To watch any part of this series, click the link below!

If you found this helpful, let us know in the comments. As well, if there’s anything else you would like to see from Holladay Ventures, let us know!