There are costs in the financing and construction of affordable housing that are not always obvious but add a considerable amount to the bottom line of a housing project. Here are some of the factors that go into the cost of affordable housing construction.
First Mortgage Calculation
When a project is being considered for financing, the underwriting institution will work with the development agency to determine how much of a monthly mortgage payment can be paid by the property considering the income that the property will be able to generate.
Because of the cap on how much gross monthly income can be considered to calculate rent costs in affordable housing, this type of development will make much less income than a market rate rental housing development. This results in a smaller amount of debt that can be shouldered by the affordable housing development. This may limit a developer in the lessened ability to invest financing into the property’s construction.
While lenders require the owner to invest equity into the affordable housing construction, they as well as other investors in the project can purchase equity at a reduced rate. This enables the equity purchasers to use this investment as a tax credit. The offset cost of this discounted equity is paid for by taxpayers.
Labor Wages and Contractor Equity
Affordable housing construction requires that workers are paid at higher federally mandated rates. A lower level of competition among contractors because of issues of contractor equity compliance. This means that the emphasis is put on factors other than bid price during sub-contractor selection.
An affordable housing project needs higher attorney involvement. Agency funding guidelines need to be followed and extra agreements need to be written, which results in higher legal fees.
With the gap between financing and equity and the actual cost of the project, affordable housing comes at a high cost to taxpayers. Often this high cost is annual over the length of the development’s mortgage.