Deal Funding: Deferred Developer Fee Is Only One Solution

Affordable housing unit

Congress’ recent spending package offers an increased $4.5 billion to HUD for fiscal year 2023, including a “Yes in My Backyard” (YIMBY) grant program and increased funding for several existing programs. This news may or may not ease concerns among developers about significant project cost increases and funding gaps.

A recent article in Affordable Housing Finance noted that developers are relying on “partners at all levels” to make new deals happen. The article also stated that more deals are closing with “significantly more deferred developer fees” – as much as 80% to 90%. Simultaneously, developers are increasing contingencies and seeking additional credits, soft funding and other gap funding sources.

Among not-for-profit developers, collecting deferred developer fees of 80% to 90% can financially weaken developers by delaying cash flow needed to fund operations and future developments. Besides deferring developer fees, many current projects’ financing has relied on:

  • Forward-allocating LIHTCs, which reduces state credits available for future projects; some states are prioritizing additional credits for older projects while others are offering additional credits to new projects but asking for credits to be returned if the deals don’t close within 18 months
  • State sources of soft funding, including state housing tax credits and loans
  • Local sources of soft funding, including fee waivers, property tax exemptions and state budget allocations funneled toward housing

Seeking multiple gap funding solutions can create deal delays. So in addition to addressing gap funding needs, some housing authorities and stakeholders are calling for changes to rules and regulations to sustain affordable housing projects, such as:

  • Reducing to 25 percent the share of adjusted basis that needs to be covered by bond costs to qualify for 4 percent credits, which would stretch existing state bond volume caps and cover more projects
  • Extending certain regulatory deadlines to help developments meet placed-in-service deadlines or repair and maintenance deadlines hampered by funding gaps and supply chain disruptions

Source: NCSHA

In a recent study for the National Council of State Housing Agencies, HFAs expressed an ever-larger threat to affordable housing. Barring more gap funding, they said that developers will need to reduce the number of units or number of projects per year, all leading to less affordable housing stock for the future.

If your development is facing funding gaps for current or future projects, talk to the team at LvHJ about strategic planning and cash flow solutions. We can help you identify new funding sources and keep you updated on regulatory changes that impact your projects.

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