Benefits and Drawbacks of Affordable vs. Market Rate Properties
One of the biggest questions that developers need to ponder before starting a HUD 221(d)(4) financed project is whether to include any affordable housing. Since a developer's goal is (naturally) to maximize profit, the obvious answer would be no. However, there are a variety of advantages to including at least some affordable units in a HUD multifamily construction loan project.
Affordable Properties Typically Offer Better Loan Terms
For market rate HUD 221(d)(4) properties: Maximum LTC: 85%, Minimum DSCR: 1.176x:
This includes properties using LIHTC, with rents that are not equal to or more than 10% below the market.
For Affordable Properties: Maximum LTC: 90%, Minimum DSCR: 1.11x:
This includes projects using Section 202 loans (designed for low income elderly residents) and those which are using 90% or more rental assistance.
For Low-Income Properties: Maximum LTC: 87%, Minimum DSCR: 1.15x:
This includes properties which will have rent and income restrictions for at least 15 years, based on a Regulatory Agreement signed at closing. This agreement will stipulate that either 20% of the units will need to have a rent set at 50% of AMI (area median income), or 40% of the units will need to have a rent set at 60% of the AMI and 10% below market rents. Alternatively, this option allows developers to get a Section 8 contract (if they're approved) for between 10% to 90% of the project's units.
How to Determine Affordable Rent Rates
It is important to understand whether the financial benefits of increased leverage and programs like LIHTC offset the risks of offering lower rents to residents. To understand this, it is essential to know the exact rent rates a developer/owner needs to offer to qualify for affordable housing benefits. To determine AMI (area median income) for affordable properties, developers can visit the HUD income limits guide.