Development of non-profit housing in the United States

[1] This inherent difference of organizational objective dictates the operational strategy of their projects; for-profits are likely to create affordable housing that maximizes profits, where non-profits aim to serve the most vulnerable populations.

Conversely, non-profits are more likely to develop in distressed neighborhoods, dedicate all of their units to low-income tenants and operate projects for the long-term in order to fulfill the mission of affordability.

[2] As a result of their business strategy, non-profits lack the financial and technical resources of for-profits, thus, forcing them to rely on multiple funding sources such as public and private grants and subsidies in order to cover development costs.

[2] Pre-development efforts such as acquiring land, forming partnerships, performing due diligence and gaining entitlements is the important first steps developers make before a project is launched.

Lack of pre-development funding can lead to weak project proposals and failure to seize opportunities to acquire land.

[3] Also, lack of funds increases development risks and decreases the likelihood of attracting capital investors or securing loans from private banks.

[3] Beginning in the 1980s, national, state and local intermediaries formed to improve the financial and technical plight of non-profit housing developers.

As a result, non-profit developers began to increase their technical competence and reduce the risk to potential public and private sector investors.

[3] National intermediaries include organizations such as the Local Initiatives Support Coalition (LISC), the Enterprise Foundation, Neighborhood Reinvestment Corporation (NRC) and the Housing Assistance Council (HAC).

These organizations help non-profit housing developers access tax credits, corporate equity investment, secondary mortgage markets and lender commitments as well as offering training courses on real estate development and finance and community organizing and social service provision.

Some considerations that non-profits evaluate before creating an ownership entity include the ease and speed with which decisions can be made, efficient provision of property management operations, and the number of investors required to meet equity needs and investment objectives of the investors relative to project cash flow, appreciation, and attitudes towards personal liability.

Non-profit organizations are not directly allocated project-based assistance; therefore, a partnership with a PHA is required to take advantage of this program.

Project-based vouchers allow owners to dedicate a portion or all of their property for affordable rental housing and receive subsidies for doing so.

[12] No less than 70% of CDBG funds granted to a community must benefit low- and moderate-income people (up to 80% AMI, or Area Median Income).

[7][12] Funds may be used for the acquisition, disposition, or retention of real property; the remodeling of existing residential and non-residential buildings; social services; and economic development.

[7][12] However, non-profit and other organizations that are part of a neighborhood revitalization, community economic development or energy conservation project are permitted to use the funds for housing.

[7] In early 2011, President Barack Obama had proposed a budget for the 2012 fiscal year which included cutting the CDBG program by 7.5%, or $300 million.

[14] Unlike CDBGs, HOME funds are granted to states and local jurisdictions specifically for the provision of affordable owned and rental housing for low- and moderate-income households by.

[17] These funds are created specifically for the provision of affordable housing to low- and moderate-income households and are based on collected revenue sources.

Local community foundations focus primarily on improving specific neighborhoods, whereas national non-profits have broader objectives.

Also, if a private company conducts a large share of their business in a particular area they may also contribute land, money and expertise to non-profit developers.

Property management requires marketing, tenant selection, rent collection, maintenance, finance, rule enforcement, strategic planning, etc.

[19] Developers create an operating model to determine a property's financial viability through projected future cash flows.

[19] Lenders measure the ability of a project's operating income to make mortgage payments by using a debt-service-coverage ratio, which is a calculation of annual operating income divided by annual mortgage payments; the higher the ratio the lower the risk of project foreclosure.

Housing in these markets is generally unattractive and thus difficult to rent, therefore buildings lose money due to high vacancy.

Furthermore, in the event that debt service cannot be covered, the lender can foreclose on the property, taking the affordable units off of the market and hurting the mission of the non-profit.