As the housing crisis in America continues, it’s more evident than ever that we need more affordable housing. However, the process of developing affordable housing can be long and complex, and because of this, it can cause a number of challenges for developers. Additionally, there is a significant gap of money between the amount of money it costs developers to build these homes and the amount that is needed from renters. In this blog, we’ll dive deeper into five of many challenges that developers face when developing affordable housing:
5 barriers to affordable housing development
- Rising construction and development costs
When it comes to developing affordable rental units for communities, especially low-income households, there are many costs involved including acquisition fees, developer fees, and construction costs. In order to obtain land to develop on, developers need to pay to purchase not only the land they intend to build on but any existing buildings on the land. As you can imagine, the cost to purchase land can be incredibly high, especially in today’s economy and in highly-populated areas where affordable housing is especially needed. As an example, consider the case of Los Angeles, where rising construction costs have stalled several HHH sanctioned projects and delayed the process of affordable housing development.
Of course developers also need to be paid for their work, and this is usually done through developer fees. These fees not only go to the developer themselves, but to all other aspects of their job, including hiring their team, administrative duties, and more. While developers can sometimes opt to hold off on their portion of the fees so that more money can go to the costs of development itself, this rarely happens as it assumes that the building will run successfully and the portion of fees will be covered by paid rent over time.
Most obvious is the amount of money it costs to build the housing units themselves. From the material to the labor itself, building these units can be extremely costly. While developers can make some construction decisions to lower the costs (i.e. using less-expensive materials), ultimately most of these costs are out of their control. Also, as we mentioned earlier, there’s a huge gap between what it costs to build these units and what most people can pay in rent.
- Onerous policies and regulations
Almost as limiting as costs are policies and regulations that oftentimes make it difficult for developers to move forward with building affordable housing units. These policies and regulations can be on a federal, state, and even local level, and surround topics including building codes, energy efficiency standards, historic preservation, environmental regulations, and many more.
According to the U.S. Department of Housing and Urban Development, implementing and maintaining certain policies and regulations can be costly over time, and ideally policymakers could conduct a cost-benefit analysis to determine if the costs of implementing certain regulations exceed the social benefits. In fact, the American Homeownership and Economic Opportunity Act of 2000, HUD established the Regulatory Barriers Clearinghouse to “provide a natural home for resources for state, local, and tribal governments on strategies to reduce regulatory barriers.”
Although the Clearinghouse does work to reduce these barriers, the fact of the matter is that a lot of these regulations make it very difficult for developers to build and maintain affordable housing units.
- Zoning that limits density
Unfortunately in a lot of areas, high-density housing is excluded, making it difficult for developers to find land that allows for the building of multiple units rather than single-family homes. Other zoning restrictions also make it difficult to produce multi-family developments like parking restrictions, minimum lot sizes, and more. Consider the case of New York, where Governor Kathy Hochul's Housing Compact to tackle the housing crisis, has brought the debate over zoning to the forefront. Suburbs of New York have restrictive zoning codes, which the housing plan wants to subvert, creating a heated conflict between the Governor and the officials from the various suburbs of the State.
These zoning practices that prohibit multi-family housing not only limits options for developers, but also for low-income families. Single-family homes are typically purchased rather than rented, limiting access for people of color and low income—populations that are disproportionately renters.
In order for developers to continue building in these excluded areas, they need special permits or zoning variants—something that is not easy to obtain. And, while being able to house more densities doesn’t automatically mean that the housing supply will increase, it at least allows developers the opportunity to build and offer communities high-density housing. Having said that, local governments are innovating on the go and coming up with other regulatory tools besides changing zoning laws, to address housing affordability. You can read more about these in our blog piece on the the NLC report titled 'Local Tools to Address Housing Affordability 2022'.
- Uncertainty and cost of LIHTC allocation process
While the Low Income Housing Tax Credit (LIHTC) was created to subsidize the development of affordable housing, its allocation process can not only be time-consuming, but confusing and frustrating, not to mention costly. We have spoken about the allocation process and eligibility in one of our other pieces on Government funding for affordable housing. In order to receive credits, projects must meet a number of criteria, all of which are guided by federal regulations and usually controlled by each state.
State Housing Finance Agencies fill in funding gaps by allocating a number of credits to developers for rental housing allocation plans, and developers typically sell these awarded credits to investors in exchange for equity. The overall process is not only complex and competitive, but can also face barriers if the surrounding community opposes a development being built in their area.
- Lack of digital tools to provide efficiency
Closing a deal for affordable housing developers is not an easy feat. On average, 150 files are collected per project and there are a number of tasks and details that need to be recorded. Compiling documents and creating (and keeping track of) checklists can not only be time consuming but are prone to human error and can significantly set back a developer in their process.
More digitized tools are needed to help reduce the time spent on menial tasks so developers can focus on closing more deals, and in time, building more units. Luckily, this is where Builders Patch can help. Our all-in-one platform easily allows developers and everyone on a project to stay up-to-date with checklists, due diligence, pro forma tables, project files, and more.
If you enjoyed this article and want to read more from us, check out our whitepaper on how technology can drive affordable housing development.