Niche properties Multifamily CCIM Feature

Affordable Housing

Six steps help to navigate this tricky terrain.

Nationwide, the affordable housing sector continues to grow - in importance and need. Demand for units consistently outpaces supply in key market areas, driven by factors such as rising rents, stagnating wages, and shifting demographics of baby boomers and millennials.

By definition, affordable housing projects require occupants to pay no more than 30 percent of their income for gross housing costs, including utilities. These affordable properties do not always have the lowest rents. Area median income percentages play a large role in determining the rental rate pricing and the impact it exerts on absorption rates and lowering cost-burdened percentages.

While it is a significant market opportunity, new investors must learn to navigate a complicated process. Commercial real estate professionals can invest wisely by following these steps.

Essential Knowledge

The six steps to success and creating growth in the affordable housing market space encompass the following:

1. Identify the four Ws - who, what, when, and where.

Who: This could be either a developer of new affordable properties or an investor looking for existing properties to buy and operate.

What: Define the types of affordable properties the developer or investor wants to operate, such as income-restricted, low-income housing tax credit properties, Section 8 properties, or workforce housing.

When: Does the developer or investor want to hold these properties for the short- or long-term?

Where: Identify main markets in which the developer or investor wants to operate, such as urban, suburban, or tertiary.    

2. Weigh the options with an expert.

Seek out a full-service provider with the experience, contacts, and creative approach to help the developer or investor build a team of experienced affordable housing experts, with both U.S. Housing and Urban Development and a government-sponsored enterprise (Fannie Mae or Freddie Mac).    

3. Identify a lender with affordable housing experience.

Find a lender that is familiar with the affordable housing finance process and the options available for debt structuring, ensuring the maximum financial wherewithal and generating the greatest return. To advance quickly,  an expert lender also will advise on tax preservation programs, recapitalizing options, flexible prepayment, and bridge to re-syndication options.   

4. Conduct a market analysis.

This will determine the demand and the depth of income-qualified residents and help commercial real estate professionals locate the most advantageous place to develop affordable property. The key to feasibility is the gap between market and affordable rents - ideally at least a 10-percent gap.

However, the higher the gap percentage, the higher the market absorption rate. Increased absorption rates signal faster and more complete lease-up potential for a given property. Also, stay aware of other developments under proposal or construction in order to avoid oversaturated areas, which can reduce the gap between market and affordable properties.     

5. Set the project timeframe.

Timing and considerations concerning the project timeframe are key indicators of the type of financing or debt option the project will require. Typically, much of the debt for new construction and/or sub-rehab affordable housing using bonds and 4 percent low-income housing tax credit is structured in one of three ways:

  • HUD 221(d)(4) new construction or sub-rehab programs;
  • Freddie Mac's tax-exempt loan program; and/or
  • Fannie Mae's MBS as tax-exempt bond collateral - fixed rate (M.TEB) program.

Typically, HUD offers the most competitive interest rates and loan proceeds along with fully amortizing, nonrecourse loans of 40 years, plus a two-year, interest-only construction period. However, HUD programs often take more than six months to close a deal.

On the other hand, Fannie Mae and Freddie Mac programs typically can be closed within 90 days. The choice of agency should be based on the elements of the loan terms most favorable to the developer or investor, such as lower interest rates, net proceeds, length of term, and timing.    

6. Stay abreast of Tax Credit Equity program basics and details.

Keep current with revisions, because the developer or investor may extract savings or other financial benefits for the affordable housing project.

Dynamic Potential

The affordable housing sector brings tremendous opportunity for growth, along with its own distinct set of challenges and considerations. The capitalization of affordable housing involves a complex layering of debt and equity. As a result, the most direct path to success resides in assembling an expert team to help navigate the process and quickly turn the efforts into ROI.

Heather Olson, CCIM, and Frank Baldasare

Heather Olson, CCIM, is assistant vice president at Walker & Dunlop in Atlanta. Contact her at

Frank Baldasare is managing director at Walker & Dunlop in Atlanta. Contact him  at


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