Making Money in Affordable Housing

Though it's not a get-rich-quick idea, it is the right thing to do. These builders use affordable housing to diversify their business.

By Meghan Stromberg, Senior Editor | May 31, 2004


Large single-family homes, single-family cottages and affordable apartments (left to right) make for a harmonious streetscape overlooking Colorado's Belle Creek's central greenspace.
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After World War II, low-interest home loans funded through the GI Bill and given to returning soldiers combined with an unprecedented era of prosperity to boost American homeownership rates significantly. According to the U.S. Bicentennial Census, 62.1% of Americans owned their own home by 1960, compared with just 43.6% in 1940. Since then, homeownership rates have grown steadily to a rate of 66.2% in 2000. (Other Census Bureau studies, including the smaller Housing Vacancy Survey, put homeownership rates even higher - 68.3% in 2003.)

Despite that gradual uptick, significant numbers of would-be homebuyers remain locked out of the American Dream. For most, the gap between the cost of housing and their annual incomes makes homeownership seem improbable, if not impossible.

Recent studies conducted by the Center for Housing Policy, the research affiliate of the National Housing Conference, show that 3.9 million working families faced "critical" housing needs in 1999. According to the Center, these families paid more than half their income on housing costs, lived in severely substandard conditions or both. The center also found that almost 4.5 million low- to moderate-income working families, while not having critical housing needs, were "nevertheless profoundly affected by the cost and conditions of their housing" because of crowded conditions, commutes of 45 minutes or longer or both.

While some of the above figures may not be familiar, the fact that our country has a desperate need for housing that is affordable to more people is not exactly new news - especially not to builders, whose daily charge is to create places that people can call home.

"We saw more and more prospective buyers priced out of the market for new homes," says Steve Kabel, president of John Laing Homes South Coast Division.

A Newport Beach, Calif.-based builder that built 1,800 homes last year, JLH entered into a strategic plan to build more affordable housing two years ago. In doing so, the company has joined a growing movement among builders, who are increasingly cracking the code to building more affordable housing - either on their own or, more often, through partnerships with various public and private agencies, financial institutions, governments and even peers. Affordable housing is no cash cow, but builders can reap benefits - both in profits and other intangibles - by adding this segment to their existing business mixes.


John Laing Homes' Cape Ann, an urban infill community in Huntington Beach, Calif., includes an affordable component with 146 detached homes. The homes, ranging in square footage from 1,300 to 1,800 square feet and with three floor plans, began in the low $200,000s. The neighborhood was the first in the area with income restrictions. Under affordable housing guidelines set forth by the city, qualified buyers must earn 120 percent or less of the Orange County median.

What Have You Done for Me Lately?
Most people, both within and outside of the building industry, sincerely want to help others.

Talk to most builders about affordable housing, however, and the conversation changes. It's not because they don't care but instead because they don't think it's a profitable business move. For some, it's hard enough to eke a decent margin out of market-rate homes after the land and fees, material price fluctuations, change orders, callbacks and other costs are calculated. Why would anybody want to build affordable housing?

The first step to answering that question is to understand what "affordable" really means. According to HUD, to be eligible for affordable housing, a buyer must have an annual income at or near 80% of the median annual income in the community.

Whatever you call it, building affordable might be more than just something to consider - it might be a very savvy business move. Gene Myers, president of New Town Builders in Highlands Ranch, Colo., has an altruistic side, but he also has a long list of the benefits of adding an affordable component to his business.

"It's important for the building industry to develop quality housing with an affordable component," Myers says. Perhaps more to the point, Myers adds, "We see it as a means to compete with the big guys."

Denver has not yet recovered from a tech crash a few years ago: The market is down nearly 40% in housing starts since 2000. Myers goes up against large, capital-rich, but not quite as nimble, publics by diversifying his business. He also speeds absorption in individual communities by offering a greater range of products and price points within the mixed-income neighborhoods.

"We built only semi-custom before, and virtually every single private competitor is now gone," says Myers, who also runs Greentree Homes. "Since expanding our mix, we've grown at a compounded 20 to 30 percent rate in a down market."

In addition to the competitive advantage, affordable housing also engenders goodwill with both municipalities and the public. Myers' city-partners expedite entitlements, waive or delay fees until closing, and allow higher densities when an affordable component is involved.

"Municipalities call us, saying, 'We want your product,'" Myers remarks. "We keep our land pipeline full because of the communities we leave behind. They become an asset to the cities and towns we build in."

Jeff Lee, president of the Lee Group in Los Angeles, is equally pragmatic about affordable, which will account for about 25% of his business in 2004, but has been as high as 50% or 60% in his 21 years in the infill game. He melds affordable with market-rate for several reasons, including the fact that it opens up land opportunities he couldn't touch otherwise. Affordable margins can be slimmer, though, with less chance that a price increase will result in unbudgeted revenue. He generally aims for, and gets, a 10 percent profit.

Still, he says that if builders don't step up and find ways to make affordable work that are agreeable to cities and profitable to builders, the latter may get slapped with the inclusionary zoning policies many cities have instituted. These laws mandate that new-home communities include a specified percentage of affordable housing. Each municipality has its own threshold, but it's typically between 80% and 120% of median income and could go to 60% or lower. Sometimes that housing gets paid for by subsidies; other times, it's up to the developer or builder to figure out how to make market-rate price points subsidize the affordable.

The Right Mix
"To have done a community of all low-end housing would have been a mistake," Myers says, referring to his first mixed-income community, Belle Creek in Commerce City, Colo. "First and second move-up adds diversity and makes it more like a healthy community. Building a single product line is what the people of Colorado have labeled as sprawl."

Adding an affordable component to its business has opened up the land pipeline for John Laing Homes, as the company shifts to include more infill housing in land-strapped Orange County and Los Angeles. A land deal often requires JLH to build affordable, as cities (and their redevelopment agencies) control a lot of in-town property. "With that seller, we're looking at some mix of affordable housing as a component of the total project every time - typically 20 to 25 percent," JLH's Kabel says.

The deals aren't easy. Usually, JLH does extensive market research to determine the market-rate prices, and the redevelopment agency uses median income and household size to identify affordable pricing. Both get loaded into the pro forma, along with construction and development costs - often including extensive environmental remediation of industrial sites or tear down of underused commercial or residential sites. Then the two parties negotiate what the builder can pay for the land to still make a decent margin - from 10 to 20 percent. "The agency ends up subsidizing the land," says Kabel.

It's a riskier deal than buying lots in a master-planned subdivision, Kabel admits, but he sees no way around it, as land seems to "evaporate." It also takes more patience and entrepreneurship. "There's always the risk that income levels - the basis of affordable pricing - won't go up, but costs of developing and building will," Kabel says. "That erodes margin, but we're comfortable with taking the risks that come with building affordable housing."

JLH is comfortable with the risk because with it comes rewards. As Southern California and other major metropolitan areas feel the pain of a housing shortage and long commutes, people want to buy in the cities. Building there often means building some affordable, but builders who take the risk find a barely tapped market hungry for homes.

Partnerships & Creative Financing
Most builders think of cities as hindrances to development, not partners. That doesn't have to be the case, says Shelley Markle of Shelley Construction Services. Working under the New Homes for Chicago program, Markle buys city-owned land for a dollar, then builds homes that must sell to a buyer making less than 120 percent of the median income. She notes that the median income is not as low as some might think - it's based on the Metropolitan Statistical Area, or MSA. In Chicago, that number includes incomes from six counties, some containing very wealthy communities that help boost the median. "The higher median opens up the definition of affordable to more and more people," she says.

It also gives the builder a little more wiggle room. "It is hard to build a house in the city with all the regulations, permits, the cost of materials and labor, and all the factors that go into it, for [a sales price of] $165,000," Markle says. "It's tight, but not terribly tight." Streamlined, fairly simple construction - think Sears catalog homes - and panelization, not to mention almost free land, help Markle and others make it work.

New Town Builders' Belle Creek - a 171-acre, 931-unit, mixed-income community that broke ground in 2000 - came out of a partnership initiated by Sam Gary and Ron Williams of the Gary-Williams Energy Corp. and the Piton Foundation, both affordable housing advocates. They recruited for-profit builder Gene Myers and the Rocky Mountain Mutual Housing Association, which is building 304 apartment units for people with low to moderate incomes. In all, 51 percent of the units, both rental and for-sale, were designed to be affordable to households earning 80 percent of the median income. Once the building team was in place, one piece of the puzzle was missing: finding smart money.

The Belle Creek team secured equity at below-market rates from two providers. One was Key Bank through its Key Community Development Corp. (KCDC), which offered the money to comply with the Community Reinvestment Act. Congress enacted the CRA in 1977 to encourage and help banks meet the credit needs of the communities in which they operate, especially low- and moderate-income neighborhoods. Demonstration of compliance gets the bank a good rating at its CRA examination. That, in turn, makes mergers and acquisitions easier.

Key and other banks can step in as lenders, providing construction and permanent loans, or as investors, says Jim Poznik, the vice president and Northeast regional manager of Key Bank. Although based in Washington, Poznik worked on Belle Creek because of his knowledge of for-sale housing. Most banks make their CRA compliance (in the housing sector) with rentals, working with the federal Low-Income Housing Tax Credit program. A federal tax credit that can impact for-sale housing, the New Markets Tax Credit program is only in its second round of allocations. It also allows taxpayers - individuals and corporations, including banks - to take a tax credit for qualified equity investments. (For more on the NMTC, see Resources)

With Belle Creek, Poznik says, "We provided direct investment and became a part owner. As an equity provider, our return came in two ways: an economic return and a way to help our [CRA] scorecard." For that, he says, Key was willing to take a smaller economic return: 20 percent versus the 30 percent a typical lender may demand.

Why choose a community development lender? According to Poznik, these institutions can back small neighborhood and scattered-site projects that typical commercial real estate lenders avoid because the projects are too small and because of the multiple layers of debt involved.


Magnusson Architecture and Planning, working with non-profit and for-profit builders, often uses a proven model: ownership rowhomes with rental flats. At Rheingold Gardens in Brooklyn, the owner occupies the first floor and income from the two rental flats above help with the mortgage.

Working with Non-Profits
Banks are not the only investors and lenders willing to work with builders doing all or a component of affordable housing. Myriad nonprofit groups exist at the national, state and local levels. Each works a little differently and offers builders and developers - or even buyers - a different piece to put the smart-money puzzle together. Often, a builder will work with a number of groups to get a deal done.

These partnerships make doing affordable possible in many cases, but the deals can get very complicated - both in putting them together and insuring that buyers meet specified requirements, such as an income that's less than 80 percent of median, the most common threshold for housing to be considered "affordable."

"There's a huge market for affordable [and attainable] housing out there," says John Kucher, executive director of Threshold Housing Corp., a nonprofit developer in Seattle. "The problem is the politicians get all goofy when you talk about housing going to anyone over 80 percent of median. But when you start putting any kind of income test on it, you lose two-thirds of the builders. They say, 'Just let me go build. I don't want to fool with all these numbers.'"

Nonprofits understand that sentiment, and many have programs aimed at shortening the builder learning curve. The Partnership for New York City New Homes program, a nonprofit organization comprised of New York business leaders, offers a training program for new builder members called Neighborhood Builders. Experienced - or "veteran," as they are termed - builders volunteer to pair up with less experienced small builders to take them through two projects from pre-development until they close the site. After successfully completing two projects with a mentor, the neighborhood builders are expected to go it alone.

Mario Procida, who has built more than 1,000 units in the Bronx, is a former Neighborhood Builders mentor. He sees it as an invaluable way to increase builder knowledge. Procida also works with the South Bronx-based Nos Quedamos (We Stay), a nonprofit group that started about 10 years ago to help rebuild the South Bronx after thousands of fires destroyed much of the area in the early 1970s. Nos Quedamos, which draws its membership from current South Bronx residents, acts as a crucial bridge between builders and developers, such as Pro-cida, and local residents. With the help of a local firm, Magnusson Architecture and Planning, Nos Quedamos conducts weekly meeting with residents to craft the redevelopment plan for the area. Because residents like to have a hand in deciding what's coming into their neighborhoods, builders face little resistance to new projects. Rather than the community opposition many builders of affordable housing face, Procida says he's welcomed. And his reputation and experience have led to successful market-rate opportunities there, too.

On the other coast, Los Angeles' Lee gives one caveat: Subsidy money can be unpredictable. "You need to have a strong market-rate business because redevelopment agencies run out of money," Lee says. As states and municipalities all over the country wrestle with deficits, the nonprofit groups that count on money from them feel the pinch.

Still, Lee contends nonprofits are essential. He echoes Procida's praise of nonprofits that can help head off community opposition and fulfill the needs of current and future residents. Century Housing, a mission-based nonprofit lender whose mission includes providing More Than Shelter, works with builders and developers such as Lee to establish facilities that offer tutoring, adult-reading programs and wellness programs for seniors within new and renovated communities. More to the point, Century Housing provides an array of products, including bridge loans, pre-development and site-acquisition financing, subordinate bond guarantees and mezzanine financing.

"We can provide the financial products that are not available to traditional lenders because these instruments represent more risk than those lenders would ordinarily be allowed to accept under their charter," says Century Housing's president and CEO Allan Kingston, who also chairs the National Housing Conference Board of Governors.

"Surprisingly, we don't have that many projects that don't follow through," Kingston adds. "That's mostly because we're able to invest more resources than a traditional for-profit lender to make sure projects don't fail. Whereas a traditional lender might foreclose, our approach is to try to work it out with the builder. We're interested in the people who will be living in a building, not the economic feasibility of the building itself."

Getting Started
Like anything new, embarking on developing affordable housing isn't easy. But as Lee notes, "Everything we builders do is brain damage." Affordable, apparently, is just another form. He advises builders to start with their local cities and their redevelopment agencies. "They know where the money is," he says.

Kabel from JLH, which builds all its affordable housing in infill locations, says the first thing to do is adjust your mindset and get employees on board with the vision. "When you're buying land in a master-planned community, a lot of the entitlement process and the risk associated with the land has already been undertaken by the developer."

"Going into infill, we recognized our team had to be concerned with a different level of entitlement," Kabel continues. "Now we were trying to identify the risk of doing environmental cleanup, how long the entitlement process might take and how much new knowledge we will have to learn - as well as how much education we will have to provide a municipality in terms of what our needs are. You do a lot of research upfront."

"There's no magic formula," Kingston says. He adds real estate agents, home building associations and the National Housing Conference to the list of where to start. Builders also can talk to their peers and regular vendors, including their mortgage providers, most of who have mortgages aimed at first-time buyers.

"Builders can profit from the extraordinary scarcity of housing in the marketplace," Kingston adds. "Only so much market-rate housing can be built - and as far as we're concerned, the more the better - but there are also an awful lot of affordable units to be built by people innovative enough to build them."

"Builders and developers are tremendously innovative people," he concludes. "They know how to find a way to get things done." --with additional reporting by Bob Sperber



For more on the resources talked about in this story and other affordable-housing tools, check out the following links, books and other useful information sources.

  • The Affordable Housing Design Advisor ( provides access to photos, case studies, design guidelines and other tools for creating well-designed affordable housing.
  • Department of Housing and Urban Development ( or the HUD User (, offer resources on housing and economic development, including the Regulatory Barriers Clearinghouse. HUD Clips ( is a repository of policies, procedures, and other HUD materials.
  • Fannie Mae ( and Freddie Mac ( provide mortgages but also work with nonprofits, municipalities and at the national level to increase homeownership.
  • The Housing Partnership Network is a network of nonprofit agencies in 37 states,
  • Low-Income Homeownership: Examining the Unexamined Goal, published by Brookings Institution Press and the Joint Center for Housing Studies in 2002, is a collection of working papers. Available at
  • The National Association of Home Builders (, the Urban Land Institute ( and the American Institute of Architects ( all have a number of publications and initiatives on affordable housing.
  • The National Building Museum in Washington ( is exhibiting "Affordable Housing: Designing an American Asset" through August 8, 2004.
  • National Housing Conference ( is a public and private coalition. Recent reports include "Four Windows: A Metropolitan Perspective on Affordable Housing in America."
  • The Nehemiah Program is a nonprofit down-payment assistance program that works with builders in nearly every state:
  • New Markets Tax Credits ( is a tax credit program from the U.S. Department of the Treasury.


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