COVER STORY Cover The Spread Affordable housing developers in Central Texas use a variety of programs and incentives to bridge the gap between tax credit equity and construction costs. Taylor Williams I n an era in which land and construction costs are perpetually on the rise, developers of affordable housing must be able to navi-gate a complex web of federal, state and local programs in order to secure gap financing — the capital that covers the delta between total development costs and those covered by tax credit equity, municipal bonds or other types of subsidies. Understanding and effectively utilizing the various initiatives and incentives — density bonuses, private activity bonds, tax increment reinvestment zones, energy efficiency compli -ance — is no easy task. Time and manpower aside, this process is further complicated by the fact that state and municipalities have their own laws and regulations when it comes to these programs. But successfully navigating them is key to eliminating development costs not covered by tax credits — the critical piece of financing that lies at the heart of virtually every afford-able housing project in Texas. For without these subsidies, the economics of paying market-rate land prices and record-high construction costs to develop housing in which rent levels are capped simply doesn’t work. “As developers that want to build high-qual-ity affordable housing that’s basically indistin-guishable from market-rate product, what we need is capital that’s designed to integrate with affordable housing,” says Ryan Wilson, senior vice president at San Antonio-based Franklin Development Co. “Our construction costs are the same as those of market-rate developers, but our rents are significantly lower, so to cover that gap, we need more money.” “As we artificially lower our rents to be af -fordable to the segment of the population earn-ing 60 percent or less of area median income (AMI), the ability to raise capital on permanent financing is reduced,” he continues. Jason Arechiga, senior vice president in the Texas office of national developer The NRP Group, observes that construction costs were about 33 percent lower five years ago than they are today on a per-unit basis. “Affordable housing developers face the same rising construction costs as market-rate devel -opers, the difference being that market-rate de -velopers can adjust rents,” says Arechiga. “Our rents are capped based on AMI, which forces us to find other avenues to fill that gap.” According to the latest data from the Associ-ated General Contractors of America (AGC), the supply of construction labor continues to trail In September 2019, Avanath Capital Management acquired Canvas Apartments, a 255-unit property in Austin that was built in 1983 and renovated in 2016. The firm is actively looking to expand its footprint of affordable housing in the fast-growing state capital. demand, with the industry losing 20,000 jobs between April and May. Nationwide, nonresi -dential and residential builders had approxi-mately 357,000 job openings at the end of April. Price escalation for construction materials has been equally rough on developers. Though many projects experienced delays due to the COVID-19 pandemic, construction was gener-ally deemed essential business and moved for-ward at regular clips once job sites were deemed safe and secure. In addition, the bevy of shelter-in-place or-ders in 2020 prompted many citizens to un-dertake home improvement projects, creating a spike in demand for materials. According to the AGC, the price of iron and steel scrap metal rose 76.6 percent between May 2020 and 2021, while the average price of lumber and plywood skyrocketed by 111 percent during that period. Arechiga notes that affordable housing devel-opers also compete with market-rate develop -ers for land. Land sellers, as owners of a pre-cious and scarce resource, are always going to ask for top dollar, regardless of what the buyer plans to do with the dirt, he points out. Despite ballooning land prices, affordable housing developers in Central Texas remain committed to competing for sites in areas that provide access to employment clusters, public transportation and good school systems. Why? Because it’s what their residents deserve, ac-cording to Wilson. “Clustering housing that’s far removed from those services doesn’t do anybody any good,” he says. “So, we’re faced with the challenge of providing housing with a finite budget in those areas that need it but may not be as affordable as a site outside of an urban center. In order to give our residents the best housing possible while juggling the economics of the real world, it’s critical that we have those programs to help bridge the gaps in our financing structures.” “Our goal is to provide residents with a true community that is comparable to the market-rate development across the street,” concurs Arechiga. “For example, NRP is utilizing gran -ite countertops at our communities not only because they are easier to maintain than lami-nate, but because they are nicer. The same ap -plies with vinyl plank flooring. Yes, it’s easier to switch out than carpet, but it’s also more aesthetically pleasing and provides a more modern-looking unit, which is something our residents appreciate.” Institutional Interest Across the spectrum of investment, demand for multifamily assets and raw land that is zoned for multifamily development is espe-cially strong right now, sources say. Various forms of federal aid to renters — ranging from rental relief programs to the Centers for Disease Control’s (CDC) national eviction moratorium — have kept cash flowing throughout the space www.REBusinessOnline.com 12 | Texas Multifamily & Affordable Housing Business | May/June 2021