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Developing Single-Family Subdivisions

PROGRAM O P E R AT I O N S

A Complete Overview of the Skills and Finances Needed To Run a Successful Program

Launched in 1982 by Jim and Patty Rouse, The Enterprise Foundation is a national, nonprofit housing and community development organization dedicated to bringing lasting improvements to distressed communities.

Copyright 1999, The Enterprise Foundation, Inc. All rights reserved. ISBN: 0-942901-41-x No content from this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system, without permission from the Communications department of The Enterprise Foundation. However, you may photocopy any worksheets or sample pages that may be contained in this manual. This publication is designed to provide accurate and authoritative information on the subject covered. It is sold with the understanding that The Enterprise Foundation is not rendering legal, accounting or other project-specific advice. For expert assistance, contact a competent professional.

COMMUNITY DEVELOPMENT LIBRARY

This book is part of the Enterprise Community Development Library, an invaluable reference collection for nonprofit organizations dedicated to revitalizing and reconnecting neighborhoods to mainstream America. One of many resources available through Enterprise, it offers industry-proven information in simple, easy-toread formats. From planning to governance, fund raising to money management, and program operations to communications, the Community Development Library will help your organization succeed.

ADDITIONAL ENTERPRISE RESOURCES

The Enterprise Foundation provides nonprofit organizations with expert consultation and training as well as an extensive collection of print and online tools. For more information, please visit our Web site at www.enterprisefoundation.org.

About This Manual


What is a single-family subdivision? A single-family subdivision is a group of homes newly built on undeveloped land. Many nonprofit community development organizations build subdivisions to provide affordable homes and create a new community. Developing Single-Family Subdivisions designed for board members is and staff of nonprofit community development organizations who are not experienced in the development of newly constructed single-family housing in subdivisions. This manual can make that process easier and clearer. It should be used together with more detailed information and helpful documents available in The Enterprise Foundations Developer Support System found on the Web at www.enterprisefoundation.org. This manual includes information on:
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Program planning and execution Role of the nonprofit as sponsor or developer Staff and consultant roles Costs of development Sources of funds and purchaser financing Construction types Marketing and sales Potential risks

Table of Contents
Introduction 2 3 8 10 Development Process Organizational Roles

This manual is part of the Program Operationsseries within The Enterprise Foundations Community Development Library. The series provides detailed information on the housing-related programs used most by nonprofit organizations. Other manuals in the series include information on:
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Staffing and Consultants Development Costs Sources of Funds 14 15 16 18 12

Single-family acquisition and rehabilitation Single-family housing for infill Multifamily new construction Multifamily rental housing through renovation Scattered-site rental housing Home improvement programs Supportive housing The HOME Investment Partnership Program

Purchaser Financing Construction Types Marketing and Sales

Community Interaction Risks and Their Solutions

20 21

Introduction
Successfully building new single-family subdivisions requires many types of funding, specialized expertise and extensive coordination. Not only must you finance, design, build and sell homes, but you must also evaluate, buy and develop land. These additional land development steps add to the complexity and overhead costs of the process. Creating new subdivisions demands many decisions. The developer must select housing types, architectural designs, building materials and energy efficiencies that respond to the demands of the client market.
WHEN TO CONSIDER NEW CONSTRUCTION OF SUBDIVISIONS
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When its less expensive than other development options If the cost of rehabilitation exceeds the replacement cost of an equivalent three-bedroom house, you should consider new construction. In general, renovation is not a cost-effective approach unless it is performed in a disciplined, selective way or unless gut renovation is feasible. If the housing has deteriorated beyond a certain percentage, say 25 percent, it is very likely that new construction can be accomplished at a lower per unit cost with a much more modern layout.

When land is available In many cases some vacant land should remain that way because it is contaminated or because there is a need for more green space in the community. Even so, many neighborhoods, especially on the outskirts of cities, still contain a number of buildable, low-cost parcels.

Development Process
Building new subdivisions involves matching land, a purchaser and a builder with acquisition and construction financing and permanent mortgages. This process includes eight steps: one planning step (strategic and program planning) and seven execution steps (feasibility and site control, master planning, securing financing, building specifications and contractor award, marketing and pre-purchase qualifications, construction, and sales and warranty). For more detailed information about the development process, see The Enterprise Foundations Developer Support System at www.enterprisefoundation.org. Initial feasibility calculations will indicate the size of a possible subdivision (too small and the planners, builders and marketers will not have economies of scale; too large and there may be too many homes to sell and lenders may balk). With the size in mind, the development team needs to find a site. The land must be buildable (able to bear the weight of new construction and without severe environmental problems not readily solved), close to existing roads and utility services (so that the costs of extending these services are not astronomical) and obtainable. After locating a potential site the nonprofit developer gains site control,usually through a legal contract that gives the developer the sole right to purchase the land parcel at a given price for a specified period of time. This time period allows the nonprofit to further test feasibility, gain financing and purchase the land in return for payment of these rights. During feasibility:
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STEP 1
STRATEGIC AND PROGRAM PLANNING

During this stage, the nonprofit board and its staff evaluate the neighborhood, the available financing, the expected demand for homes, and the strength and diversity of partners before deciding to embark on building a new subdivision. The organization needs to base this decision on facts and careful study, not merely on the desire of a few staff, community or board members to see some new houses in the neighborhood.

Engage an architect to execute a preliminary design. Do not always trust his or her estimate on construction costs. An architects strength is in design, not cost estimating. Hire an engineer or a builder to provide you with a reasonably accurate estimate of costs. An engineer should also complete test borings to determine if the site can support the houses you want. Go over the construction schedule in detail with the builder or engineer. This schedule significantly affects the financial viability of your project. Retain a lawyer if you have questions regarding zoning. If you are inexperienced or are attempting to increase your production level, you should consider hiring a development consultant to complete initial financial projections and to map out an appropriate development strategy.

STEP 2
FEASIBILITY AND SITE CONTROL
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In the second stage, the nonprofit developer begins the process of calculating feasibility of the development. This involves several estimations, including the number and projected sales price of new homes; land, construction and other expenses; the costs of available financing; and the expected demand for the homes built. Feasibility will be recalculated dozens (even hundreds) of times during the development process, as new information replaces earlier estimates.

STEP 3
MASTER PLANNING

After gaining site control the developer proceeds as quickly as possible, to meet the deadline set by the site control agreement through the development process. The land is tested by engineers for weight-bearing capacity and by environmental specialists for toxins. If contamination exists, the possibilities for remediation are explored. Surveyors will do topographical maps that show the exact configuration of the site: where it dips and where it rises.

Using this information, as well as the developers sense of the market, architects will be asked to produce a master plan a precise description of the locations of streets, sidewalks, utility lines, driveways and houses. The subdivision master plan should consider a mix of site layout and building configurations that adds appreciably to the character and marketability of the homes. The following chart highlights typical decisions that must be made in conjunction with the design team to create the final plan.

Typical Master Plan Decisions Component Entrances Options Formal or informal; massive walls and signage to announce strong presence; minimal walls and signage for understated presence, defined by formal, informal or natural landscaping Developed in a straight line with a focal point at the end; based on a grid; curvilinear; loop or cul-de-sac; defined by formal or informal landscaping; parking allowed or not Natural materials and colors or high-tech materials; strong or minimal presence; period, traditional or contemporary style Defines streets; provides security; provides mood and atmosphere; uses period or traditional lighting standards; uses hidden or contemporary lighting standards; underscores landscaping Natural buffers of undisturbed vegetation; new landscaping and berms or new buffers of fences and walls Natural amenities found on the site such as lakes, creeks, meadows, marshes, mature vegetation; constructed amenities such as day care centers, courtyards, computer labs, parks, playgrounds, clubhouses and gyms

Streets

Signage and Street Furniture

Lighting

Buffers and Defensible Space

Amenities

Included in master plan decisions are housing types.The developer must select detached(each house completely separated from its neighbors) or attached(each house connected to neighboring houses on one or two sides) styles. A house on a small piece of private land at one time represented the American Dream, but with rising land and development costs, many single-family detached houses are now built on very small lots. Three of the modern ways to meet market demand for detached homes are the following:
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ZONING AND SUBDIVISION APPROVAL

The modified grid pattern, where the house sits very close to the street with a larger back yard Garden or patio homes, where side yard setbacks are minimized so that nearby houses are very close Zero lot-line options, where the homes are built very close to one side of the property, leaving more open space on the other three sides

While a large, empty piece of land may seem a blank tablet, it is actually controlled by thousands of pages of regulations. If you are lucky or have purchased correctly, the land already will be zoned for its intended end use as a new home construction site. If zoning reviews for entitlement or density bonuses for providing affordable housing are offered by the jurisdiction, a developer must spend months and sometimes years applying for and receiving the appropriate zoning approvals. Even in cases where the desired zoning is in place, the new subdivision will be subject to a review process. Representatives of various governmental agencies will review, approve and modify the plan for the layout of the streets, any amenities, the various housing types and the general master plan. In many jurisdictions this scrutiny will require the services of a specialized attorney, civil engineers and architects, who will help you prepare the necessary documentation and will often represent you for a fee at various review-board meetings. These approvals are necessary prior to construction.

These three types of higher density detached housing may be clustered in or around a courtyard to further maximize the available land. In attached housing, duplexes or townhouses, the advantage of ownership of the structure remains while a significant portion of the land is commonly shared. The selection of housing style requires that you match the target groups demands with the design features in your homes. These design decisions will continue to evolve beyond conceptual drawings into a buildable set of plans. As you move through this process, it is extremely important to purchase accurate cost estimating services from an engineer or builder and to verify that you are still under budget before proceeding with a more advanced design.

STEP 4
SECURING FINANCING

STEP 5
BUILDING SPECIFICATIONS AND C O N T R A C T O R AWARD

With a site secured and a budget in place, you can apply for financing. It helps to think of financing needs in phases: predevelopment, acquisition, construction and permanent. Some funding sources may meet more than one need, but others will limit their support to one phase only. Most organizations look to foundations, such as The Enterprise Foundation, or nonprofit lenders during the early, riskier stages; as the project progresses they are able to secure commitments from conventional lenders and equity investors. Financing phases, uses and sources are described briefly below (further detail is given in the Sources of Funds section).

During this phase, the nonprofits architect finalizes house designs, and contractors bid on doing the construction. The nonprofit will have investigated potential bidders, learning about their reliability, quality of production and teamworking potential with the nonprofit. Select a pool of possible bidders, including only those who have built subdivisions in the past. Bidders must have the capacity to carry out the land development work (preparing the site for building by leveling the area and removing impediments; building roads, sidewalks and curbs) as well as build houses and build many at once. The nonprofit will then prepare and issue a Request for Proposals (RFP) to potential bidders. The RFP will detail exactly what is expected of the builder, based on building specifications drawn from the architectural planning. Any construction concerns particular to the nonprofit or its project (phasing construction to match pre-sales, for example, or utilizing local and minority residents as part of the construction team) must be part of the RFP .

Financing Phase Predevelopment Uses Architectural, engineering and consultant costs Land costs; title and legal fees Sources Foundation grants; nonprofit housing fund loans; program funds Nonprofit housing fund loans; banks; city program funds; grants Nonprofit housing fund loans; banks; city program funds; grants Banks; city program funds; grants for down payment and mortgage assistance

Acquisition

Construction

Construction and architectural costs Funds to buyer; repayment or conversion of acquisition, construction and predevelopment loans

Permanent

The nonprofit will select one of the bidders and negotiate a final contract. Make sure this contract results in realistic costs and time frames. Do not grab the low bid, only to find that midway through construction the contractor has to request more money and more time. The construction contract will have to be approved by construction lenders to the project.

STEP 7
CONSTRUCTION

STEP 6
MARKETING AND P R E-P U R C H A S E QUALIFICATIONS

This is the stage in which actual construction of the subdivision takes place. The role of the nonprofit is to monitor and oversee the builder, keeping the marketing and financing players informed of progress. Oversight has two components: scheduling and problem solving. First, construction is done according to a specific schedule, created by the builder and approved by the nonprofit prior to the start of construction. The builder will receive draws based on its progress. The nonprofit needs to have weekly construction meetings, confirming that everything is moving according to schedule. When timing begins to veer off schedule or costs off budget, the nonprofit needs to immediately find out the reasons and get the builder back on track. Problems caught early are easier to solve than those that get out of hand. Second, the nonprofit needs an experienced project manager to oversee the quality of building in the subdivision. This person tours the site frequently, always inspecting the work done when the builder requests a draw of funds. At the end of this phase, construction on the houses is completed. As part of the sales phase, potential purchasers view the houses prior to closing the sale and the builder deals with any problems or defects.

In this stage, marketing of the to-be-constructed homes begins. Some lenders will require that a specific percentage of the homes are pre-sold prior to the beginning of construction; in those cases marketing should begin at the end of the Master Planning stage. The nonprofit or a chosen realty firm will do marketing and intake. Either the nonprofit developer, real estate agent or another agency needs to qualify potential home buyers (determine that they are likely or not likely to obtain the mortgage financing necessary for purchase). This entails developing a pool of interested buyers who have been prequalified by short credit checks and a simple, one-page application. At the end of this period, each potential home buyer should have an individualized program that maps out the credit and home-ownership training they must fulfill, along with the down payment required to qualify for purchase. Marketing and qualifying will continue through the construction period and possibly after until all homes have potential and, ultimately, actual buyers.

STEP 8
SALES AND WARRANTY

When construction is completed and approved by all lending sources, the nonprofit assists the buyer in the initial transition to home ownership by helping at purchase and mortgage closing. The nonprofit may also provide home maintenance training for the purchaser. The builder provides warranty follow-up services for the home. At this stage the organization throws a party for everyone!

Organizational Roles
In subdivision project development, nonprofit organizations can play one of three roles: 1. Sponsor or co-developer 2. Developer with strong technical consultants 3. Developer with in-house expertise

ROLE 2
NONPROFIT AS A DEVELOPER WITH STRONG TECHNICAL CONSULTANTS

In this development model, the nonprofit organization handles the following tasks:
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Serving as the sponsor Finding land Submitting or assisting in submitting all funding and subsidy applications Selecting all professionals for the project Handling all financing and cash flow needs

ROLE 1
NONPROFIT AS A SPONSOR OR CO-DEVELOPER

This structure requires the least participation by the nonprofit. It leaves the real estate development work to another organization, either a forprofit or another nonprofit, that will do most of the work. You will receive a modest sponsorship fee for your efforts. The role of the nonprofit in this model includes:
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ROLE 3
NONPROFIT AS A DEVELOPER WITH IN-HOUSE EXPERTISE

Defining community interests Working with governments to obtain subsidy Handling a specific job, such as marketing Protecting own organizational interests

A development partner can bring the following resources to the effort:


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In this model, the nonprofit organization must have strong technical knowledge and experience in tax, financing, legal and construction activities. The model also requires a commitment to ongoing subdivision development to justify the high overhead costs associated with learning the business. For less experienced nonprofits the first option nonprofit as sponsor or co-developer is the best choice. Many times it is easier and safer to form a joint venture with an experienced developer of new subdivisions for your first project. In areas where your organization is confident of its skills and roles, it may consider taking on certain aspects of the project, such as marketing, pre-purchase counseling, subsidy financing or community land planning. A partner can be for-profit or nonprofit. Select partners who have been successful in their previous development efforts. You are not just looking for good ideas and someone who understands your mission; you are also in search of someone who will complete the project.

Cash and up-front development money Equity for land purchases A strong financial balance sheet Extensive subdivision development experience and experienced staff Reserve guarantees Strong ongoing relationships with architects, builders and engineers that ensure quality Back office support to ensure compliance with all rules and deadlines

The critical role of your nonprofit in a partnership is to define the characteristics of the residents you want to serve and to ensure that the finished project meets these residents expectations and needs. You should define the monthly housing costs that the projected residents can afford. In negotiations with a for-profit joint-venture partner remember that your contribution to the partnership is the government subsidy that you control or coordinate. Use this leverage to guarantee that low-income people are being served to the maximum extent possible, given the reality of total development costs. In negotiations with partners and consultants, fees should reflect the risk. The commitment of time, staff and resources in the predevelopment phase is a substantial gamble for you and your consultants. If you choose to be a sponsor or a partner, you are risking your good name. What is the value of that name in your community? If you are a well-known organization, your name alone can be worth thousands.
ROLES OF THE BOARD

COMMUNITY ISSUES

The board and staff should discuss and address the potential community response to subdivision development in general and to specific projects in particular. 1. Will a proposed project meet community opposition? 2. Do you have a plan in place to deal with potential conflicts? 3. Have you discussed any potential problems with key supporters? 4. What do you expect to be the response if you are building the first low-income housing development in a suburban school district with no low-income families? 5. How can you mitigate a less-thanfavorable response? Do not shy away from any project based on your anticipation of conflict in the community, but be prepared. Your board, if strategically formed by political and public relations concerns, plays an active role. By meeting with key individuals, politicians and appointed officials, members build or maintain positive support for your project.
AVOID CONFLICTS OF INTEREST

Your nonprofits board of directors will decide whether to develop single-family housing as a subdivision. The board ensures that your mission is being met and that the necessary resources are available. The board may also need to raise capital that the organization needs to begin or expand housing development, although other organizational structures may use a subcommittee designated for this purpose.

Board directors should not personally or professionally profit from the development activity. Do not use a law firm, engineer, builder or other professional on the board, even if the services are pro bono. This changes the deals dynamics and may hinder the staffs ability to negotiate in the best interest of the project and organization. The exception to this is a banking relationship. There are a limited number of banks involved in financing affordable housing, and the banks typically have several layers of decision making, reducing the direct involvement of a board member.

Staffing and Consultants


As developer the nonprofit will need experienced staff persons filling a variety of roles. What follows is a list of the roles, time allocations and required skills for an organization that produces 50 homes annually through subdivision development. Note that these fractions of FTEs refer to the amount of time each 50-unit project will consume. For example, the executive directors salary per year may range between $50,000 and $60,000, but a 50-unit project may only take one-fifth of his or her time.
Development Staff For 50 Homes Per Year Fraction of FTE allotted to program .20

Position/Role Executive Director Cost: $50,000$60,000

Critical Skills Required Strategic sense of local politics; negotiating and relationship-building skills; knowledge of housing development and finance

Senior Program Director Cost: $45,000$60,000

.25

Strong public and private financing abilities; team management experience; negotiating skills; strong writing and editing skills Financial analysis abilities; knowledge of financing programs and procedures; knowledge of construction; writing skills Record-keeping abilities; aptitude for details

Project Manager Cost: $30,000$40,000

1.00

Administrative Assistant Controller

.50

.25*

Experience with project accounting, capitalization and reserves Aptitude for details; knowledge of reporting formats

Bookkeeper

.25*

* Development phase only. As the inventory of operating projects grows, additional staff must be added. Note: Nonprofit organizations will generally have these other line items in their general operating budget: rent, utilities $10,000; phone $ 8,000; equipment rental (computers, copier, fax) $5,000; supplies (office, program, postage and delivery, printing) $10,000; consultants (auditors, public relations, fund raising) $25,000; travel and training $ 6,000; program expenses and staffing, if involved in social services or other programs as budgeted. FTE = Full-Time Equivalent

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CONSULTANT ROLES

In developing subdivisions, working with a great many consultants is typical. These include lawyers, accountants, architects and specialists in financing and structuring a deal. The work involved in putting together a subdivision is very detailed, and even the most experienced nonprofits use professional advice. A local nonprofit has many jobs. It is unreasonable to assume that staff can devote sufficient time to the intricacies of changing zoning ordinances, environmental regulations and other technical nuances of the development process. Good consultants are:
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Accountant Your project accountant, who is part of your development team, must have strong knowledge of issues involving land development and home sales. You should make sure the accounting firm can serve as an advisor on financial management issues. The accountant will help you set up a sound financial management system that gives your organization a clean audit and clear, timely reports on:
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Budget-to-actual income and expenses, which show line-item analysis by project and explain any substantive variations. They also explain steps to bring expenses in line with the budget. Cash flow, including a comparison of projections and actual performance. They also show sources of funding and the performance of each source.

Respected in your community or have regional or national reputations Well-capitalized and very experienced Successful in their previous development efforts

The following consultants are typical: Attorney Your attorney must be skilled in partnership negotiations and knowledgeable of land development issues. It helps if your attorney is also experienced in real estate and construction law. Look for one with a reputation for cost-effective service and consider establishing a fixed-price contract. Architect or engineer Your architect should be knowledgeable of subdivision development and the local zoning and code issues. He or she should also be cost-conscious, experienced in affordable housing development and willing to work as part of a team. Builder Your builder must have demonstrated experience in building subdivisions, preferably in fair-wage projects. Does the company have the capacity to continue work through delays in payment from city or state funding sources? Check references for the builder carefully, particularly from other nonprofits. Who are the companys subcontractors and suppliers? You may want to talk with them, as well as its bankers. Visit a current construction site. Is it clean? How many workers are on site?

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Development Costs
Following is a development budget itemizing all costs for a typical house within a 50-unit subdivision, based on an average house 3 bedrooms, 2 baths, 1,200 square feet.
Costs for a Typical House Within a 50-Unit Subdivision Average Per Unit LAND ACQUISITION Purchase price Title report and settlement fee Title insurance Transfer tax, document stamps & recording fee Environmental audit Survey Prepaid property taxes Subtotal Land Acquisition Costs LAND DEVELOPMENT Engineering Road construction Utilities and storm sewer Impact fees Subtotal Land Development Costs CONSTRUCTION COSTS Direct costs @ $52 per sq. ft. for 1,200 sq. ft. Hard cost contingency @ 5% Builders profit @ 10% Subtotal Construction Costs PROFESSIONAL FEES Plans and specifications Construction oversight Sponsors legal and audit costs Financial consultant Subtotal Professional Fees $ 6,200 150 175 100 400 225 50 $ 7,300

$ 1,200 2,200 3,050 2,000 $ 8,450

$ 62,400 3,120 6,240 $ 71,760

$ 1,400 800 100 300 $ 2,600 (Chart continued on next page)

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Costs for a Typical House Within a 50-Unit Subdivision (continued) Average Per Unit FINANCING COSTS Origination fee on purchaser mortgage @ 1% Interest on predevelopment loan $10,000 @ 3% for nine months Interest on private construction loan $73,500 @ 12% for 6 months
(Note: Predevelopment and construction loans are drawn down as needed. In this example, it is assumed that, on average, 60% of the principal amount of these loans are outstanding at any time.)

50 225 2,646

Subtotal Financing Costs OTHER SOFT COSTS Appraisal Application fee to subsidy source Other lender legal Marketing Prepaid hazard & builders risk insurance Utilities during construction Working capital/reserve Soft cost contingency Subtotal Other Soft Costs NONPROFIT DEVELOPERS FEE 6% of $94,186 TOTAL DEVELOPMENT COST PER HOUSE

2,921

275 15 50 200 200 150 200 65 1,155

5,651

$ 99,837

Actual line-item costs will vary considerably in different locales. Generally, though:
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Hard construction costs (in the budget above, direct construction costs and hard cost contingency) will be about two-thirds of the total budget. The developers fee will usually come only if the actual costs of developing the homes are at or less than the budgeted amount. If costs are higher, the developers fee may be needed to help make up the difference.

The amount of actual interest and utilities during construction depends on the length of the development period. This budget assumes a three-month predevelopment period and a six-month construction period; costs will be higher if these activities take longer than predicted in the budget.

Use this budget as a guide to the specific line items used for development cost budgeting, and as a model when creating a budget specific to your situation.

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Sources of Funds
Organizations generally encounter three different capital needs as they develop a successful lowincome subdivision housing project using taxcredit equity: predevelopment, acquisition and construction, and working capital. Purchasers will require mortgage and, usually, down payment or other financing assistance, which is discussed in the next section.
PREDEVELOPMENT FUNDS ACQUISITION AND CONSTRUCTION LOANS

The predevelopment period lasts until you actually close on an acquisition or construction loan. The major costs in this period involve analyzing buildings, applying for tax credits, paying consulting and professional fees, and covering staff expenses. In addition, landoption costs are included as a predevelopment expense. Except in a few hot markets across the country, the developer should achieve site control through a contingent contract using a note for the earnest money. This involves very little outlay of cash or interest payments prior to the initial settlement. Where this is not possible, the nonprofit may have to option the property. The nonprofit must provide from $2,000 to $10,000 for an option, funds that can be lost if the settlement does not occur within the contracted time period (often 12 to18 months). As noted earlier, national foundations, such as The Enterprise Foundation and some local foundations, often extend predevelopment loans or recoverable grants to finance up-front costs on an unsecured basis with or without recourse to the local nonprofit. You may decide to develop in partnership with an organization that has inhouse expertise and the capacity to pay some or all predevelopment costs.

Acquisition and construction loans (typically one loan for both purposes) are usually borrowed from the private banking system once there is a guarantee of a permanent mortgage. These relatively safe, short-term loans are drawn down after the work is completed, minus a 10 percent retainer based on the bank inspectors approval of the work completed. If low- or nointerest funds are available for acquisition and construction (often from city or state housing agencies), use them first to save interest expenses for the project.
WORKING CAPITAL

Inadequate cash flow is a major problem during the development of single-family subdivisions, so prepare your development cash flow budget very conservatively. Remember, many cash outlays are required prior to obtaining construction financing options on buildings, environmental surveys, preliminary drawings, market studies and attorneys fees. These costs can easily range from $45,000 to $100,000. Carefully estimate cash flow during construction. Will your financing sources keep pace with the demands of your contractor? Lagging payments can be a particular problem with public dollars. Is there a history of delays in public funding in your area? Calculate your cash flow needs month by month. What is the largest cash drain you may experience during the project? Work to eliminate it. Your staff CFO or controller should be involved in this planning process. The Community Development Library manual Developing Realistic Cash Fow Projectionscan help. l The best sources for meeting cash flow shortages are a foundation or corporate grant, a programrelated investment from a foundation or a line of credit from a lender.

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Purchaser Financing
Purchasers typically secure the funds necessary to buy a house from two sources: cash from the purchaser (down payment) and money from a lender (mortgage). Many lower-income households will not have sufficient cash for the down payment or sufficient income to qualify for the mortgage loan. As a result, cities and counties often have home assistance programs operated directly through public housing agencies or through funds granted to a nonprofit organization. The amount of public funds available is often based on the income of the home buyer (with an upper limit in most cases).
Monthly Housing Payment Calculation HOUSE PURCHASE PRICE (including all closing costs) Subtract any buyer subsidy by adding together any closing cost, down payment or second-mortgage grant programs available to potential purchasers. Subtract any cash down payment expected from the buyer. The mortgage amount a buyer will have to finance to purchase the house for $101,560. Based on a 30-year mortgage with 7 percent interest, this is the monthly mortgage payment on $65,060. Add the estimated monthly payments for property taxes and property insurance. This is the principal, interest, taxes and insurance (PITI), better known as a monthly housing payment. $101,560

Calculate hypothetical financing scenarios before starting your program to help you understand the economic constraints the program. of Establish a target income group and the number of units to be sold for your project. Then play with the figures until the numbers balance. For example, the more public funds available per unit qualifies households with lower incomes, but then fewer homes can be constructed and sold with the same amount of public funds. Here is one example of how purchaser financing is calculated.

$35,000 1,500

$65,060

$432 + $100

$532

To qualify to purchase this house selling for $101,560, a household must have a gross income (income before taxes) between $19,344 and $22,800 annually to pay $532 a month for the PITI. These figures are based on the general guidance of mortgage lenders that the payment is between 28 percent and 33 percent of the buyers monthly gross income.

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Construction Types
The development team will select a method of construction from the following options: stickbuilt, modular or panelized construction. The final choice will depend on:
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Project size Site constraints Worker availability Market acceptance Distance to manufacturing plants Local code acceptance

Stick-built housing has the widest market and local code acceptance. In areas of the country with hurricane and earthquake requirements or specialized design standards, using stick-built construction is usually the easiest way to comply with local standards. Modular Construction Large sections of the house are built in a factory and shipped to the site for assembly. These large boxes are set on a permanent foundation, fastened together, hooked up to utilities and finished for final occupancy. Modular projects work especially well in mid-sized developments (15 or more units), but any project can benefit from the factorys bulk purchasing of materials. Modular construction may provide savings in architectural fees and the potential for decreased construction time, but these advantages can quickly evaporate when developers decide to finish basements. Modular construction is a great option when workers are difficult to find or seasonally available. Usually the design personnel have excellent stock plans and target middle-income home buyers. It is not recommended that you hire an architect to help redesign the standard modular product to meet your clients needs. Use an engineer to lay out the site, design the foundations and provide job site inspections. The modular plant must be within 250 miles of the development site or the cost of shipping the unit can seriously decrease any cost advantage. In some jurisdictions often in urban areas the local code officials have little if any experience with modular construction. This can result in significant delays in project approval.

Stick-Built Construction Carpenters take individual pieces of lumber and connect them to create a building on site. This usually involves using some pre-built components such as roof and floor trusses, pre-hung doors, pre-manufactured kitchen cabinets and factory-produced staircases. This construction method works well in very small developments (one to five units) and very large developments (more than 70 units). In small developments with low overhead, family-owned-and-operated contractors can often deliver a product at significant savings. On large sites, the field workers and subcontractors become familiar with the individual models, gaining great efficiency in both production time and cost. Stick-built construction is the most labor-intensive building process and is therefore dependent on a pool of relatively skilled and available carpenters, roofers, drywallers, etc. Be aware that in cities surrounded by rapidly growing suburbs, it may be difficult to compete for carpenters and subcontractors when $200,000 and $300,000 houses are being constructed nearby.

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Panelized Construction Large components, usually walls, kitchens and bathrooms, are manufactured in a plant and transported to the building site. There they are used in conjunction with traditional stick-built methods to construct a home. Panels may either be open wall or closed wall. In a closed-wall system, sealing has been applied to the interior finish (usually made of gypsum board) in the plumbing, electric and insulation areas before field installation. The exterior walls of stressed skin are created using plywood or other sheathing chemically adhered to a foam core. These panels are exceptionally well insulated and energy efficient. However, stressed skin is often unfamiliar to local building inspectors and usually requires extensive scrutiny before being approved for construction. Panelized construction makes sense where there is a local factory with a relatively large repertoire and the local contractors are highly familiar with the panelized system. Do not use a closed-wall panelized system unless the product has been built at least twice before, each time with a minimum of eight units of the model you are choosing. Just like the first released version of computer software, the first released version of closed-wall panelized units may contain a great number of bugs. Unfortunately, these bugs can be very difficult, and expensive, to fix once installed. Code officials generally look at open-wall panelized construction in the same way as stick built, while closed-wall panelized construction receives the same reaction as modular. Stressed skin is often viewed as a foreign product that requires extensive scrutiny and secondary opinions prior to being approved for construction.

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Marketing and Sales


The availability of buildable land can lead nonprofits to consider large-scale construction. Market preferences and available financing may offer the potential for a developers fee. Given the size of the development, normal lender concerns and the many options available, a formal market study is required during the project feasibility stage. The market study must answer the following four questions: 1. How big is the total market your local area in and what percentage can your project capture? 2. What are the demographic and lifestyle characteristicsof the chosen target market within your household income range? 3. What housing lifestyle preferencessuch as , types of developments, location, amenities and services, does your target group demand? (This answer must accurately identify the difference between demand and desire for a new home.) 4. Based on local development cost, the competition and the economic factors shaping the target markets buying power, what is your projects absorption ratewithin a given period?
KNOWLEDGE OF YOUR MARKETS D E M A N D IS ESSENTIAL

How many choices will you offer buyers in floor plans and amenities? Compare what the competition offers and make sure you offer buyers at least the same, if not more, value.
EARLY MARKETING PLANS

Marketing plans are completed early on for three reasons: to identify and coordinate the types of advertising activities (groundbreakings, open houses, radio spots, etc.); to establish formal underwriting standards and process; and to determine the roles of any partners in the project (housing counseling agencies, real estate agents and lenders).
Timing Your Sales
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When do you begin offering the homes for sale? When do you sign contracts? What are the consequences of those decisions? Early marketing efforts risk angering customers and diminishing the confidence of lenders and the general public if the houses are not delivered on time at the advertised price. Signing sales contracts early reduces the risk that you will be unable to sell your homes, but your nonprofit could lose money if construction costs increase during development after you have already agreed to a specific sale price. Waiting to sign contracts risks losing interested buyers and, if lenders restrict building based on presale of the homes, will hold up the construction schedule.

Targeting an underserved market and offering new housing does not guarantee that you will sell your homes. You are competing directly with new rental projects, renovated housing and existing options. Strategic research about location, price, amenities and timing is required. This begins with total development costs. If the target market is not willing to purchase at actual cost, what subsidized sales price will create demand? Sales price and monthly housing cost must be balanced with site-selection concerns. The convenience and quality of shopping, recreational activities, transportation, day care and schools will have an enormous impact on your ability to sell affordable houses.

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MARKETING MATERIALS

Even if you have a model unit for prospective buyers to inspect, a brochure or portable display (preferably in color) that shows your homes and highlights features is recommended. A complete marketing packet is a good idea. It should contain the project name, the developer and a number to call for more information, along with a color site plan, drawings of multiple views of the various house styles and floor plans, and drawings of landscape and entrance options. Use it to sell your homes to buyers, the community and the banks. Keys to successful marketing:
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Offer a variety of house styles and floor plans. Give buyers options when possible, such as entrance layout, colors and landscaping. Use a diligent sales staff. Deliver a quality product, on time. Create a pre-qualified pool of purchasers.

Keys to successful sales:


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Maintain contact with pre-qualified purchasers throughout the construction period, updating them on the homes and ensuring that they stay qualified for financing. Have the right information on down payment, closing costs and other buyerassistance programs. Assist purchasers through the closing process.

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Community Interaction
During the development process, many constituencies will surface. The nonprofit real estate developer must pay very close attention to the needs or demands of these groups. Each is important, and all interact informally and are influenced by the comments of others. Many projects have been delayed or entirely derailed by community opposition, even projects sponsored by established, politically connected organizations.
WORK WITH YOUR NEIGHBORS INVOLVE NEIGHBORS EARLY IN THE PROCESS

Remember that neighbors of the vacant land will be neighbors of your residents. Work with them throughout the development and initial occupancy phase. This will help your residents feel welcome in their new neighborhood. But remember that most people do not like change. Even replacing a vacant lot with new homes may cause complaints. Expect to make some design changes in response to neighbors. Neighbors in the broader geographic area may be more supportive because they see the development as the removal of an eyesore or an increase in business opportunities.
AVOID OPPOSITION, IF POSSIBLE

Regardless of whether you expect the development to cause major conflict, involve neighbors and supporters early in the process. Some NIMBY is a cover for racism, and it is helpful to have these neighbors expose their opinions early and loudly so the public can reject them. Take some friends to meetings with you. You will feel better with support in the audience. If you believe that your project will be controversial, seek help from your public donors and organizations with similar goals. Make a special effort to involve public officials, briefing them early and often. And do not forget informal community leaders, like the woman on the block who knows everybody.

A particular market constraint often affecting affordable housing producers is NIMBY (Not In My Back Yard). This can take the form of legal restrictions (numerous approvals required, high amenity requirements, flat-rate impact fees) or informal opposition. The approval process may be a basis for legal challenge, which most developers do not have the time and money to fight. If NIMBY is a continuous constraint, you may have to organize with civil rights groups, other developers and the business community to seek political or judicial solutions. If this fails, look for projects in other neighborhoods or jurisdictions.

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Risks and Their Solutions


PURCHASER FALLOUT INEXPERIENCED DEVELOPERS

In a program where the purchasers buy their homes before construction begins, the potential for cold feet or sudden financial hardship can spell disaster. Buyers can lose jobs, back out when faced with the realities of a 30-year mortgage or reject the finished home. When a delay in tenancy happens, somebody must cover the costs of carrying the unsold home. Solution Organizations should develop a large pool of pre-approved purchasers to whom the completed property can be re-marketed. Building a number of homes on spec and hoping to market them once completed is tempting, but in rebounding neighborhoods, this can lead to long sales periods with little certainty about the final purchase price.
CASH FLOW PROBLEMS

Nonprofits new to subdivision development will be making decisions and facing risks not yet encountered by the organization. Solutions Plan carefully! Accurate feasibility studies of land development costs, formal market studies of actual demand, environmental assessments to identify the presence of environmental hazards and researching the availability of utilities will help control this risk.

Most of the fees generated from developing subdivisions are only available when the homes sell. Until then, the nonprofit developer must front overhead and technical service costs. Solution Many organizations obtain an operating line of credit to pay for up-front development costs. And many try to secure an operating subsidy for administrative staff that is not dependent on the sales of the new homes.
LOW APPRAISALS

There may be few, if any, comparable new construction units when the program begins. This can lead to very low appraisals for the completed home. Solutions Low appraisals result in private mortgages that are lower than the purchase price. Public subsidies often provided as second mortgages can bridge the gap between the private mortgage and the amount needed for purchase.

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Notes

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Notes

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Notes

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THE ENTERPRISE FOUNDATION

The Foundations mission is to see that all lowincome people in the United States have access to fit and affordable housing and an opportunity to move out of poverty and into the mainstream of American life. To achieve that mission, we strive to:
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Build a national community revitalization movement. Demonstrate what is possible in low-income communities. Communicate and advocate what works in community development.

As the nations leader in community development, Enterprise cultivates, collects and disseminates expertise and resources to help communities across America successfully improve the quality of life for low-income people.
ACKNOWLEDGMENTS

Authors: Armand Magnelli, Deborah Webster, The Enterprise Foundation; Bob Santucci, consultant Contributors: Bill Batko, Carter Cosgrove + Company, Ben Hecht, Catherine Hyde, Jane Usero, Benjamin Warnke
SPECIAL THANKS

Research and development of this manual was made possible by the National Community Development Initiative, which is a consortium of 15 major national corporations and foundations and the U.S. Department of Housing and Urban Development, and scores of public and private organizations. NCDI was created to support and sustain the efforts of community development organizations.
FOR MORE INFORMATION The Enterprise Foundation 10227 Wincopin Circle, Suite 500 Columbia, Maryland 21044-3400 tel: 410.964.1230 fax: 410.964.1918 email: mail@enterprisefoundation.org For more information about The Enterprise Foundation or the Community Development Library, visit us at www.enterprisefoundation.org. To review our online community magazine, check out www.horizonmag.com.

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