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This is a very basic introduction to financing Cooperatives and other forms of Affordable Housing. But when you understand this, you'll at least be able to understand what consultants are talking about.

also see: Fifty Ways to Finance Your Co-op

1. Development Budget 

 Known as "Development Pro Forma" or "Sources and Uses." Like all good budgets, has Income and Expenses.

Sources (Income) - There are two types of sources: debt (which you must pay back) and equity (cash - which you do not have to pay back. Note that most affordable housing developments borrow money twice. First, the construction loan to buy the land and pay for the construction. Then, the permanent financing to pay back the construction loan.

Uses - All of the development costs. Includes:

                                Acquisition (of the existing land and buildings)

Hard Costs (construction, and at least 10% construction contingency)

Soft Costs:long list, including architecture, development consultant, legal, permits, fees, interest and other costs during construction period, finance costs, etc. Also often includes "capitalization" (startup cash) for reserve funds.

            Total of all development costs is "TDC" for Total Development Costs.

2. Operating Budget  

also known as Operating Pro Forma.

Income - Main income is usually rental income (or carrying costs), which should be the total possible rental income less 5 - 10% for vacancies and non-payment. Could also include commercial rental income, laundry, parking, and interest.

Operating Costs - Another long list, including management, common utilities, legal, taxes, insurance, maintenance, normal repairs, and payments to reserve funds. People often refer to per unit operating costs (which are almost always more than what you'd expect) - ranging from $3,500 per unit per year up to about $8,500.

Income minus operating costs is Net Operating Income or NOI. 
Debt Service - Payment on loans ("debt" in #1 above), is paid out of NOI.

Net Operating Income        =               Debt Service Coverage.
Debt Service

DSC should be at least 1.10, and usually 1.15.

3. Other Important Ideas

Reserve Accounts - money that is put aside for when necessary.

Replacement Reserve - for major repairs. Traditionally $250/unit is put into RR per year, but this is really inadequate.

Operating Reserve - for times when units are vacant for long periods, or operating deficits caused by other reasons. Should be about 3 months of annual operating costs.


Affordability is usually defined in terms of the number of households in a development that belong to any of three income groups: low, moderate and market (sometimes referred to as very low, low and market).

Low Income - households with total annual income less than 50% or 60% of the median income for households of the same size for this geographic area.

Moderate Income - households with total annual income less than 80% of the median income for households of the same size for this geographic area.

Market Income - households with total annual income more than 80% of the median income for households of the same size for this geographic area.

"Mixed Income" developments are developments that have market units and low or moderate units.

Developments that participate in almost any housing program cannot charge low and moderate income people more than 30% of their adjusted household income for total housing charges (including utilities) every month.

There are many ways that developments are made affordable.

Equity programs contribute equity to a development. This reduces the need for debt, which in turn reduces the need for rental income.

Interest Subsidies, or Below Market Interest Rates ("beamers") reduce the interest on debt, reducing the required rental income.

Rental Subsidies help occupants pay rent every month.

Major Affordability Programs 

All of these programs are competitive and all have different restrictions on how they are used.

bulletHOME - a federal program, administered by cities and towns, that can be used for equity, debt or rental subsidies.
bulletHOPE - a federal program, being phased out, for government-owned buildings.
bulletCDBG (Community Development Block Grants) - a federal program, administered by cities and towns that is used to fund human services, infrastructure, and, sometimes, affordable housing (debt or equity).
bulletHDSP ("Heads Up") - The version of CDBG available for affordable housing in small cities in Massachusetts.
bulletHousing Finance Agencies - Provide  BMIR for afforable housing. Also Federal Home Loan Bank and others for US. Especially larger developments (20 units or more).
bulletLow Income Tax Credits, or syndication - A costly, difficult, inefficient and bureaucratic program, but one of the only ways of getting significant amounts of equity into affordable housing.
bulletSection 8 - federal rental subsidy. Can be mobile (move around with person) or site-based (stay with one apartment). Difficult to obtain.
bulletOther - There are lots of other miscellaneous or no-longer-available programs, including Weatherization, MRVP (aka ch. 707), RDAL, SHARP and others.



Unless otherwise indicated, copyright 1999 ARCH. All rights reserved.
Revised: October 02, 2003.

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