Non-profit housing developers build affordable housing for individuals under-served by the private market. The non-profit housing sector is composed of community development corporations (CDC) and national and regional non-profit housing organizations whose mission is to provide for the needy, the elderly, working households, and others that the private housing market does not adequately serve. Of the total 4.6 million units in the social housing sector, non-profit developers have produced approximately 1.547 million units, or roughly one-third of the total stock.Bratt, Rachel (2009). Should We Foster the Non-Profit Housing Sector as Developers and Owners of Subsidized Rental Housing. Joint Center for Housing Studies. Since non-profit developers seldom have the financial resources or access to capital that for-profit entities do, they often use multiple layers of financing, usually from a variety of sources for both development and operation of these affordable housing units.

Non-profit development vs. for-profit development Both the non-profit sector and for-profit sector build affordable housing, although missions, operations and financial and technical abilities differ. The core difference between a for-profit and a non-profit organization is that for-profit entities operate to produce returns to owners or shareholders, whereas non-profits either reinvest profits into the organization and/or donate money to serve their mission. This inherent difference of organizational objective dictates the operational strategy of their projects; for-profits are likely to create affordable housing that maximizes profits, where non-profits aim to serve the most vulnerable populations. Examples of strategies that for-profit entities use to maximize profits include locating their projects in neighborhoods with strong rental markets, mixing market-rate units into their buildings to increase operating income, and developing an exit strategy to maximize sale proceeds from their building. Conversely, non-profits are more likely to develop in distressed neighborhoods, dedicate all of their units to low-income tenants and operate projects for the long-term in order to fulfill the mission of affordability.Urban Land Institute (2005). ULI Community Catalyst Report Number 3: Best Practices in Production of Affordable Housing. Washington D.C.: The Urban Land Institute.

As a result of their business strategy, non-profits lack the financial and technical resources of for-profits, thus, forcing them to rely on multiple funding sources such as public and private grants and subsidies in order to cover development costs. Using multiple funding sources is risky because it creates complex financing which can be both timely and expensive. Most of these public and private sources exist exclusively for non-profit entities and although this provides an advantage for the non-profit industry, for-profits would often refrain from spending the uncompensated time and effort for such complicated deals.

Issues during pre-development Pre-development efforts such as acquiring land, forming partnerships, performing due diligence and gaining entitlements is the important first steps developers make before a project is launched. A major problem for non-profit developers is that their deals are thinly capitalized and funding pre-development costs is difficult; these costs include architecture, engineering, site control and feasibility analysis. Non-profits also confront marketability, feasibility and financing problems that usually deter for-profit developers. Pre-development is essential for packaging a project proposal, and funding is necessary to work through any issues during this time. Lack of pre-development funding can lead to weak project proposals and failure to seize opportunities to acquire land.Walker, Christopher (1993). Non-Profit Housing Development: Status, Trends and Prospects. Housing Policy Debate, 4(3),369-414. Also, lack of funds increases development risks and decreases the likelihood of attracting capital investors or securing loans from private banks.

Beginning in the 1980s, national, state and local intermediaries formed to improve the financial and technical plight of non-profit housing developers. These organizations improved the mobilization of capital including project and operating support, pre-development finance, and provided technical assistance for finance packaging. As a result, non-profit developers began to increase their technical competence and reduce the risk to potential public and private sector investors.

National intermediaries include organizations such as the Local Initiatives Support Coalition (LISC), the Enterprise Foundation, Neighborhood Reinvestment Corporation (NRC) and the Housing Assistance Council (HAC). These organizations help non-profit housing developers access tax credits, corporate equity investment, secondary mortgage markets and lender commitments as well as offering training courses on real estate development and finance and community organizing and social service provision. Furthermore, these groups help non-profits form partnerships with each other and public and private parties, helping to foster support and funding for non-profit housing development.

Ownership

Non-profits generally form partnerships to develop and own affordable housing projects. Some considerations that non-profits evaluate before creating an ownership entity include the ease and speed with which decisions can be made, efficient provision of property management operations, and the number of investors required to meet equity needs and investment objectives of the investors relative to project cash flow, appreciation, and attitudes towards personal liability. Furthermore, impacts of tax considerations for the ownership entity itself as well as individual investors are also evaluated; this includes apportioning ordinary income liability and capital gains liability.Rolfe, G. October 2011. Program Ownership. Real Estate Development. Lecture Conducted from the University of Washington, Seattle, WA.

Forms of legal ownership structures that non-profits create include general partnerships, limited partnerships and limited liability companies (LLC). In a general partnership, two or more entities come together to form a new business entity where each partner is jointly and severally liable for all legal and financial obligations. Also, each member has a right to participate in all partnership decisions unless specified otherwise in the partnership agreement. Partnerships are not tax entities, so all tax consequences are passed directly to individual partners; partners agree to shares of tax consequences, as well as cash flow and appreciation of the project. Limited partnerships are similar to a general partnership except that one or more partners act as a general partner, and the rest of the partners are limited partners. Limited partners are treated differently than general partners in that they are only liable for the capital invested and cannot participate in routine operations or decisions of the partnership without losing their limited liability protection. The partnership agreement defines the responsibility of each partner and how the share profits and tax consequences. An LLC combines the advantages of a corporation for personal liability purposes (liability is limited to the amount of capital invested) and those of a partnership for tax purposes (the entity is not taxed).Brueggeman and Fisher (2011). Real Estate Finance and Investments (Fourteenth Edition). New York: McGraw-Hill. 575-577.

Financing Since non-profits lack the funds to develop and operate their buildings they seek funding from external sources such as local, state and federal governments and private entities. Projects often have layered subsidies in the form of equity, debt, grants and tax concessions (non-profits are tax-exempt entities per section 501(c)(3) of the IRS tax code).Internal Revenue Service. Exemption Requirements-Section 501(c)(3). Accessed December 6, 2011.

Federal

Low-Income Housing Tax Credit

Through LIHTC, investors receive a tax shelter of one dollar ($1) for every tax credit received over a 10-year period. The price of individual tax credits may vary and does not necessarily have to be a 1:1 exchange. The dollar amount of tax credits available to a state is determined by that state's population. Developers apply to state agencies, such as a state Housing Finance Agency, for allocation of tax credits. After receiving the tax credits, the developer then sells the credits to investors. No less than 10% of a state's tax credit allocations must be allocated towards housing development by non-profit organizations.

When selling LIHTCs, developers typically enter into a limited partnership (LP or LLC) with an investor (see discussion above regarding ownership) where the investor becomes 99% partner. While LIHTC can be used to entice investors to a project, they seldom cover total development costs and developers must find additional sources of "gap financing".

Section 8

Currently, the Housing Choice Voucher program (through Section 8) provides funds to Public Housing Authorities (PHAs) which pay single and multi-family homeowners the difference between 30% of a tenants’ income and “fair market rent” for providing affordable housing. There are two methods of distributing Section 8 funds: through project-based assistance and through tenant-based assistance. Non-profit organizations are not directly allocated project-based assistance; therefore, a partnership with a PHA is required to take advantage of this program. PHAs may use up to 20% of their voucher allocation towards project-based vouchers.

For non-profit developers that own the land where their housing development is located, Section 8 generally affects a project's income since rental subsidies are being provided. Project-based vouchers allow owners to dedicate a portion or all of their property for affordable rental housing and receive subsidies for doing so. In the event a tenant decides to move out of a subsidized unit, that unit remains affordable. In contrast, with tenant-based vouchers, the subsidy is tied to the tenant, thus the tenant may move from one household to another and still be eligible for housing assistance.

Section 202 & Section 811

Section 202 and 811 are HUD programs that provide capital grants for non-profits to finance the construction, rehabilitation or acquisition of supportive housing for the elderly (Section 202) and the disabled (Section 811). These programs ensure that non-profit owners of elderly and disabled housing under these programs will not have to pay for long-term financing, by eliminating the need for debt and rental subsidies in order to support very low-income tenants.U.S. Department of Housing and Urban Development. Section 202 Supportive Housing for the Elderly Program. Accessed December 4, 2011.U.S. Department of Housing and Urban Development. Section 811 Supportive Housing for Persons With Disabilities. Accessed December 4, 2011.

Federal pass-through The following funding programs described are provided by HUD, but allocated to states and local jurisdictions for distribution to projects. Housing developers apply for funds through the states and local jurisdictions; however, the subsidy funding actually comes from federal monies.

Community Development Block Grant