Costs and Financing

Financing affordable housing is a challenging and complex undertaking. Even after acquiring a site, navigating neighborhood concerns, and gaining local approvals, a successful affordable housing project requires the nimble assemblage of a financial package that includes contributions from local, state, and federal programs; subsidized loans of all shapes and sizes; and conventional debt. And though the national need for affordable housing grows every day, resources remain scarce. Competition for those resources is intense, leading to ever more creative financing arrangements for affordable housing projects, including those with green building features.

The multiplicity of financing sources for affordable housing is matched only by the multiplicity of benefits, described throughout this book, that green affordable housing delivers to the community. However, it is an axiom of green affordable housing development, and much of green building development in general, that there is a temporal and a categorical mismatch between funds and benefits.

On the timing side, while financing is available for the up-front costs necessary to build an affordable housing project, the benefits are delivered only after the project is completed. And while the sources can all be accurately quantified in dollars and cents, only some of the benefits of green affordable housing, such as utility savings, can be easily quantified. Other direct benefits, such as lower incidence of respiratory illnesses, are harder to measure in dollar terms or are difficult to ascribe solely to a particular affordable housing project. This latter difficulty is particularly acute when considering the regional environmental benefits, such as avoided stormwater runoff or reduced waste going to landfills, of a specific green building project.

In terms of categories, there is often a disconnection between those who invest in green building features and those who ultimately reap the benefits. Affordable housing developers investing in energy-efficient technologies often have little or no ability to recover the investment through higher sale prices or increased rents. This is because rents and sale prices are fixed by government lending or tax credit agencies. As a result, the increased first cost of green features is often seen as taking money from future development projects. This makes many types of green affordable housing financing fundamentally different from market-rate for-sale housing, where the builder can expect to recover extra green investments in the form of increased sales prices or higher rents.

The successful financing of green affordable housing relies on creating a closer alignment between who is making the investment and who is ultimately deriving benefits. This chapter looks at ways affordable housing developers—and those who support them—can seek this realignment of costs and benefits in practical and effective ways by explaining methods of:

• Expanding the definition of cost to include concepts of life-cycle costing, payback, and return on investment

• Determining long-term value—and who derives that value—in order to present a more complete financing picture

• Balancing who benefits from the green features with how they are paid for

• Clarifying how the realignment of costs and benefits can alter the design process

• Conducting a five-step process for assembling a green-friendly financial structure


Figure 5.1 shows the vast array of financing sources for affordable housing. Within these programs—all of which have excess demand for a limited supply of resources—three basic rules stand out for those who want to understand how to pursue green affordable housing.

• Rule 1: It is critical to recognize the difference between equity and debt. Many of the programs provide equity to a project. In affordable housing development, equity usually is not "paid back" to the investor but instead comes in the form of tax credits (which are used to generate equity), grants, or rebates. The amount of equity is not dependent on operating costs and is usually combined with some form of long-term debt.

FIGURE 5.1. Affordable housing funding sources chart.

FIGURE 5.1. Affordable housing funding sources chart.

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