Let me give you an example
of a private developer who wanted to build a ten unit market rates apartment building. Lets assume the cost will be $125,000 per unit. The total cost will be $1,250,000 and just to make it simple assume there is no down payment and the bank financed the whole project.
At the completion of the project the owner will need to pay back a mortgage of $1,250,000. Very simple… On the topic of mortgages, it might be worth learning about selling mortgage notes, especially if you’re a person or entity collecting loan payments looking to exchange them for a lump sum of cash today, instead of holding onto the loan over a long period of time – you can find more info about this online.
Now consider a developer that says they will make this same 10 unit building “affordable”. They go to the City of Worcester looking for HOME funds and any other funds, the Commonwealth of Massachusetts and anyone else looking for “affordable housing monies”.
It will take time but after couple a couple of years, the affordable housing developer is able to line of $2,o00,000. The key is that this $2,000,000, you do not have to pay back as long as you rent to qualified tenants. This project might cost $3,000,000, 267% more then the private developer, but you will only have to pay a mortgage back on $1,000,000.
Although this same project cost $1,750,000, the affordable housing developer actually has less to pay back, $1,000,000 versus $1,250,000. It gets better, the developer of the $3,000,000 project typically has a 10% development fee so they get $300,000.
Let me say that again, the “affordable” housing developer
- has a cost of $3,000,000 versus $1,250,000
- ends up with lower mortgage of $1,000,000 versus $1,250,000
- $300,000 put in their pocket today while the private developer gets nothing.
Do you understand now why these projects are so popular and why we have so many projects throughout the City of Worcester? Cap all projects at 25% affordable and support projects like Winn all day long.
