NEWS & INFORMATION

Considerations for Nonprofits Entering Affordable Housing

Considerations for Nonprofits Entering Affordable Housing

By Dan Hubbard

For numerous nonprofit organizations, the realm of affordable housing presents an enticing opportunity to make a significant impact. By facilitating stable housing for the communities they serve, nonprofits can further their missions and provide invaluable socio-economic stability. Additionally, effective affordable housing initiatives can generate revenue and fees, aiding nonprofits in offsetting program expenses and bolstering their financial standing. At face value, it appears to be a mutually beneficial arrangement.

However, delving into affordable housing means navigating a landscape dominated by full-time investors and profit-centric mentalities. This presents a fundamental disparity between the altruistic focus of nonprofits and the profit-driven motives of their for-profit counterparts. Such a disconnect lays the groundwork for common pitfalls that nonprofits must be vigilant about from the outset of any affordable housing endeavor.

Nonetheless, nonprofits need not be deterred. Many have successfully embraced affordable housing development and significantly furthered their missions by forging effective partnerships with full-time investors. Here's a closer examination of four key strategies nonprofits should consider when contemplating involvement in affordable housing development:

Approach with Clarity:
Nonprofits must acknowledge that partnerships in affordable housing come with obligations. This entails meticulously assessing partnership agreements as they take shape, ensuring a comprehensive understanding of all terms before signing. Every stakeholder within the nonprofit should be well-versed in the agreement's nuances, fully comprehending the organization's commitments.

Investors expect clear delineation of how the development will be managed, with specific emphasis on anticipated returns on investment. Nonprofits must maintain focus not only on the social impact but also on the financial outcomes, recognizing the primacy of these expectations for partners to avoid potential setbacks.

Realistic Assessment of Capacities:
Successful ventures in affordable housing necessitate a candid evaluation of a nonprofit's operational capabilities. Organizations must honestly appraise whether they possess the requisite resources and mindset to effectively oversee a venture that essentially operates as a for-profit entity within their structure. While financial institutions often have dedicated departments for aspects like budgeting and tax considerations, nonprofits—typically lacking experience in these domains—are thrust into roles as developers and managers with ultimate property oversight.

Nonprofits must determine if they have the internal capacity, including staff, tools, and expertise, to fulfill the responsibilities of effective property management. This might involve enlisting the services of external property management firms or enhancing the skill sets of internal staff through training in financial procedures.

Cultivate the Right Team:
With a clear understanding of partnership dynamics and organizational strengths and weaknesses, nonprofits can assemble a proficient affordable housing development team. This team typically comprises an experienced CPA, legal counsel, and a general contractor or architect with multifamily housing expertise.

Syndicators play a crucial role in connecting nonprofits with potential investment partners and aiding in the evaluation of various options. Housing consultants offer invaluable guidance, particularly for organizations less experienced in affordable housing development, helping establish initial processes and enhancing overall understanding.

The importance of forming this team early cannot be overstated. Nonprofits should leverage this expertise during the partnership agreement drafting phase, as team members often phase out post-project initiation. Gaining insights and expertise before this transition is essential.

Anticipate Potential Ramifications:
Effectively navigating the affordable housing landscape involves acknowledging potential deviations from the plan. Failure to meet development milestones outlined in the partnership agreement may necessitate repayment of previously disbursed development fees to investors. In severe cases, the nonprofit's involvement may be called into question.

Nonprofits should not presume leniency from lenders or investors at any stage. Unrealistic expectations or organizational inertia can imperil both the development's future and the nonprofit's standing.

Harnessing the Potential of Scale:
Nonprofits that excel in affordable housing development often find subsequent initiatives progressing more smoothly and efficiently. Establishing robust processes, building internal capabilities, and fostering strong partnerships can transform subsequent ventures into more profitable and successful endeavors. Scaling operations in this manner can confer a substantial organizational advantage.

Taking a Long-Term View:
Nonprofits should adopt a long-term perspective regarding early affordable housing endeavors. Initial challenges and potential stumbling blocks should be viewed as valuable learning experiences rather than sources of discouragement. The outcome will be more prosperous developments that fortify a nonprofit's financial stability and advance its social mission.

If there are any questions that Dan can answer for you, please email info@preparednonprofit.com.