low income housing tax credit

How Developers Build Affordable Housing and Make Money (Inside the Low Income Housing Tax Credit)

Affordable housing is one of the most talked-about subjects in real estate right now, and almost nobody understands how it actually gets built. Here's the puzzle: how does a developer pay market rate for the land, market rate for construction, and market rate for design, then turn around and rent that apartment for $1,100 a month and still make money?

I sat down with my good friend Evan Holladay of Holladay Ventures to get the real answer. We walked through Stonebridge Lofts, his brand-new 311-unit community in Goodlettsville, about 20 minutes north of downtown Nashville, and he broke down the entire capital stack for me. The engine that makes it all work is the low income housing tax credit, and once you see how it fits together, affordable housing development starts to make a lot more sense.

Oh, and there's a moment in here where the construction budget came back $8 million too high and nearly killed the whole deal. We'll get to that. If you're serious about commercial real estate investing, this is one of the most creative corners of the business.

Stonebridge Lofts, By the Numbers

311 units

1, 2, and 3-bedroom affordable apartments

~$70M

Total development cost

99 years

Committed affordability on the community

Meet Evan Holladay and Stonebridge Lofts

Evan is one of those developers who's actually on a mission. His whole company, Holladay Ventures, is built around solving the housing crisis, and Stonebridge Lofts is the perfect example of what that looks like when it's done right.

It's a 311-unit community with one, two, and three-bedroom apartments where families can actually afford to live. But here's what makes it interesting to me as a broker: he put over 11,000 square feet of ground-floor retail out front, plus a 5,000 square foot clubhouse, a pool, and a playground. This isn't a housing project. It's a real community.

The retail was a choice, not a requirement. Evan didn't have to do it. He did it because mixing uses, retail and living in the same place, creates value all around. The city of Goodlettsville wanted activation on Main Street, and Evan wanted placemaking. When you can tell a resident "you could live here and work here," you drive value for the property and the people in it. That's a lesson straight out of investing in retail, and it applies whether you're building 300 apartments or buying your first strip center.

The Capital Stack That Makes It Pencil

Here's where it gets good. The reason affordable housing works financially comes down to how the capital stack is built, and it looks nothing like a normal underwriting exercise on a market-rate deal. Evan breaks it into three pieces.

About 40% is tax credit equity. This is the low income housing tax credit doing the heavy lifting. The project qualifies for credits, and Evan sells those credits to investors like PNC or US Bank in exchange for cash. More on exactly how that works in a second.

About 50% is permanent debt. And it's better debt than you'd get on a normal deal. Because it's tax-exempt debt, the lender doesn't pay taxes on the interest income, so the rate comes in roughly 100 basis points below a typical commercial mortgage. Evan's standard deals right now run a 40-year amortization with a 1.15 debt service coverage ratio. Those are terms most of us would kill for.

The last 10% is the gap filler, and it's the hardest part of the whole thing. This is local soft funding from the metro government. They put out an RFP, and you compete against other developers who all need that same money. So you have to build a compelling story around the future impact of a community that doesn't even exist yet. Evan's constantly building relationships with cities and housing authorities looking for that next gap filler, because without it, the other 90% doesn't come together.

How the Low Income Housing Tax Credit Actually Works

I asked Evan to break the low income housing tax credit down on a third-grade level, because this is the part that trips everyone up. Here's the simplest version.

You put the project together and submit it to a government entity. They approve it and award you tax credits. Then you sell those credits on the secondary market to a bank. Say your project qualifies for $10 million in credits. That's really $1 million a year for 10 years, essentially an annuity of tax credits. You take that $10 million to PNC, and in return they hand you roughly $8 million in cash today.

"We'll take the $10 million in credits, go to PNC, and say, here's 10 million in credits, it's really 1 million per year for 10 years. And in return, they give us 8 million of cash."

- Evan Holladay, Holladay Ventures

Why 80 cents on the dollar instead of the full amount? Time value of money. The bank is waiting 10 years to collect, so they discount it. And this isn't a passive relationship. Because the investor only gets their credits if Evan delivers the community and keeps it in compliance, they're a hands-on partner for the long haul. It's a symbiotic deal. They are highly motivated to see you succeed, which is a very different dynamic from passing the hat to raise a syndication.

This is the piece I want you to sit with. Affordable housing developers aren't magicians. They've just mastered a stack of tax credits, tax-exempt debt, and public funding that most investors never learn. If you want to understand the broader tax benefits that make real estate such a powerful vehicle, this is that same principle turned all the way up.

The $8 Million Surprise

Now for the part that nearly killed the deal. While Evan was already deep into pre-development, Amazon announced its Housing Equity Fund, a $2 billion fund split between Seattle, Nashville, and Arlington, Virginia. Evan saw Nashville on the list and thought, "Holy moly, this is our opportunity." He reached out, got on something like 20 calls educating Amazon's team on how affordable housing works in Tennessee, and eventually landed them as a partner. That capital helped push the project toward the finish line.

And then the construction budget came back about $8 million higher than what the deal could support. Just $8 million. No big deal, right? We'll find that under the couch cushions.

Here's how a good developer responds to that. Evan went to work on value engineering, cutting cost without breaking the promises he'd made on quality. At the same time, he locked down his long-term debt and equity partners. One group believed in the impact of the community enough to lock the rate three months before closing. This was early 2022, and everyone could see rates were about to climb. So the second the LOI hit his desk, Evan signed it and locked a 4.5% construction rate and a 4.5% permanent rate on a 40-year amortization. Value engineering, the rate lock, and Amazon's funding together saved the deal.

That's the real lesson here. Deals don't fall apart because of one problem. They fall apart because the developer doesn't have the relationships and the creativity to solve the problem when it shows up. Whether you're financing a 311-unit community or figuring out how to buy your first commercial property, the developers who win are the ones who can problem-solve on the fly.

Why This Doesn't Look Affordable

If you drove past Stonebridge Lofts, you'd never guess it was affordable housing. And that's exactly the point.

When most people picture affordable housing, they picture the old barracks-style public housing, no sense of place, no gathering spaces, no community. We spent decades cramming people into projects that were badly designed for human beings, and we're still paying the price for it. Evan's whole thesis is that you can build a massively more uplifting community, one that actually changes lives through the built environment, without breaking the bank.

Case in point: the clubhouse at Stonebridge is, as far as Evan knows, the only 100% solar-powered clubhouse in Tennessee, backed up by three Tesla Power Wall batteries. He used it as a test case to prove sustainability and affordability can live in the same project. That's a long way from the ten-can-of-sardines approach we used to call affordable housing.

And the long game is genuinely long. Because of the Amazon funding, this community is committed to some form of affordability for 99 years. Evan's model is to hold, then around year 15 to 20 bring each community back into the program, modernize it, extend the affordability, and pull out some money for himself and his investors along the way. Compare that to chasing a quick flip, and you can see why this is such a different animal than most multifamily investing strategies.

Key Takeaways

Affordable housing pencils because of the capital stack. Roughly 40% tax credit equity, 50% tax-exempt debt, and 10% local gap funding, not developer charity.

The low income housing tax credit is the engine. $10 million in credits sold to a bank turns into roughly $8 million in cash today, with the bank as a long-term compliance partner.

Tax-exempt debt beats a normal mortgage. Roughly 100 basis points cheaper, on a 40-year amortization with a 1.15 DSCR.

Relationships save deals. An $8 million budget gap got solved through value engineering, a locked rate, and Amazon's equity fund, all built on partnerships.

Modern affordable housing is placemaking. Ground-floor retail, a solar clubhouse, and real amenities create communities you'd never guess were affordable.

This article is adapted from a conversation with Evan Holladay on the Tyler Cauble YouTube channel. For a primer on the basics, check out how does affordable housing work.

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