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What Is Total Development Cost?
It’s critical to understand how the total development cost plays a part in determining a project’s eligibility for HUD subsidies.
When developing any type of commercial real estate project, costs are of the utmost concern. Especially in recent years, with the soaring price of timber, steel, and transportation, many developers have responded by closely scrutinizing all expenses involved in a project.
This is especially true of affordable housing developers — and not just because costs have drastically escalated there, too. Projects taking advantage of the Department of Housing and Urban Development’s Low-Income Housing Tax Credits, or LIHTC, must calculate a project’s Total Development Cost — a specifically defined term — to understand the level of subsidy a development will receive.
Depending on which type of LIHTC a project is utilizing, the subsidy covers a different portion of a project’s Total Development Cost, or TDC. A 4% LIHTC subsidizes 30% of all costs, while a 9% LIHTC covers a significantly higher 70%.
What’s Included in TDC
It can often be more complicated to figure out an affordable housing project’s Total Development Cost than one might expect. Naturally, the costs of materials and labor are included, but the list is actually quite extensive. All of the items below are typically considered part of a project’s TDC:
Construction (both labor and materials)
Site acquisition
Administration
Planning
Equipment
Demolition
Infrastructure
What is the total cost of developing a multifamily property?
The total cost of developing a multifamily property can vary significantly depending on the size and scope of the project. According to the National Association of Home Builders, the average cost of constructing a multifamily property in 2018 was $103 per square foot. This cost includes the cost of labor, materials, and other expenses associated with the project.
It is important to note that the cost of developing a multifamily property can vary significantly depending on the location of the project. For example, the cost of construction in the Northeast region of the United States is typically higher than in other regions. Additionally, the cost of materials and labor can also vary depending on the local market.
For more information on the cost of developing a multifamily property, please visit Multifamily Construction Costs: An Investor Guide.
What are the components of total development cost?
Total Development Cost (TDC) includes the costs of construction (both labor and materials), site acquisition, administration, planning, financing, equipment, demolition, and infrastructure. Infrastructure costs even include work done off-site, such as sewage improvements a block away from the building site.
HUD sets limits on what Total Development Costs should be, on a per-unit basis. Developers exceeding these limits may apply for a waiver, and enforcement of this requirement does change from time to time.
What are the most common costs associated with developing a multifamily property?
The most common costs associated with developing a multifamily property include contractors, subcontractors, architects, materials, and other expenses. According to the National Association of Home Builders, these costs have been increasing in recent years. It is important for developers and investors to understand the exact nature of multifamily construction budgets and why they keep rising so quickly.
For more information, please see Multifamily Construction Costs: An Investor Guide.
What are the differences between hard costs and soft costs when developing a multifamily property?
Hard costs are those associated with physical building construction, while soft costs are intangible, and are typically associated with the planning, permitting, and financing of a construction project.
Some of the most common examples of soft costs include:
- Architectural, planning, and engineering fees
- Legal fees, permits, and taxes, property and construction insurance
- Multifamily construction loan application fees/origination fees, interest payments, and other related financing fees
- Moveable furniture and building equipment (i.e. lawn chairs, fire extinguishers)
Depending on how construction costs are calculated, some expenses that are incurred after building completion may also count as soft costs, including lease-up costs and marketing expenses, security, building maintenance, and other, similar costs.
In general, soft costs can be seen to directly impact hard costs. For instance, having an effective architect and engineer can help reduce the amount of materials used to construct a building. Plus, spending more on soft costs now can also reduce future soft costs. For example, making sure to hire high quality legal counsel can reduce the chance that a development will incur additional legal fees or permitting expenses down the line.
How can I reduce the total development cost of a multifamily property?
There are several ways to reduce the total development cost of a multifamily property. One way is to look for ways to save on expenses. This could include finding ways to reduce utility costs, negotiating better rates with vendors, or finding ways to reduce labor costs. Additionally, you could look for ways to reduce the cost of materials, such as by using recycled materials or buying in bulk. Finally, you could look for ways to reduce the cost of financing, such as by taking advantage of tax incentives or finding a lender that offers competitive rates.
For more information, please see the following resources:
What are the best strategies for financing the development of a multifamily property?
The best strategies for financing the development of a multifamily property depend on the size and scope of the project. Generally, the most common methods of financing multifamily properties include:
- Conventional Loans: Conventional loans are typically the most common type of loan used for multifamily properties. These loans are typically offered by banks and other financial institutions and can be used to purchase, refinance, or renovate a multifamily property. The terms of these loans vary, but they typically require a down payment of at least 20%, and the interest rate is usually fixed.
- FHA Loans: FHA loans are government-backed loans that are designed to help low- and moderate-income borrowers purchase or refinance a multifamily property. These loans typically require a down payment of 3.5%, and the interest rate is usually fixed.
- Portfolio Loans: Portfolio loans are loans that are held by a lender and not sold on the secondary market. These loans are typically used for larger multifamily properties and can be used to purchase, refinance, or renovate a multifamily property. The terms of these loans vary, but they typically require a down payment of at least 20%, and the interest rate is usually fixed.
- Private Money Loans: Private money loans are loans that are provided by private investors, such as individuals or companies. These loans are typically used for short-term financing and can be used to purchase, refinance, or renovate a multifamily property. The terms of these loans vary, but they typically require a down payment of at least 20%, and the interest rate is usually fixed.
It is important to do your research and compare the different loan products available to find the best option for your needs. You can find more information about multifamily property financing on Multifamily.Loans.
The infrastructure cost aspect even include work done off-site. For example, if you must invest in sewage improvements which will be conducted a block away from your building site, those costs are still included in TDC.
TDC Limits
HUD sets limits on what Total Development Costs should be, on a per-unit basis. Developments are required to adhere to these limits, which are set based on a project’s location, to regulate the amount of public housing funds that may be used to subsidize any LIHTC developments.
Developers exceeding these limits may apply for a waiver. This typically requires the developer to justify any higher-than-expected costs, and approval is generally determined on a case-by-case basis. Enforcement of this requirement does change from time to time: For example, HUD waived the TDC waiver requirement for projects exceeding TDC by up to 25% without a waiver through the end of 2021.
Should a project exceed TDC without a waiver, this essentially means the development is not classified as affordable housing and will not benefit from those respective subsidies.