Key Performance Indicators

for Affordable Housing Rental Units

By ANAFP Member Deepak Butani, CPA, LLM

Affordable housing is defined as housing where the occupant is paying no more than 30 percent of his or her gross income for housing costs, including utilities. The U.S. Department of Housing and Urban Development (HUD) administers federal aid to local housing agencies that manage the housing for low-income residents at rents they can afford. Developers and their partners often assemble many sources of subsidies to help fill the affordable housing funding gap. Construction subsidies, called the low income housing tax credits, is the most common financing source. Others financing avenues  include mortgages with below-market interest rates, tax-exempt bonds, local loan funds, federal and state tax credits, federal grants, loans from programs like the HOME, local grants,  and deferred developer fees. The primary challenges of affordable housing include a shortage of available units, high construction and land costs, and regulatory hurdles like zoning restrictions. These factors, combined with economic inequality and stagnant wages, make it difficult for low- and moderate-income households to find and maintain suitable housing. Hence it is extremely important that the affordable housing unit’s financial and operational performance is regularly measured against key performance indicators. Some of these key performance indicators are:

1. Debt Coverage Ratio(DCR) : The debt coverage ratio calculates the ability of the affordable housing unit to cover the cost of debt. The formula is: Net Operating Income less replacement reserve deposits divided by Must pay principal & interest expense. A stabilized affordable unit would aim for a DCR ratio of 1.20.
2. Physical and Economic Occupancy: Physical occupancy measures the percentage of units occupied. Economic occupancy is a metric in real estate that measures the percentage of potential rental income actually collected, reflecting a property's financial performance. Economic occupancy differs from physical occupancy, which only considers the number of leased units, by accounting for factors like unpaid rent, concessions, and below-market rental rates that affect. A stabilized unit should have 90% occupancy.
3. Reserves: Financiers typically mandate a set aside of funds for replacement reserves that can be used if needed for possible emergency and planned capital expenditure and a set aside for operating reserves be maintained for possible future operating losses. The required reserves are generally mentioned in underwriting agreements. A stable unit will have fully funded replacement and operating reserves as stated in agreements.
4. Physical Plant: Ideally an inspection of the physical plant results should yield no issues. If there is deferred maintenance or there are building violations and environmental issues it will result negatively. A larger number of building violations will also mean the unit is less stabilized.
5. Sponsor and General Partners: The General Partner is generally a not for profit charged with the day to day operations of the affordable unit. Day to day operations include keeping the physical unit safe and clean, paying the bills and collecting the rent in a timely manner. Also a higher level of financial stability of the General Partner translates to higher ability to meet obligations.
6. Program Compliance:  Since the affordable unit is funded by a multitude of government sources, there are many regular compliance reports that have to be completed such as rent roll, building violations, Accounts Receivable aging, Income statements, Balance Sheet and Cash flow statement. Timely compliance and prompt follow up will mean a stabilized affordable unit.
7. Insurance & Tax Issues: An affordable property should aim to have no pending insurance or tax issues.  All outstanding items such as real estate taxes should be paid on time and there should not be any expired insurance coverage issues. Adequate funds should be set aside for all these expenses
8. Reporting: All reports due to funders should be submitted on time and any delays should be avoided. Audit reports should be completed on time and any deficiencies on the management report should be promptly addressed. Tax returns should be filed on time and any open items should be quickly addressed.
9. Recapture of Tax Credits: Tax credit recapture refers to the government's reclaiming of all or a portion of a previously claimed tax credit. This typically happens when the conditions that initially qualified a taxpayer for the credit are no longer met within a specified timeframe, according to the IRS and other sources.  Those investors who have taken the tax credits to lower their taxes on prior year tax returns would now have to be recapture the tax credits. Any unit where this happens is not a stabilized unit

In conclusion, affordable housing is here to stay. It offers the solution in the wake of rising housing costs.  The ever increasing inflation and other economic pressures have made it difficult for families to survive and thrive. With the growing demand for housing and the increasing pressure on urban spaces, innovative solutions are needed now more than ever. The tools listed above can be useful to maintain optimum efficiency in the operations of an affordable housing unit.