chapter 1: Introduction to Affordable Housing Development

Learning Objective: Users will gain familiarity with the affordable housing development process as a whole and understand how this guide can help them plan and execute.

About this guide

Overview of this guide

This guide provides a comprehensive overview of affordable housing development in Colorado. In working with local partners in markets across Colorado, CHFA staff recognized the wide range of knowledge and capacity of developers in the state. CHFA created this guide to serve as a reference for those wishing to develop affordable housing and/or better understand the development process. This guide complements CHFA’s other resources, technical assistance, and capacity-building efforts intended to support affordable housing development in the state.


The content of this guide is organized into a series of chapters describing key processes and elements of affordable housing development. In addition to these chapters, the guide includes practical tools and links to resources to help users apply the content to their work. Case studies that illustrate key concepts and provide real-world examples of what development may look like are also included.

Although much of the content and examples focus on affordable rental housing development, most of the information in the guide also applies to developing for-sale housing. Key exceptions to this are noted throughout the guide.

About Colorado Housing and Finance Authority (CHFA)

CHFA strengthens Colorado by investing in affordable housing and community development. CHFA offers financial resources to strengthen homeownership, affordable rental housing, businesses, and communities.

Since 1974, CHFA has invested more than $26 billion in Colorado’s economy. These resources help:

  • homebuyers achieve homeownership,

  • households attend homebuyer education classes held statewide,

  • affordable rental housing be developed or preserved,

  • businesses access capital to support jobs, and

  • communities and nonprofits build capacity to further strengthen Colorado.

Who should use this guide

Existing Developers Seeking tools and resources for different stages of the development process or who are interested in exploring a new development model or scale
Aspiring Developers Seeking to explore the feasibility of affordable housing development for their organization
Developers Based in Other States Seeking to understand the differences between developing affordable housing in Colorado and developing in other states with which they are familiar
Public Officials and Community Stakeholders Seeking to understand the housing development process so that they can better support it
Staff at Housing-focused Organizations Seeking to learn more about aspects of development with which they may be less familiar

How to use this guide

The guide can be used in print, digital PDF, or online form. This online version provides additional features and interactivity that offer a more rich experience – for example an interactive glossary, interactive tools, and more interconnection between sections. The online content can be navigated using the interactive navigation panel located on the right side of the screen.

Because the content is organized into chapters, tools, and case studies, users can download, print, and work through sections of the guide separately using the download management interface.

In addition, the guide has recorded a series of video trainings that explain key content and tools.

What is affordable housing?

Introduction to housing affordability

Housing affordability is an important consideration for everyone, regardless of income. Whether a household earns $250,000 or $50,000 annually, they must balance how much they can afford to spend on housing costs so they have sufficient income for other needs, such as food, clothes, transportation, medical expenses, and savings for emergencies. The higher the cost of living in a home relative to a household’s ability to pay, the less affordable it is.


Although there is no universal definition of how high housing costs have to be for them to be unaffordable, the most commonly used definition in the U.S. is that housing costs are affordable if they represent no more than 30 percent of a household’s gross income on an annual basis.[1] This is the definition used by CHFA and the U.S. Department of Housing and Urban Development (HUD).

  • For renters, housing costs are generally captured as the total annual costs of rent plus any utilities the tenant pays out of pocket. Including utilities in these calculations is important because it allows for more even comparisons across rent payments, since some rents and condo fees include some or all of the cost of utilities while others do not.

  • For homeowners, housing costs are generally captured as the total annual costs of the mortgage payment, utilities, property taxes, homeowners insurance, homeowner or condo association dues, and any private mortgage insurance paid.

Income is generally captured as the total annual gross income (income before taxes or other deductions are taken out). Capturing both income and housing costs on an annual basis instead of monthly is important because there can be seasonal or other variations in both values over the course of the year. For example, some jobs may require more hours or pay better at certain times of the year, utility costs may vary with the weather, and property taxes and insurance may only be paid a few months out of the year.

Households paying more than 30 percent of their income for housing costs are considered “housing-cost-burdened.” Those paying more than 50 percent of their income for housing costs are considered “severely housing-cost-burdened” or “extremely housing-cost-burdened.” These terms are often used interchangeably.

Affordable housing definition

Affordable housing means housing that costs no more than 30 percent of income for a given income level. In other words, the question you should be asking when thinking about affordable housing is not “is this affordable housing?” but rather “to whom is this housing affordable and are they in need of more affordable housing options?”

This also means affordable housing can take a variety of forms, depending on the populations in need of it—large apartment buildings, single family for-sale homes, and everything in between can be affordable to particular populations. Affordable housing also does not need to have any form of public support or subsidy to be affordable at a given income level. In fact, in the housing development world, we often differentiate between subsidized and unsubsidized affordable housing to draw that distinction. Both subsidized and unsubsidized affordable housing can help meet community demand, but as discussed later in this guide, also carry distinct advantages and disadvantages.[2]

Calculating housing affordability

As an example, consider a household earning a $50,000 annual salary and paying $1,200 per month for an apartment, including the cost of utilities, or the equivalent of $14,400 per year. Is their housing affordable to them? In this case, their housing cost represents 29 percent of their annual income for housing costs ($14,400/$50,000), which would be considered affordable to them.

You could do this same calculation for a homeowner. If a homeowner earned $50,000 per year and had a total housing cost of $14,400 per year (including mortgage payment, taxes, insurance, utilities and all other factors mentioned above), their housing cost would also represent 29 percent of their income and would thus be affordable to them.

You can also think about this question from the perspective of the income required to afford a given housing cost. For example, if an apartment rents for $1,500 per month including utilities, who would this be affordable to? To calculate this, multiply by 12 months to get the annual cost ($18,000) and then divide by 30 percent, which is $60,000. This apartment would be affordable to anyone earning $60,000 or more. The principles are similar for for-sale housing, but buyers must also be sure to consider other factors such as down payment and interest rate.

Targeting affordability using area median Income

The question of who needs more affordable housing is a complicated one. Imagine two Coloradans who each earn $50,000 per year. One lives in Denver and is single with no children. The other lives in Pueblo and is a single parent of two young children. How do their needs for affordable housing compare?

Instead of using a specific dollar threshold such as $50,000 per year, affordable housing developers, programs, and policies use a measure of income that accounts for the typical income in the housing market they live in, also called the Area Median Income (AMI). Income for the purposes of affordability calculations is expressed as a percentage of the AMI. For example:

  • A household earning $40,000 per year in a region where the AMI is $80,000 would have an income level of 50 percent of the AMI.

  • If that same household lived in a region where the AMI is $50,000, they would have an income level of 80 percent of the AMI.

  • A household earning $40,000 per year in a region where the AMI is $40,000 would have an income level of 100 percent of AMI.

Although this may seem like a complicated way to capture income, it is critical for affordable housing developers to understand. This approach enables public and nonprofit programs to target a level of housing needs across communities with different market conditions. For this reason, most federal, state, and local programs will describe housing needs and programs in these terms.

If a development is supported by funding from a public sector agency such the federal government or a state agency, the funding program may impose restrictions on who can live in a unit based on the percentage of the AMI they earn. For example, a development with 40 apartments might be required to have 20 apartments affordable to families earning 30 percent or below of the AMI and another 20 apartments affordable to families earning 50 percent or below of the AMI. All 40 units are forms of affordable housing, but they are targeted to families with different income levels.

The most common income thresholds used for affordable housing targeting are 30, 50, 60, 80, 100 and 120 percent of AMI. You will encounter this targeting regularly in housing needs assessments and funding programs. You may also see specific ranges referred to with labels. For example, households with incomes between 0 and 30 percent of the AMI are often referred to as extremely low-income. Other labels like very-low-income, low-income, moderate-income, and workforce housing are also common. Unfortunately, there are no universal definitions for what these labels refer to, so organizations may use them differently. For example, one organization might use “workforce housing” to mean housing affordable to those with incomes above 50 percent of the AMI. Another organization might use the same term to refer to those with incomes above 80 percent of the AMI. Therefore, it is critical that developers pay attention to the percent of the AMI itself and not the label being applied to it.

Figure 1 shows CHFA’s Housing Continuum, which illustrates the general relationship between a household’s income level and the type of housing that may be affordable to them, although this will realistically vary between housing markets.. These housing models are defined and explored in more detail in Chapter 3: Housing Development Models, Team, and Roles.

 

Figure 1: CHFA's Housing Continuum
homeless shelter
transitional
permanent supportive (psh)
below 30% AMI
affordable rental housing
30% to 80% AMI
first-time/long-term homeownership
50% AMI and above
middle-income
rental housing
60% to 120% AMI

In addition to adjusting for the AMI in the location, housing programs typically adjust income thresholds based on the number of people in the household. This helps to account for the fact that larger households will need larger, and therefore more expensive, units. For example, Table 1 below shows the dollar thresholds used by HUD for a household to qualify for income-restricted housing in Alamosa County in fiscal year 2021 relative to the number of people in the household. As you can see, “30 percent of the AMI” can refer to a wide range of incomes once household size is accounted for.

Table 1 – HUD FY 2021 Income Limits for Alamosa County.[3] Median family Income in the county is $52,300.

 

Number of People in Household

 

1

2

3

4

5

6

7

8

80% of the AMI

$41,200

$47,050

$52,950

$58,800

$63,550

$68,250

$72,950

$77,650

50% of the AMI

$25,750

$29,400

$33,100

$36,750

$39,700

$42,650

$45,600

$48,550

30% of the AMI

$15,450

$17,650

$21,960

$26,500

$31,040

$35,580

$40,120

$44,660

Specific dollar thresholds like these are published by HUD at the county and metropolitan statistical area (MSA) levels, with all counties in the same MSA having the same thresholds to account for the fact that people looking for housing in a region will often be looking across jurisdictional boundaries. HUD also applies additional rules to account for special cases and outlier conditions. This includes setting floors or caps on income limits based on:

  • poverty thresholds,

  • high or low housing cost area designations,

  • the relationship to the U.S. median family income level,

  • The median family income in non-MSA areas of the state, and

  • the change in the income limits from the previous year.

These methods can sometimes result in counties having similar income thresholds even when they have different housing market conditions. While it is important to understand the general methods outlined above, if you are planning to utilize a public program that requires rent restrictions, it is recommended that you rely on the published thresholds rather than trying to calculate dollar thresholds yourself.

The relevant thresholds should be published and/or available upon request from the organization that administers the program being used. HUD thresholds are updated each year, usually in March or April. For more information about income limits for your county, see HUD’s Income Limit Tool.

  1. For a brief history of racial and ethnic disparities in housing, see “A Very Brief History of Housing Policy and Racial Discrimination
  2. One common example of a different approach to affordability and ability to pay for housing costs is the one used in mortgage underwriting where ability to pay is treated differently. Assets and debt are considered alongside income, etc."
  3. U.S. Department of Housing and Urban Development. “Income Limits.” Accessed August 1, 2021. https://www.huduser.gov/portal/datasets/il.html

Housing needs in colorado

The need for greater housing affordability is a nationwide issue, and Colorado is no exception. According to a 2019 report by the Colorado Division of Housing (DOH), who engaged 868 stakeholders across the state to better understand housing needs:


“In general, there is a housing shortage, with very limited housing stock across the state, and much of existing housing stock is aging or otherwise of poor quality, especially mobile homes. Stakeholders were also vocal that the price of housing has ‘skyrocketed’ and is ‘astronomical.’ The high costs of land, labor, and construction materials makes new development very difficult, especially in remote rural regions where contractors are far away and developing infrastructure is costly. Stakeholders demonstrated need for a diverse housing stock, including single family, multifamily, townhome, duplex, four-plex, supportive housing, accessory dwelling units, and more…numerous stakeholders also expressed that housing needs cover a wide spectrum of individuals—from those experiencing homeless to households at 200 percent of the Area Median Income (or AMI; the median income for a household of three ranges from roughly $50,000 to $100,000 depending upon the county of residency). Finally, many stakeholders discussed that limited staff capacity, especially in rural areas, makes it difficult to adequately respond to the situation.”[4]

The report goes on to discuss more specific needs and stakeholder perceptions in different regions of the state. As this quote demonstrates, the need for greater housing affordability is acute, wide-ranging, and varied across regions in Colorado. The data also support these stakeholder perceptions. According to CHFA’s Gap Map 2021 Dashboard, among renters:

  • 79 percent of households earning 30 percent of AMI or below are housing-cost-burdened

  • 66 percent of households earning 31 to 60 percent of AMI are housing-cost-burdened

  • 44 percent of households earning 61 to 100 percent of AMI are housing-cost-burdened

  • 5 percent of households earning 100 percent or more of AMI are housing-cost-burdened

  • On average, a Colorado household would need to earn 121 percent of AMI to afford to purchase the median-priced for-sale home in the state.

This reinforces the findings from the DOH report that need exists at all points on the income spectrum and that more affordable housing in all its forms will be needed statewide. CHFA’s 2018 white paper “The Housing Affordability Gap” further explores the need for more housing of all types and details factors contributing to Colorado’s current market conditions.

Although housing needs are present across the state, there are differences between communities regarding what has given rise to this need, and therefore, what challenges and conditions need to be considered in addressing these housing affordability gaps. Proposing a high-rise apartment building might be an efficient use of high-cost land in an urban area but may or may not be a feasible or desirable approach in a rural area. Some communities may be resistant to new development occurring, while others may welcome it. Thus, consideration for the local housing market context is critical. For more information on understanding local housing needs and conditions, see Understanding Housing Need in Chapter 3: Housing Development Models, Team, and Roles.

Colorado market types

This guide refers to market conditions using the three market types described below. This generalization will help you consider some of the combinations of conditions you may encounter working in different parts of the state. However, every market is unique—some regions may align with one or more of these types and others may have their own character. So, these can be thought of more as a learning tool rather than a way to label real markets. You will still need to understand the specific housing needs and market conditions in a community in which you plan to develop.

Market Type

Locations

Typical Market Characteristics

Urban

Housing markets of major metropolitan areas such as Denver, Boulder, Fort Collins, Colorado Springs, Pueblo, and Grand Junction typically have an urban character

  • Typically have good access to jobs and amenities

  • A wider range of potential partner organizations for developers, including other developers, contractors, service providers, property managers, and community organizations

  • Housing affordability gaps across low- and moderate-income levels

  • Some local neighborhoods may be more likely to actively engage affordable housing development (see ”Who Are Community Stakeholders?” in Chapter 4: Engaging the Community.)

  • Access to public transportation, employment centers and retail, and amenities may be relevant issues for target populations.

  • Likely to be detailed land use regulations and building codes to regulate, shape, and/or encourage development

  • Wide variation in housing types, from single family homes to large multifamily buildings

  • There are challenges related to water and tap fees in some areas.

Resort

Areas that have ski resorts and/or prominence of second/vacation homes – generally in the mountains

  • Smaller communities are often in proximity to recreational opportunities
  • Municipalities may have more resources, relative to their size, to invest in increasing housing affordability due to the presence of greater second-home investor tax base, tourism, and commerce in the community.
  • Often have limited land availability for development due to the allocation of land for recreational or park use
  • Previously undeveloped sites may lack existing connections to utility systems, imposing additional development costs.
  • High land values and affordability challenges at income levels up to 200 percent of AMI due to a housing market focused on serving more affluent buyers
  • Distance to contractors and construction materials results in high development and housing costs.
  • Often have good job access due to the tourism economy, but the lack of affordable housing forces many workers to absorb longer commuting times, increasing their transportation costs
  • Can be a lack of housing that is available to rent for long periods of time, given the seasonal cycles of the tourism economy
  • Higher profit margins for high-end homes decrease the profit incentive to develop affordable housing.
  • Exposure to harsh winter weather may reduce life span of housing stock requiring weatherization and home rehab to maintain safety and livability.
  • The limited supply of affordable rental housing may also lead to overcrowded housing.
  • There are challenges related to water and tap fees in some areas.
  • Lack of affordable housing impacts employers seeking to attract/retain employees.

Rural

Areas that are not urban but don’t have the same emphasis on resorts and second homes as resort communities

  • Land availability is likely to be less of an issue compared to urban and resort markets although infrastructure such as water and utilities might not be in place.
  • Likely to be less complex land use regulations and building codes compared to urban areas
  • Housing developments tend to be smaller scale, which can reduce savings from larger economies of scale and make key financing programs less suitable for use.
  • Distance to contractors and construction materials may result in higher construction costs.
  • Lack of affordable housing impacts employers seeking to attract/retain employees.
  • There are challenges related to water and tap fees in some areas.
  • Exposure to harsh winter weather may reduce life span of housing stock requiring weatherization and home rehab to maintain safety and livability.
  • May have less discretionary resources or staff capacity to incentivize affordable housing development

Key themes in this guide

In addition to the housing needs discussed above, this guide highlights a set of three key themes. While there are specific points in the development process when these are particularly relevant, they are also important lenses to maintain throughout.


Theme 1: How can affordable housing developers advance diversity, equity, and inclusion (DEI)?

While often used together to describe related principles, diversity, equity, and inclusion mean different things. Diversity is appreciating the similarities and differences among individuals. Inclusion is making decisions through the process that engage, embrace, and leverage diverse perspectives. Equity is fostering a culture and creating systems where people thrive, and everyone gets what they need given where they are starting from.

In this guide, equity means recognizing that the needs of specific populations will vary by location and development goals, and that some populations experience inequitable housing challenges and outcomes. These populations include racial and ethnic groups, veterans, older adults, people who have experienced homelessness, neurodiverse people, and those with special needs. For developers, this means working to understand the role of housing and any associated services in people’s lives, seeking to meet them where they are. Affordable housing often disproportionately houses historically marginalized populations. As a developer, you can work to understand the reasons for this and consider how you can address the underlying factors driving these inequities as part of your work.

For more information about advancing diversity, equity, and inclusion in affordable housing development, see the Diversity, Equity, and Inclusion Self-Assessment Tool.

Theme 2: How can affordable housing developers increase the disaster resilience of the buildings they create and the people they serve?

In recent years, natural disasters have been occurring with greater frequency and severity as our global climate changes and impacts local conditions across the country. Natural disasters including, but not limited to, wildfires, flooding, mudslides, tornadoes, and hail often have disproportionate impacts on low-income and other vulnerable populations because they lack a financial buffer to secure temporary alternatives to housing, maintain their jobs remotely, and generally recover from the financial impacts of the disasters.

For more information about improving resilience in multifamily housing developments, see Enterprise Community Partners’ Ready to Respond: Strategies for Multi-Family Building Resilience and Portfolio Protect tools.

Theme 3: How can affordable housing developers create sustainable and energy-efficient developments that provide healthy spaces for residents to thrive?

Green and sustainable building practices are relevant to every part of the housing development process and can have positive impacts for developers, residents, and the environment:

  • Reducing the carbon footprint and emissions in both the production and operation of housing is important for reducing environmental impact.

  • The increased efficiency in energy and water consumption reduces the environmental burden of development and the operating costs for property managers and residents while increasing housing affordability. Recall that total housing costs account for utilities, so reducing utility burden is another way of directly reducing housing-cost burden.

  • Green and sustainable materials often have positive health and quality-of-life impacts on residents relative to some alternatives.

For more information about this topic, see the Green Building and Sustainability brief.

Development process overview

The affordable housing development process can be understood as a series of five primary phases, each of which has several processes and decision points that are important to understand and build your capacity. Some phases require unique skillsets and expertise that may require partnering or contracting with another organization to complete. Other skillsets, such as engaging the community, will be valuable in all steps of the process.

Development Phase

Description

Associated Chapters in this Guide

Phase I: Developing the Concept

This phase focuses on understanding (1) the need for affordable housing and other associated services in the community, (2) the types of housing that could respond to that need, (3) the capacity of your organization to play the roles that will be required to develop this type of housing, and (4) where additional partnership will be needed.

Chapter 2: Organizational Considerations

Chapter 3: Housing Development Models, Team, and Roles

Chapter 4: Engaging the Community

Phase II: Predevelopment and Feasibility Assessment

This phase translates your concept into a specific development scope, including (1) identifying and securing a site for development, (2) developing a design concept, and (3) completing various feasibility assessments and cost estimates.

Chapter 5: Predevelopment

Chapter 6: Market Feasibility

Chapter 7: Financial Feasibility

Phase III: Securing Financing

This phase focuses on securing the financing required to complete and operate the development over time, including (1) assembling financing from multiple sources and (2) preparing multiple versions of project documents to comply with different funder requirements.

Chapter 7: Financial Feasibility

Phase IV: Development

This phase involves (1) the final contracting, design, and site preparation for construction and (2) the actual construction or rehabilitation of your development.

Chapter 8: Project Construction

Phase V: Post-development (Management, Operation, and Compliance)

This phase includes (1) identifying and signing leases with tenants, (2) creating agreements with service providers, (3) managing the property, and (4) long-term stewardship.

Chapter 9: Project Operations and Compliance

The complexity, timescale, and dependence of the development process can be unpredictable with unexpected twists and turns. For example, an environmental review might turn up an unexpected issue, an expected financing source may be withdrawn, or the price of lumber may skyrocket due to an unforeseen global pandemic. Thus, flexibility, adaptation, and persistence are key characteristics of successful developers throughout each of these phases.

This guide utilizes case studies to illustrate each development phase or topic area with real projects from Colorado. The full case studies are available at the end of the guide or as links in the navigation pane on the right side of the screen.

Where to find help

Learning how to develop affordable housing can feel intimidating and it can be difficult to know where to begin. However, the need for quality affordable housing in Colorado is great, and we must tackle this challenge together.


Fortunately, you are not alone in this journey. There are several national and Colorado-based organizations that can help you expand your knowledge and ability to undertake development, including:

  1. CHFA: CHFA provides a range of resources for new developers or those aspiring to take on new development models. In addition to this guide, you may also find the following resources from CHFA helpful:

    1. A series of live and recorded trainings that expand on this guide and allow for a more interactive experience.

    2. CHFA program staff and community relationship managers can assist you with information about how to access and use CHFA's resources including construction and permanent loans, gap funds, housing tax credits, and technical assistance to support your goals. CHFA's team also can connect you with other community partners and resources available. Information about CHFA's staff is available on CHFA's website, chfainfo.com.

    3. Reports and other resources that can improve your understanding of issues related to affordable housing development

    4. CHFA's Small-scale Affordable Housing Technical Assistance Program offers free technical assistance for small-scale housing development from a stable of expert consultants maintained by CHFA and is available through a competitive application process.

  2. Colorado Division of Housing (DOH) provides a range of products and services for developers, including trainings, financial support, reports and data on housing conditions, and regional development specialists who have knowledge targeted to specific markets in the state.

  3. USDA Rural Development maintains multiple rural development offices across the state that support a range of programs, including some relevant to multifamily housing.

  4. Housing authorities and local jurisdictions local housing authorities and jurisdiction staff have significant experience and knowledge about key stakeholders, processes, rules and regulations that are applicable. It is important to build relationships with these key stakeholders early in the process.

  5. Additional organizational and information resources applicable to various stages of the development process are included in the relevant chapters of this guide.

Colorado Division of Housing. “Stakeholder Engagement: Engaging Stakeholders on Affordable Housing Policy in Colorado.” February 6, 2020. https://drive.google.com/open?id=1eF3Tedw4Tdr7Vtrb44jxVt92qUdAUf4p&authuser=0

Colorado Housing and Finance Authority. “Housing Affordability in Colorado: The Housing Continuum.” October 2018. https://www.chfainfo.com/getattachment/a7f4be85-7a8e-4783-b5f4-d4d48763761a/WP_HousingContinuum.pdf

Colorado Housing and Finance Authority. “Housing Affordability in Colorado: The Housing Affordability Gap.” October 2018. https://www.chfainfo.com/getattachment/cad06816-f243-4218-b438-65df4c903f44/WP_HousingAffordabilityGap.pdf

Colorado Housing and Finance Authority. “The Gap Map 2021 Dashboard.” Accessed August 1, 2021. https://public.tableau.com/profile/colorado.housing.and.finance.authority#!/vizhome/TheGapMap2021/HousingContinuum

Enterprise Community Partners. “Portfolio Protect.” Updated: 2020 https://www.enterprisecommunity.org/solutions-and-innovation/disaster-recovery-and-rebuilding/portfolio-protect

Enterprise Community Partners. “Ready to Respond: Strategies for Multi-family Building Resilience.” 2020. https://businesscontinuity.enterprisecommunity.org/sites/default/files/strategies-for-multifamily-building-resilience.pdf

Rural Community Assistance Corporation. “Utah Affordable Housing Guide for Developers.”

U.S. Department of Housing and Urban Development. “Income Limits.” Accessed August 1, 2021. https://www.huduser.gov/portal/datasets/il.html

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