Modular Affordable Housing Projects
By Pamela Martineau
8 min read
Pulling Together Financing, Building Strong Partner Teams and Selecting Sites
Modular affordable housing projects—with their quick construction timelines and cost savings compared with traditional stick-build projects—are gaining in popularity, but the projects present unique challenges in terms of financing, development expertise and site selection.
Tax Credit Advisor spoke with project managers, investors and consultants on modular affordable projects to gather tips on pulling together these increasingly popular projects. From distinctive draw schedules to challenges in site selection and transportation, people working in this space say that addressing the unique quirks of the projects upfront can give investors the confidence to invest and save money in the long run.
“Have an experienced deal team in place before you reach out to your potential financial partners,” advises Kyle Kochtanek, senior development officer and investment strategy lead at U.S. Bancorp Impact Finance, which has invested in modular projects since 2017. “Any good financial lending institution will have a lot of questions, so make sure you have the answers at the outset.”
Kochtanek also says it is important to work with a development team that has done a Low Income Housing Tax Credit deal with modular before and knows the requirements, from a local and federal standpoint.
Site Selection
Modular projects require sites that fit the specifications of the individual modular units and will allow sufficient ingress and egress for the large cranes that will set the modular units into place. An advantage of modular projects is there is far less on-site work than a traditionally built project, so disruption to neighbors is reduced.
In Minneapolis, the Minneapolis Public Housing Authority (MPHA) is developing an 84-unit modular project across 16 sites. The first site is expected to be ready for leasing this September. MPHA seized upon the plan after Minneapolis allowed multifamily housing on single-family lots – the first city in the nation to do so.
Juan Torres, project manager for MPHA, says the speed at which the modular project could be developed was one of the reasons MPHA opted to use modular. The city has an 8,000-person waiting list for affordable housing, so making these units available to families quickly is a priority.
“This is why modular really shines in the project…the approach is much faster,” says Torres. “It takes 13 months for all 16 sites…The speed of construction allows us to house people faster and reduce the impact on the neighbors, so they aren’t hearing every single nail going into a stud.”
Modular often takes anywhere from 30 to 50 percent less time for construction from start to finish and construction costs can be reduced by as much as 20 percent over traditional stick-build. The modular units are built off-site in a factory, in this case by RISE Modular, just outside the Minneapolis Metropolitan area. Working with a local factory cuts down on the cost of transporting the units to the sites. While the modular units are being built in the factory, some of the needed site work is taking place at the 16 scattered sites.
In selecting the sites, Torres says MPHA knew it needed approximately 65 feet as a minimum width to accommodate these buildings. Most single-family lots in Minneapolis are 40 feet wide, so MPHA worked with the city to identify big lots within its existing portfolio, or lots with an adjacent City of Minneapolis lot so they could meet the width requirement. They also looked for lots near public transit and other amenities. In most cases, MPHA already owned scattered site properties that needed to be torn down because of their physical condition. In those cases, 13 families were impacted by the demolitions and MPHA worked to ensure they were advised of the process at all stages. They received relocation assistance and were given the first option to move into the new units that would be assembled on their former sites.
“We are proud of the process in terms of tenant engagement. Our tenants were the first to learn of the plan before we did external communication,” says Torres. “They were given the ability to move to a different unit, take a voucher or come back to the units. Some of our tenants have confirmed they want to come back to the site.”
Mary Tingerthal, president of Tingerthal Group and a consultant on the MPHA scattered site project, says the fact that the projects were built on single-family lots throughout the city allows families to live in single-family neighborhoods with good schools.
“Being able to have a solution that gives families a single-family neighborhood choice, is at the heart of why this is such an exciting project,” she says.
All units have been allocated project-based vouchers and are therefore available to households at or below 30 percent of area median income.
Financing
Kochtanek, of Impact Finance, says that when his bank considers investing in a modular project, it wants to know whether the development team has worked together or has worked on modular projects.
“The critical element when looking to invest in a modular deal is understanding the deal team – the modular builder, the general contractor, the architect, the consultant and the developer who is orchestrating the whole process,” says Kochtanek. “We want to dive in and understand the relationship between the modular builder and general contractor. Have they done deals before? Have they done a LIHTC deal before?”
“Do they have a cohesive team with experience and education around this emerging technology?” Kochtanek adds.
Tingerthal says the members of the finance team for the MPHA project visited the modular factory to learn about the process and see the completed products. They were also shown how the modules are protected on-site at the factory and then transported.
RISE Modular, Tingerthal says, has a very large, secure area where the modules are stored after they are built in the factory.
“They are shrink-wrapped like a boat with white plastic and stored on stands that a truck can back up to when they are ready to be shipped to a site,” she says. “The factory takes care of the storage. They are responsible and liable right up until the boxes are in place and attached to each other, at which point they hand off the liability to the general contractor.”
Kochtanek says that knowing such details about storage and transportation is critical for the finance team because ensuring the units are insured every step of the way is key. On the Minneapolis project, Impact Finance was both the construction lender and the investor in the tax credits and solar credits. A $25 million housing revenue bond from the City of Minneapolis was also part of the financing package. The scattered site project needed to meet the 50 percent test on the bond at each of the 16 sites. The test requires a developer to verify that 50 percent or more of the tax-exempt bond proceeds are used to finance the aggregate basis of any building and the land on which the building is located. Failure to meet test requirements would jeopardize the status of a LIHTC project.
“We had to meet the test on every single site,” says Torres. “It was a lot of work, but something we prepared our general contractor to do.”
Torres, the project manager, says his team worked hard to scale the project like a large LIHTC deal.
“That is how we brought people on board,” says Torres. “We told them it is a LIHTC deal cut into 16 pieces spread out in the city of Minneapolis.”
The Minneapolis project will utilize Solar Tax Credits that became available through the Inflation Reduction Act. The additional credits generated more equity for Impact Finance. Citibank, which provided the first mortgage for the project, allowed the project to show lower operating costs because the project generated 30 percent of its own electricity with the panels. Torres says the solar allowance in the operating cost is something relatively new for a deal.
“Banks usually aren’t willing to do that,” he says.
Draw Schedules
Modular projects typically require larger upfront costs than a traditional project, since the modular factory is paid a large advance early to build the units.
“With modular, you have bigger draws sooner than with traditional projects,” says Torres. “You are front-loading the work that is happening earlier on.”
After the big early draws, the Minneapolis project had monthly draws, like a traditional project, and only one monthly draw for the whole 16-site project, not 16 different draws.
Kochtanek emphasizes that strong communication among deal team members can go a long way toward making a project successful.
“Modular is unique in that you are part of an assembly line. Having everyone on the same page is imperative to maintaining a smooth supply chain, which aids in a successful modular build,” he says.
