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.
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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)
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.
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.