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The Top 3 Reasons Why Developers Should Partner with Local Municipalities

$100 billion worth of infrastructure improvement deals, which valued more than $22 billion were reported by PwC at the end of 2017. As the absorption rates in some markets are beginning to slow, multifamily housing demand has been booming, and new construction stalls, developers are turning to local municipalities to form strategic public-private partnerships. In result, renters are demanding more affordable housing options and developers are utilizing these partnerships to cut costs and produce their final products faster. There are 3 main reasons driving these partnerships this year.

#1: Affordable Housing is High in Demand

As the boomers join millennial's in today’s renters’ society, multifamily developers have spent the majority of this decade serving a growing number of leisurely multifamily developments. Due to the growing numbers, the demand for affordable housing has been continuously rising across the board in some of the most populated markets. Developers should look to local municipalities for partnerships that provide tax incentives and subsidies to develop affordable housing in order to meet the current demand.

#2: Opportunities Outside of Traditional Markets

Most of the market has been top-heavy, catering to the higher end buyers in traditional markets. We expect to see more developers focusing on renters and buyers in the middle of the market. Opportunities are waiting in secondary cities throughout the country where metropolitans are looking for ways to reduce housing costs while staying nearby the city. Developers should begin looking for opportunities outside of traditional markets, as the local or traditional markets are at or nearing single digit absorption rates.

#3: Finding Creative New Used for Existing Resources

Developers and many builders are searching for projects that can utilize already existing resources due to new construction costs rising. Adaptive reuse is a trend that is offering new and creative ways to reinvigorate or recompose existing buildings to be used for multifamily. This trend will cut costs and enable developers to infuse high end features and luxuries into new affordable housing units. Local governments, in which some are mandated to provide affordable housing, are keen on partnerships that can give new growth to local eyesores and vacant buildings.

Finding Public-Private Partnerships

Public-private partnerships were reserved predominantly for massive infrastructure projects like highways and government buildings. Small partnerships were unheard of up until a few years ago. The bikeshare program is what developed in cities across the U.S. ten years ago and are a great example of how successful these small partnerships can be.

While housing has been one of the oldest and most familiar forms of public-private partnerships, these partnerships are used for infrastructure projects like bridges, ports, hospitals, and schools. The FHA, HUD, and many of the VA programs as well as rescue packages instituted after the housing collapse in 2008 and 2009 all use some form of private money for financing. The bulk of these initiatives were centered on housing and transportation last year.

Use Caution When Entering Public-Private Partnerships

Oversight must go hand-in-hand when joining in public-private partnerships. Almost half of the major transportation public-private partnerships over the last 30 years have either had to be renegotiated or ran out of money and had to be bailed out by taxpayers according to numbers from the Brookings Institution.

Incentives are used to squeeze as much profit out of these deals as possible which is common with private companies. It is incumbent upon local governments to monitor and provide oversight over these deals, remembering that these partnerships are aimed at improving efficiency, not financing – taxpayers are still footing the bill for the initiative.

Risks must be more broadly shared between the public and private companies in order for these partnerships to benefit suggests Strong Towns Journal. Their suggestions including conditions like:

  • “Limited and Quantifiable Risk”

  • “Mutual Skin in the Game”

  • “A Realistic Chance for a Positive Return”

  • “A Proportionate Share in the Gain”

Developers look for big towns typically, so the smaller towns have the hardest time attracting developer dollars. For that reason, there are local, state, and federal programs aimed at incentivizing investment in small cities and towns. The EPA is just one agency with several programs that include tax incentives and abatement's for public-private partnerships.

Article Written By: Cailyn Dickerson with Daydra Management

Source: 3 Reasons Why Developers Should Form Partnerships with Local Municipalities by SIOR HQ

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