Development & the Bottom Line
Many of us have had moments when our inner entrepreneur pipes up and says: “Why doesn’t XYZ exist as a business? It seems so obvious!” Often, the answer—especially if you don’t have an MBA or finance degree—is that the financial side of your idea is more complicated than it first appears.
Many of us feel a tension: we believe people are underpaid for their work, yet also think the cost of living is too high. This “business irony” leads us to oversimplify the complexity—especially the financial complexity—behind why things cost what they do.
The Housing Crisis Through a Financial Lens
Housing provides a stark example. Home prices have outpaced wage growth for years, driven by several factors. Since 2008, new home construction has lagged behind demand, pushing prices higher. At the same time, material costs, land values, and financing costs have all risen, making homes more expensive to produce.
To maximize margins, most builders focus on larger homes—three or four bedrooms—because the cost of capital and development favors scale. Today, upwards of 70% of new homes fall into this category. The result: an industry geared toward maximizing returns rather than addressing the full spectrum of housing needs.
For those concerned with affordability, this reality poses a challenge. One common response is to pursue density—building more units on less land to spread out site and infrastructure costs. This explains the surge in townhome development in recent years. For many for-profit developers, density is the only way to avoid being pigeonholed as “luxury builders” and still remain financially viable.
The Developer’s Balancing Act
A typical real estate development is financed with two main sources of capital:
Equity: usually 20–30%, invested either by the developer or outside investors.
Debt: the remaining 70–80%, typically from a bank construction loan.
Once homes are sold, proceeds must first repay the loan with interest, then return equity capital (plus any promised investor returns), and only then provide compensation to the developer.
Bank loans follow relatively straightforward terms tied to prime rates. Equity, however, is more complicated: the higher the return you promise investors, the more likely you’ll raise capital—but the greater the risk that the developer earns little or nothing for years of effort. In soft markets, this becomes particularly risky, as projects can take two or more years of hard work before producing income.
Townhome projects also face significant predevelopment costs. Developers must prepare business plans and pro formas and often secure rezoning before investors will commit. Communities frequently resist dense, multi-story developments, so it is common for more than half of proposed projects to die at the rezoning stage.
This attrition means developers must absorb losses from failed projects and recoup them through the few that do succeed—further driving up the costs of the homes that eventually get built.
The Nonprofit Dilemma
Even developers most often criticized for being “profit-driven” are, in reality, navigating tight financial constraints. While their projects may not deliver perfect affordability outcomes, they do add much-needed supply and help ease housing shortages.
Nonprofit developers, by contrast, often rely on subsidies or grants. But these come with their own challenges:
Limited availability: Most housing-related federal funds flow through HUD, and over 80% of its budget goes to rental vouchers. Only a small portion—around $100M—supports new construction, usually funneled into large-scale rental projects.
Complex requirements: Grants come with extensive bidding, reporting, and compliance conditions designed to prevent fraud. Many grants are reimbursable, requiring bridge loans to cover upfront costs, which adds interest expenses.
Partial coverage: Grants rarely cover full project costs, forcing nonprofits to layer bank loans. But these can be difficult to secure, since mandated lower home prices reduce appraised values and weaken underwriting.
The end result is that grant funding often increases project complexity and doesn’t fully solve the financial challenge. Even if you do find a grant, you spend much of it complying with its requirements, meaning those dollars don’t go as far as typical equity would.
A Path Forward
At MicroLife, we are exploring solutions through Cottage Courts and Pocket Neighborhoods. These models introduce density to reduce costs while maintaining architectural character. Low-profile cottage homes integrate more seamlessly into historic neighborhoods than three-story townhomes and appeal to the most underserved demographic: households of one or two people.
Despite making up over 60% of the population, these households are poorly served by an industry focused on large, 2,500+ square-foot homes. By clustering parking, we reduce road space, minimize car dependency, and preserve green space, creating neighborhoods that feel more open and livable.
Because communities are more receptive to this type of development, we avoid many of the entitlement failures that plague townhome projects, saving both time and money. The result is a naturally affordable, community-friendly development model that we hope can serve as an example for others in the industry.
pocket neighborhood site plan- credit: Ross Chapin Architects
In summary, Real estate development is rarely as simple—or as profitable—as it looks from the outside. Both for-profit and nonprofit developers face steep financial and regulatory challenges. But with thoughtful design and new models, we can create housing that is both financially viable and socially beneficial.
