Innovative Solutions for Financing Affordable Housing
Expanding affordable housing inventory presents one of today’s greatest challenges for multi-family developers, public agencies and non-profit organizations. To deal with the complex process of assembling the capital needed to expand inventory, unconventional alternatives are emerging. Some are new, others are new variations of established tools, and all are calling for the attention of stakeholders.
“The growing need for affordable housing has served to increase government allocations to existing subsidy programs; brought new stakeholders such as corporations, private investors and philanthropists to the market; and spurred the creation of more and different financing solutions,” noted Ron Homer, Chief Impact Investing Strategist at RBC Global Asset Management.
He highlighted community land trusts, zoning and inclusion permit programs, opportunity zone funds, and the acquisition and rehabilitation of naturally affordable housing stock in low-income neighborhoods. “The benefits of these programs are the ability to complement government grants with incentives that attract private capital and innovative developers to use these tools to create quality housing supply,” Homer added.
A completely different type of capital source is AFL-CIO Housing Investment Trust, a mutual fund that finances affordable development. HIT offers open-ended construction financing, term commitments and tax credit bridge loans. As of December 31, the fund was financing 41 ongoing projects with 7,223 units, of which 3,972 were affordable. Terms are typically 24 to 48 months (fixed or based on SOFR) for construction loans and up to 40 years for permanent loans, including partial interest only.
Capital structures are tailored to the project, including taxable and tax-exempt, credit-enhanced and on-balance sheet debt financing at fixed and variable interest rates. The loan-to-value ratio varies depending on the structure and affordability of the unit mix. A key stipulation: contractors and sub-contractors on funded projects must be represented by trade unions affiliated with the Building and Construction Trades Council Where North American Building Trades Unions.
California, often a workshop for innovative policies, is in the early stages of a new initiative that reorients existing communities. Using proceeds from 30-year municipal bonds, public housing agencies and their partners acquire properties at market price in high-cost markets. These properties are then converted into rent-restricted communities for residents earning 60% to 120% of the area’s median income.
“Rental units that were once out of reach and market priced will now be accessible to tenants who previously couldn’t afford them,” said Jim Farris, CEO of Capital Mosser. “This financing tool allows property owners to sell unrestricted at current market values and allows cities and agencies to meet their need for more affordable housing in accordance with their RNHA-determined housing goals.”
In a $157 million deal last December, Waterford Property Co. and CSCDA acquired three properties in Escondido, Calif., a town in San Diego County. Waterford, the project administrator, and the CSCDA will immediately reduce rents for new qualified residents earning between 80 and 120% of the area’s median income. Residents will benefit from an average reduction of 12.2% compared to current rents and a reduction of 13.8% compared to market rents.
The CSCDA and its partners expect participation in the program to increase, but observers suggest its long-term impact remains to be seen. “Because of the recency of this program, it remains to be determined how properties and bonds will perform over the next 30 years,” Farris said.
Necessity drives invention in high-cost markets like New York. Faced with the scarcity of conventional funding sources, housing agencies are using mixed revenue models. “Market rental units leverage private capital to subsidize the creation of affordable housing,” observed Derek Marcus, director of acquisitions and development at Cornerstone TF.
That was the strategy behind the developer’s mixed-income community at 52-41 Center Blvd. in the Hunter’s Point section of Long Island City. Major local agencies include the city’s Housing Development and Preservation Department and Housing Development Corp. Public-private partnerships are key to achieving affordable housing production goals. And without a crucial tax exemption, mixed housing development in New York would not be financially viable, notes Marcus.
Fannie Mae and Freddie Mac offer multi-family green loans to borrowers who agree to meet specific energy and water criteria. Recently, regional lenders have launched similar products or partnerships to support green and low-carbon strategies, often in cooperation with affordable housing agencies. These agencies range from Community Preservation Society., the New York City Energy Efficiency Society. to the Pennsylvania Housing Finance Agency. Property Assess Clean Energy financing, which finances energy upgrades through loans repaid by property assessments, is also gaining traction in the affordable sector.
Community Development Financial Institutions also offer loans to finance the needs of affordable housing developers. The pilot programs help use pledges from CDFIs and private foundations to fund deposits required by modular housing entrepreneurs, noted Desiree Francis, senior vice president of community finance at Capital One.
At the street corner
Five key trends will shape the affordable housing finance landscape over the next 5 to 10 years, Francis predicted.
- The LIHTC program continues to be a key funding source, according to Capital One research, but development requires more funding sources to meet demand. “As the number of funding sources used in LIHTC developments has increased, some housing finance agencies and other funders are finding ways to create one-stop-shop models by coordinating on consolidated applications or documents funding.”
- Growing interest in financing and providing services to residents, such as healthcare, digital access and wealth creation.
- Greater focus on housing preservation.
- Support BIPOC community developers to advance inclusivity.
- Collaboration led by development actors or through public-private partnerships.
Read the March 2022 issue of MHN.