Click Here to Download the Full White Paper
There is a tremendous shortage of affordable multifamily rental housing in America today.
In 2011, 11.8 million renters with extremely low incomes—less than 30% of area median income (AMI)—competed for only 6.9 million affordable units. That’s a shortage of 4.9 million units.1 For every 100 households with an income at or below 30% of AMI, there are only 30 available affordable housing units.2
That shortage, known as the affordability gap, has more than doubled since 2007 as the number of extremely low-income renters has grown. For the people who need affordable housing the most, there is only a small fraction of the rental market available to them.
To help meet this need, numerous federal, state and local programs and incentives are available to finance the preservation and new construction of affordable multifamily housing. However, successfully completing a transaction typically requires the combination of several funding sources and the careful coordination of numerous timing and funding requirements. As such, financing an affordable multifamily rental housing project can be a daunting task.
That’s why Lancaster Pollard has published “Financing Options for Affordable Multifamily Rental Housing,” a guide that provides an overview of the funding options available to affordable housing developers and how those sources can work together to result in a successful transaction.
“We published this white paper because it is imperative that those of us working in the industry preserve and develop as many affordable housing units as possible to help alleviate the affordability gap,” said David Lacki, managing director of Lancaster Pollard’s affordable housing group.
“Because financing such a project involves so many moving parts, funding sources and deadlines, a good understanding of the entire process is essential. That’s where our white paper comes in. It provides a great overview of the process and gives specific examples of preservation and new construction deals that, although complicated, resulted in ample benefits for the developer and the communities in which those projects reside,” he added.
What the Guide Provides
The white paper begins by citing numerous statistics and reports that diagnose the unacceptable affordability gap we face today. It then provides a brief history of government efforts to provide every American with safe, decent and affordable housing, a federal goal since the passage of the Housing Act of 1937. Ever since the passage of the Housing Act, the federal government has played an important role in the preservation and development of affordable housing options for low- and moderate-income households.
Perhaps the most important resource for creating affordable housing in the United States is the low income housing tax credit (LIHTC), a program that has financed more than 2.6 million affordable rental homes since its inception in 1987. After detailing how both 9% and 4% LIHTCs are allocated, the white paper describes the application process as well as how developers can collaborate with LIHTC syndicators. LITHCs are often used in conjunction with agency financing programs, such as those from the Federal Housing Administration (FHA) or the U.S. Department of Agriculture (USDA).
After providing an overview of LIHTCs, the white paper details both short-term construction financing and permanent debt financing. Construction financing is used more extensively than permanent debt financing as it can be used to transition to other sources of funding as well as to centralize administration of the construction draw process and monitoring. Permanent debt financing is necessary for affordable housing projects that do not have sufficient tax credit equity, grants, reserves or other funds necessary to complete the desired project.
Knowing how commercial banking relationships can be beneficial during both the construction and the permanent debt phases is key for borrowers. Banks often provide both construction and permanent financing to affordable housing projects much in the same way they provide loans to any market-rate or commercial real estate project.
The guide describes the important role tax-exempt bonds play in the creation and preservation of affordable housing. Tax-exempt bonds are an essential part of a 4% LIHTC transaction because they are required for the allocation of 4% LIHTCs by the state housing finance authority and because they provide an important source of funding that helps complete the funding picture and makes a transaction feasible.
It goes on to explain how the aforementioned funding elements work with and often rely upon agency enhancements via the federal government. The federal government has created several funding and credit enhancement programs to assure that affordable housing developers and managers can access capital in order to continue their missions of providing housing to the nation’s low- and moderate-income families. Government agency enhancements put the full credit support of highly rated federal agencies behind loans to affordable housing projects, making them more attractive (less risky) to potential investors.
Several FHA programs are detailed including: Sec. 221(d)(4) program, which provides for the new construction or substantial rehabilitation of multifamily rental properties; Sec. 223(f) program, which provides for the acquisition or refinance of multifamily rental properties; Sec. 223(f) LIHTC Pilot, a new program designed to make tax credits work better with FHA financing; and Sec. 223(a)(7) program, which is used to refinance properties that have existing FHA-insured loans.
In addition to FHA, USDA, Fannie Mae and Freddie Mac have programs that can be used in the financing of affordable multifamily rental housing. The USDA Sec. 538 program provides for the financing of either new construction or acquisition with substantial rehabilitation and is reserved for properties in rural areas. Fannie Mae and Freddie Mac, although often the subject of much debate in Washington, play an immensely valuable role in affordable housing finance as they deliver liquidity to the market, which is essential in maintaining a robust and stable housing-finance environment.
The white paper also provides an overview of gap financing, also known as soft funding. Gap financing comes in the form of subsidies from federal, state and local governments. Affordable housing developers rely on these subsidies to fill in the funding gaps that appear in the majority of transactions.
Real World Examples
Sprinkled throughout Lancaster Pollard’s white paper are numerous case studies that provide examples of how affordable multifamily rental transactions are structured using many of the aforementioned funding sources. For example, the paper presents the case study of Garden Park Villa, a 50-unit affordable seniors housing complex in Colorado owned by National Church Residences. After being allocated 4% LIHTCs, National Church Residences wanted to use equity generated from the LIHTCs to upgrade the facility. Lancaster Pollard recognized that the project was a good fit for the FHA LIHTC Pilot Program. In what was one of the first LIHTC Pilot deals in the country, the firm privately placed 100% cash-backed, tax-exempt bonds to meet the 4% LIHTC requirement that at least 50% of the project’s eligible basis be financed with tax-exempt bonds, underwrote a taxable loan insured by the FHA Sec. 223(f) program and closed the loan 135 days after submission.
In another example, Lancaster Pollard depicts how the USDA Sec. 538 program helped Whispering Hills, a 72-unit project in Illinois, finance the acquisition and much-needed rehabilitation of its deteriorating apartments. Case studies involving Fannie Mae and other funding sources are also provided throughout the guide.
Lancaster Pollard’s white paper, “Financing Options for Affordable Multifamily Rental Housing,” is a thorough guide that undoubtedly will serve as a valuable resource for affordable housing developers and other parties involved in affordable housing transactions. Despite the complexities inherent in the process, there is one concept that is absolutely clear—affordable multifamily rental housing projects need financing; there are a variety of methods for financing them; and a solid understanding of all the options is essential.
1. Joint Center for Housing Studies of Harvard University, “America’s Rental Housing: Evolving Markets and Needs.” (2013): 6.
2. National Low Income Housing Coalition, “America’s Affordable Housing Shortage, and How to End It,” Housing Spotlight Vol. 3, Issue 1 (Feb. 2013): 2.
