Innovative Solutions for Affordable Housing Finance
As demand in the sector rises, these strategies shouldn’t be overlooked.
Expanding the inventory of affordable housing presents one of today’s biggest challenges for multifamily developers, public agencies and nonprofit organizations. To address the complex process of assembling the capital necessary to expand the inventory, unconventional alternatives are emerging. Some are brand-new, others are fresh variations on established tools, and all call for attention from stakeholders.
“Growing need for affordable housing has served to increase government allocations to existing subsidy programs; brought new stakeholders like corporations, private investors and philanthropists into the market; and has stimulated creation of more and different financing solutions,” noted Ron Homer, chief strategist of impact investing at RBC Global Asset Management.
Waterford Property Co. and the California Statewide Community Development Authority recently acquired Alcove in Escondido, Calif., as part of an initiative to expand affordable housing stock in high-cost markets. Image courtesy of Business Wire
He pointed to community land trusts, inclusionary zoning and permitting programs, Opportunity Zone funds and acquisition and rehabilitation of naturally affordable housing stock in lower income neighborhoods. “The advantages of these programs are the ability to supplement government subsidies with incentives that attract private capital and innovative developers to use these tools to create more quality housing supply,” Homer added.
An entirely different kind of capital source is AFL-CIO Housing Investment Trust, a mutual fund which finances affordable development. HIT offers construction-to-permanent financing, forward commitments and tax credit equity bridge loans. As of last Dec. 31, the fund was financing 41 in-progress projects with 7,223 units, 3,972 of which were affordable. Terms are typically 24 to 48 months (fixed or SOFR-based) for construction loans and up to 40 years for permanent loans, including partial interest-only.
Capital structures are tailored to the project, including both taxable and tax-exempt, credit-enhanced and balance-sheet debt financing across fixed and variable interest rates. Loan-to-value varies by structure and affordability of unit mix. A key stipulation: Contractors and subcontractors on financed projects must be represented by unions affiliated with the local Building and Construction Trades Council or North America’s Building Trades Unions.
California, frequently a workshop for innovative policies, is in the early stages of a novel initiative that repurposes existing communities. Using proceeds from 30-year municipal bonds, public housing agencies and their partners acquire market-rate properties in high-cost markets. Those properties are then converted to rent-restricted communities for residents earning from 60 percent to 120 percent of area median income.
“Formerly out-of-reach and market rate rental units will now be accessible to tenants who could not afford (them) before,” said Jim Farris, CEO at Mosser Capital. “This financing tool allows owners of unrestricted properties to sell at current market values and for cities and agencies to support their need for more affordable housing per their RNHA-determined housing goals.”
In a $157 million deal last December, Waterford Property Co. and CSCDA acquired three properties in Escondido, Calif., a city in San Diego County. Waterford, the project administrator, and CSCDA will immediately lower rents for qualified new residents earning between 80 percent to 120 percent of the area median income. Residents will realize an average 12.2 percent discount to current in-place rents and a discount to market-rate rents of 13.8 percent.
CSCDA and its partners expect participation in the program to grow, but observers suggest that its long-term impact remains to be seen. “Due to the recency of this program, it is yet to be determined how the properties and bonds will perform over the next 30 years,” Farris said.
TF Cornerstone’s mixed-income community at 52-41 Center Blvd. in Queens was financed by cross-subsidizing market rate apartments. Image courtesy of TF Cornerstone.
Necessity is sparking invention in high-cost markets like New York City. In the face of scarce conventional funding sources, housing agencies are using mixed-income models. “Market-rent units leverage private capital to cross-subsidize the creation of affordable housing,” observed Derek Marcus, director of acquisitions and development at TF Cornerstone.
That was the strategy behind the developer’s mixed-income community at 52-03 and 52-41 Center Blvd. in the Hunter’s Point section of Long Island City. Key local agencies include the city’s Housing Development and Preservation Department and Housing Development Corp. Public-private partnerships are crucial to meeting affordable housing production goals. And without a crucial tax exemption, mixed-income housing development in New York City would not be financially viable, Marcus notes.
Fannie Mae and Freddie Mac offer Multifamily Green Loans for borrowers who commit to specified criteria for energy and water. Recently regional lenders have debuted similar products or partnerships to support green and low-carbon strategies, often in cooperation with affordable housing agencies. These agencies range from Community Preservation Corp., the New York City Energy Efficiency Corp. to the Pennsylvania Housing Finance Agency. Also gaining momentum in the affordable sector is Property Assessed Clean Energy financing, which finances energy upgrades through loans repaid by property tax assessments.
Community Development Financial Institutions also provide loans funding affordable housing developers’ needs. Pilot programs are helping use commitments from CDFIs and private foundations to fund deposits required by modular housing contractors, noted Desiree Francis, managing vice president of community finance at Capital One.
Around the corner
Five primary trends will drive the affordable housing finance landscape over the next 5 to 10 years, Francis predicted.
- The LIHTC program continues as a key source of funding, according to Capital One research, but development requires more funding sources to meet demand. “As the number of funding sources used in LIHTC developments have increased, some housing finance agencies and other funders are finding ways to create one-stop shop models by coordinating on consolidated applications or financing documents.”
- Growing interest in funding and providing resident services, such as health care, digital access and wealth creation.
- A greater emphasis on housing preservation.
- Supporting developers among the BIPOC community to advance inclusivity.
- Collaboration led by development participants or via public-private partnerships.
