The Preservation Game

By Philip Melton, Centerline Capital Group

The Affordable Housing landscape is shifting to a new focus on preserving existing multifamily stock. The trend began during the financial crisis, when construction financing was nearly impossible to locate. Also, state agencies want to maintain properties that have received Low Income Housing Tax Credit status.

A large number of these properties were facing the end of their initial 15-year compliance period, and the availability of state and federal subsidies to sustain these properties had dried up through budget cutbacks. Additionally, demand for Section 8 properties had increased significantly as developers/owners sought opportunities to lock in long-term payment subsidy streams.

To a city or state official, preservation means the ability to maintain quality housing stock for lower income residents. To a developer, preservation affords an opportunity to reestablish functionally obsolete housing stock. To an owner, it’s an investment in their existing housing portfolios, and to residents it often means an improved quality of life via the rehabilitation of their homes. Fannie Mae, Freddie Mac and FHA have all turned their attention to preservation of affordable housing through increased financing offerings and a focus on the mission of providing affordable housing.

During the 2009-2011 recession, the use of tax-exempt bonds in conjunction with low-income housing tax credits waned considerably. Lately, there has been a resurgence in developer interest in Private Activity Bond programs, largely in the areas of acquisition/rehabilitation projects or “preservation” deals. New construction using tax-exempt bonds remains challenging given the lack of subsidies available to ease gaps in financing; however, in-place rehabilitation with renovation budgets equal to $25,000+ per unit is gaining momentum. A number of factors driving this trend include: a willingness of upper-tier LIHTC investors to invest; the reduction in lease-up risk, which should lead to a faster delivery of tax credit benefits; the availability of private activity bonds at the state level (unlike competitive 9 percent allocations); and, an oftentimes smaller financing gap to bridge in the capital structure.

Projects with Section 8 contracts are the most desired, especially in light of HUD’s willingness to enter into new 20-year Section 8 contracts, often with increasing rents post-renovation.

Congress has shown its support as well for the Section 8 program through a recent decision to increase Section 8 appropriations by $536 million in fiscal year 2013. This bill passage indicates the commitment Congress is making to affordable housing efforts. Interestingly, the new appropriations total was $1.1 billion more than HUD’s requested funding level for the Section 8 program.

As the first big wave of LIHTC deals come to the end of their first 15 years of compliance, there will be greater demand for upgrading that housing stock. The preservation of affordable housing is not only good business; it’s the right thing to do.

Philip A. Melton is senior managing director in the Affordable Housing Debt division of the Affordable Housing Group of Centerline Capital Group.