Why Capital Flows for Mission-Driven Multifamily
In cities such as Nashville, these units can be a lifeline for lower-income workers, observe Northmarq's Jesse Lemos and William Rhett.
Mission-driven multifamily is a much-needed product in the U.S. Rents for these properties are priced below the 80 percent area median income threshold, which varies per census tract. Additionally, affordable housing is a necessity due to housing prices reaching the highest levels in history. First-time home buyers are struggling to generate enough for downpayments, but having the ability to save due to the affordability of their apartment or rental would assist this group with the purchase of their first home.
Mission-driven projects fall into a few multifamily categories, but the defining characteristic centers around the availability of units at or below the threshold of 80 percent AMI. The more units that are affordable to renters at this threshold, the higher the “mission-driven” aspect of a project. Typically, these projects have below-market to average rents in high earning areas. High-mission-driven projects are crucial to providing affordable housing to all. By committing to a high-mission-driven project, owners of multifamily are awarded with the best terms in the market from Fannie Mae, Freddie Mac and FHA.
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Promoting accessibility, affordability and sustainability
In many cities, like Nashville, that run on tourism and services—such as music, hotel, bars and restaurants —workers in these industries typically do not have the required incomes to live close to where they work. With more affordable apartments in and near these central business districts, communities, economies and lifestyles would improve due to accessibility.
While high-mission projects are usually older projects in great areas, developers need to be more incentivized to build new projects that fit within a high-mission framework, as lower-income workers should have the same opportunity to live and work in great areas of town. Tax reduction is the biggest way to incentivize developers and owners to continue with high-mission-driven projects. Investors need to meet minimum returns, and typically they will not voluntarily build affordable projects without help from city or government programs.
With defined mission-driven housing programs, cities make it easier for developers to work with them. For instance, a new program was recently rolled out in Nashville, and one of the options requires 40 percent of the units to be at 75 percent AMI. This is a 15-year program and with that commitment, the developer/owner’s incentive is a 70 percent to 80 percent real estate tax reduction over the initial 10 years, followed by a 50 percent to 60 percent reduction for the next five years. The real estate taxes will be fully assessed back to 100 percent in year 16 unless the owner reapplies for an additional 15-year term, which can be done after year 10 of the initial term.
Lending on mission-driven multifamily
Mission-driven multifamily is what Fannie Mae and Freddie Mac strive to lend on. For these properties, spreads get reduced, more interest-only financing is available and amortization can also increase to 35 years, in some cases. Whether it’s an acquisition or a refinance, all these benefits amount to more proceeds for the borrower. Fannie Mae and Freddie Mac both have programs that offer some of these terms if at least 20 percent of the units are marked for 80 percent AMI. That program is in place for six out of seven years, or nine out of 10 years, depending on loan term.
The best possible financing terms are available when projects target affordability, but challenges can be incurred when operators must maintain a certain number of affordable units. Several of the best Fannie Mae and Freddie Mac loan options have strict language in loan agreements; if these covenants are broken, there can be penalties.
Cities and developers working together
Local authorities are getting more creative on how to implement multiple types of strategies for developers and/or current owners to reduce real estate tax burdens or anything else that can reduce costs and encourage the development of mission-driven projects. Cities may offer something such as vouchers to musicians, bartenders, hotel employees or others working in similar industries. Another potential solution involves repairs and maintenance turnovers, where cities cover the turnover cost to rent the unit to another renter in the same 80 percent AMI category.
Unfortunately, most developers would not cater to a high-mission project without incentives from local governments. New high-mission projects do not underwrite without a reduction in tax burden, so cities need to identify areas where they want affordable housing and broadcast the leverages of following their guidelines. Additional education is needed, as well, as the advantages of high-mission projects are often not clearly understood by developers and investors.
A spotlight on Nashville
The Edgehill neighborhood in Nashville is a fantastic example illustrating what’s possible when developers, residents and local authorities work together. About a mile from 12 South and adjacent to Music Row, Edgehill is a 560-acre neighborhood that is experiencing significant development, while making sure the community’s culture and history are preserved and enhanced.
There are more than 3,200 apartment units approved for development in the area that will add a variety of housing options. Affordable and subsidized units combined with mixed-income housing will be added, along with complementary retail, office and other commercial space. The neighborhood already has one low-income housing tax credit project along with other projects in the works that may have affordable components.
Jesse Lemos is a senior vice president and William Rhett is a vice president at Northmarq. Northmarq executives contribute to Viewpoints frequently. The most recent article can be found here.
