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Securing Financing

SECURING FINANCING

Financing unsubsidized affordable SMMF depends on a range of factors: a property’s capital needs; its size; and its location, to name a few. To many lenders, deals for unsubsidized affordable SMMF represent a niche financing market. Financing, like other aspects of the preservation process, benefit from economies of scale. Few national products are designed specifically for SMMF properties, making it an under-resourced inventory.

Many traditional tools for affordable housing development, such as the Low-Income Housing Tax Credit, favor larger properties and new construction. Depending on a property conditions, four percent tax credits may not be enough to fund capital needs and typically require a larger deal to be financially feasible. Building a portfolio of unsubsidized affordable SMMF properties or preserving unsubsidized affordable SMMF properties as part of a larger development are two ways to build economies of scale, and in turn, expand eligibility for financing.xxi

For a detailed discussion of the challenges of financing SMMF properties, see Small Multifamily Rental Property Financing by the Office of the Comptroller of the Currency, U.S. Treasury Department: www.occ.treas.gov/publications-and-resources/publications/community-affa....

Meeting a lender’s loan-to-value requirement can pose another barrier for underwriting purposes, when capping rents at affordable levels. Some financial products on the West Coast, such as the New Generation Fund in Los Angeles, offer higher loan-to-value ratios to address this barrier (but as of now these products are only available regionally).xxii

For instance, the New Generation Fund, a revolving loan fund for acquisition and predevelopment, offers up to 120 percent loan-to-value for nonprofit sponsors and up to 95 percent loan-to-value for for-profit sponsors.

The preservation of some unsubsidized affordable SMMF properties can be financed using conventional lending products. If an unsubsidized affordable SMMF property needs to be more heavily subsidized to maintain affordability, additional sources of capital or direct subsidy will be needed.

Financial Modeling Tool

Unsubsidized affordable SMMF preservation is often viewed by financiers as a niche market and many existing financing products for affordable housing are not designed for this property type. These factors can make it difficult to assemble sufficient financing for preservation. This toolkit provides an overview of financial products that can support your unsubsidized affordable SMMF preservation project, along with this interactive tool through which you can evaluate project feasibility and potential financing gaps to help you build appropriate financing strategies.

Two versions of the financial modeling tool are available: 

 

For details on the construction and assumptions involved in the financial modeling tool, see the technical documentation for Atlanta, GA or Miami, FL

NATIONWIDE CAPITAL SOURCES AND SUBSIDIES FOR SMMF PRESERVATION

Table 1 below provides a snapshot of nationally available capital and subsidy sources that could support the preservation of affordable SMMF properties.

TABLE 1. RESOURCES AVAILABLE FOR PRESERVATION OF SMMF PROPERTIES

 

Program

Resource type

Considerations for unsubsidized affordable
small- and medium-scale multifamily properties

U.S. Department of Housing and Urban Development

FHA 223(f) Multifamily Loan Insurance Program

Hard debt

  • Designed for properties with 5+ units

  • Lower-interest rate

  • Non-recourse financing

  • Substantial rehabilitation ineligible

Freddie Mac

Small Balance Loan Program

Hard debt

  • Simplified capital stack

  • Streamlined underwriting

  • Pricing breaks

  • Designed for properties with 5+ units and portfolios (2+ loans)

  • Non-recourse financing

Fannie Mae

Small Balance Loan Program

Hard debt

  • Simplified capital stack
  • Streamlined underwriting
  • Pricing breaks
  • Designed for properties with 5+ units
  • Non-recourse financing

Freddie Mac

Value-Add Program

Hard debt

  • More feasible for larger unsubsidized affordable SMMF properties (25+ units)

Freddie Mac

NOAH Preservation Loan

Hard debt

  • Minimum affordability requirements
  • Minimum equity requirements
  • Full underwriting process

Freddie Mac

Impact Gap Loan

Hard debt

  • Need to find an outside impact investor

U.S. Department of Housing and Urban Development

Project-based vouchers

(administered by local housing authorities)

Operating subsidy

  • Stable resource
  • Pre-screened tenants
  • Competing local programmatic priorities
  • Ongoing administration costs
  • Limit on project-based vouchers per project

U.S. Department of Housing and Urban Development

HOME Investment Partnerships Program

(administered by local jurisdictions and states)

Soft debt

Grant

Hard debt

  • Stable resource

  • Flexible (can fill multiple capital needs)

  • Maximum affordability

  • Subsidy limits

  • Competing local programmatic priorities

  • Alignment with funding cycles

  • Compliance with federal requirements

  • Prevailing wage requirements (12+ assisted units)

  • Rules when combining HOME and tax credits

U.S. Department of Housing and Urban Development

Community Development Block Grant

(administered by local jurisdictions and states)

Soft debt

Grant

Hard debt

  • Stable resource

  • Flexible (can fill multiple capital needs)

  • Maximize affordability

  • Competing local programmatic priorities

  • Alignment with funding cycles

  • Compliance with federal requirements

  • Prevailing wage requirements (8+ assisted units)

Enterprise Community Loan Fund

Acquisition Loan

Hard debt

  • Developers’ experience

  • Full-time development staff to offset experience

Enterprise Community Loan Fund

Pre-Development Loan

Hard debt

  • Developers’ experience

  • Full-time development staff to offset experience

 

Fannie Mae’s and Freddie Mac’s Small Balance Loan programs offer two of the most viable financial products for preserving unsubsidized affordable SMMF properties. Both programs offer financing for properties with 5 to 50 units. These programs can assist relative newcomers to the unsubsidized affordable SMMF market. As non-recourse financing (i.e., the property’s operations secures the loan), strong property management is critical. However, the programs’ size thresholds leave out the smallest multifamily products (those properties with 2 to 4 units).xxiii

A focus on 5+ units leaves out more than 39,000 units in 2–4-unit properties in Miami-Dade County and nearly 49,000 units in 2–4-unit properties in Atlanta’s five-county region. Enterprise Community Partners, Inc. tabulation of 2017 ACS 1-Year microdata.

While federal resources for affordable housing have been declining, they still represent a long-standing resource for preserving unsubsidized affordable SMMF. The HOME Investment Partnerships (HOME) and Community Development Block Grant (CDBG) programs are two federal programs that can support unsubsidized affordable SMMF. These federal programs are available to entitlement communities (cities and counties) directly and through state agencies to non-entitlement communities, which both set more specific priorities for their use.xxiv

Visit HUD’s Community Development Block Grant and HOME Investment Partnerships program sites, respectively, for more information about how entitlement communities are determined.

One of HOME and CDBG’s advantages is their flexibility. Both programs can be used to fill a range of capital needs. For instance, both acquisition and rehabilitation are eligible activities under these programs. HOME funds can also be used to refinance a project’s existing debt in conjunction with rehabilitation.

An important consideration when using either program is a developer’s ability to comply with all federal requirements, including paying local prevailing wages. The smallest unsubsidized affordable SMMF projects may avoid this requirement entirely. The prevailing wage requirement is triggered for properties with eight or more assisted units when using CDBG dollars and 12 or more assisted units when using HOME dollars. Prevailing wages may add significant cost to the project (as much as 20 to 40 percent by one national estimate).

Rental assistance available through local public housing authorities is another federal resource—in this case, to support ongoing operations of unsubsidized affordable SMMF properties rather than capital needs. Project-based vouchers, a component of the federal Housing Choice Voucher program, keep individual units affordable for tenants and generate consistent rents for a property owner. However, public housing authorities have their own policies guiding the use of these vouchers and typically award them through a competitive process. Developers can also accept rental assistance directly from tenants as another way to assist with their cash flow.

For more information about these and other available resources, see our Financing Resource Guides for Atlanta and Miami.

FUNDING RESILIENT UNSUBSIDIZED AFFORDABLE SMMF

As major weather events become more frequent, communities across the United States are increasingly focused on building resilience to disasters. The federal government offers resources to communities for recovery and resilience activities, some of which can be used to support the preservation of unsubsidized affordable SMMF. Table 2 provides a snapshot of federal funding programs for disaster recovery and hazard mitigation available to developers, nonprofits or local governments in Florida and Georgia.

TABLE 2. FEDERAL FUNDING PROGRAMS FOR DISASTER RECOVERY AND HAZARD MITIGATION

Organization

Program

Resource type

Eligibility for funding

FEMA

Hazard Mitigation Grant Program

 

Grants

Businesses and nonprofits can apply for funding through local governments

SBA

Disaster Loan Assistance

Low-interest loans

Businesses and nonprofits can apply directly

EDA

Disaster Supplemental Funding

Grants

Nonprofits can apply directly

HUD

Community Development Block Grant – Disaster Recovery (CDBG-DR)

Grants

Businesses and nonprofits can apply for funding through state and local governments

 

LOCAL SUBSIDIES FOR
UNSUBSIDIZED AFFORDABLE SMMF
in Atlanta, GA

Locally, there’s a wealth of resources that could be used to support unsubsidized affordable SMMF properties in Atlanta, including federal programs discussed in this section. For instance, the City of Atlanta administers a multifamily loan funded by the HOME Investment Partnership Program. This program funds multifamily acquisition and rehabilitation, in addition to new construction. The program’s locally defined priorities encourage preservation of SMMF properties in stronger markets. The program encourages preservation of properties with fewer than 40 units, near transit, and in areas where residents are at risk of displacement.

NOTABLE LOCAL TOOLS INCLUDE:

ATLANTA BELTLINE AFFORDABLE HOUSING TRUST FUND

This fund, administered through Invest Atlanta, provides both equity and grants. It serves properties located in BeltLine Tax Allocation Districts and requires affordability to households at or below 60 percent of area median income.

URBAN ENTERPRISE ZONE PROGRAM

This program designates districts where property owners can receive a ten-year tax abatement for improvements made to their properties (new construction or renovation), if they meet certain priority criteria, which includes providing affordable housing.

ATLANTA NEIGHBORHOOD DEVELOPMENT PARTNERSHIP LOAN FUND

This debt product is available through an Atlanta-based Community Development Financial Institution and requires affordability.

LOCAL SUBSIDIES FOR
UNSUBSIDIZED AFFORDABLE SMMF
in Miami, FL

Locally, there’s a wealth of flexible resources that could be used to support unsubsidized affordable SMMF properties in Miami. These resources include the Documentary Stamp Surtax Program, Community Redevelopment Agencies, and the Miami-Dade County Affordable Housing Trust Fund.

State agencies, including the Florida Housing Finance Corporation (FHFC) and Florida Department of Economic Opportunity also offer additional tools for this property type in Florida, although the transactions costs may be proportionally higher when using them.

NOTABLE LOCAL AND STATE TOOLS INCLUDE:

DOCUMENTARY STAMP SURTAX PROGRAM

This local, public program offers soft debt for rehabilitation projects that serve households between 50 and 140 percent of area median income.

COMMUNITY REDEVELOPMENT AGENCIES (CRA)

CRAs, administered by the Miami-Dade County Office and Management and Budget, offer soft debt and grants. Financing is only available in geographically defined districts.

PRE-DEVELOPMENT LOAN PROGRAM

This program, available through FHFC, provides low-interest (1 percent), non-amortizing soft debt for pre-development and acquisition in exchange for deeper affordability serving households at or below 50 percent of area median income.

CONSIDERATIONS BEYOND CAPITAL

Lenders evaluate deals for unsubsidized affordable SMMF through a different lens than more traditional affordable housing deals. In unsubsidized affordable SMMF deals, lenders place a larger emphasis on their belief in the owner, including the owner’s capacity for property and asset management and past development experience.

Why is this the case? Unsubsidized affordable SMMF properties are viable investments only if they can maintain a steady cash flow (in contrast to subsidized properties where compliance with affordability requirements is an added consideration). These properties are especially sensitive to vacancy. A strong track record of property management demonstrates the ability to control expenses, retain tenants, and effectively asset-manage.

ADDITIONAL WAYS TO SUPPORT UNSUBSIDIZED AFFORDABLE SMMF

Regional resources, such as the Community Investment Corporation’s model in Chicago and NOAH Impact Fund in the Twin Cities region, have been created to directly address the barriers associated with financing unsubsidized affordable properties, including smaller ones.

Local decisionmakers in Atlanta and Miami should consider how to develop similar tools for both cities. Additionally, many national financial products could be adapted to better-serve this property type.

Ways to support this property type include:xxv

For more recommendations on ways to support unsubsidized affordable SMMF preservation in Atlanta, see Preserving Naturally Occurring Housing Affordability in Metro Atlanta Neighborhoods; in Miami, see Miami-Dade County Affordable Housing Preservation Plan.
  • Creating a lending or banking consortiumxxvi

    In a lending consortium, bankers “pool their risks and resources to address areas of need.” For a detailed discussion of the challenges of financing SMMF properties, see Small Multifamily Rental Property Financing by the Office of the Comptroller of the Currency, U.S. Treasury Department: www.occ.treas.gov/publications-and-resources/publications/community-affa....
  • Creating an SMMF equity pool funded by government and/or philanthropy

  • Expanding existing national preservation funds to properties with 50 or fewer units

  • Expanding existing capital products to properties with 5 or fewer units

  • Working with philanthropic organizations to provide the following:

  • Credit enhancements

  • Program-related investments

  • Unfunded guarantees to financial institutions

BUILDING STRONG RELATIONSHIPS WITH LENDERS

Assume more of the risk
(compared with other affordable housing financing models, like the Low-Income Housing Tax Credit).

For instance, one national lender said they would require at least 5 percent equity to consider underwriting an unsubsidized affordable SMMF project.

Possess strong development and/or property management expertise

A developer should be able to demonstrate familiarity with property management and leasing laws, including a successful history of property ownership and management. If a developer does not have this expertise in-house, they can demonstrate how they will fill any capacity gaps, such as partnering with a large management company for the first few years of operations or hiring an accountant and lawyer to assist them. This expertise can vary based on the property’s condition and phases of the project. For instance, you may benefit from a property management partner with expertise in addressing troubled properties during the rehabilitation process but may need a different long-term manager once the property is preserved.

Make a strong first impression

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