In 2012, more lenders made more capital available for affordable housing. Nearly every lender contacted by Affordable Housing Finance reports that they closed a higher volume of loans to affordable housing properties in 2012 than the prior year—and 2011 had already been a much busier year than 2010.
“We have done business with a broader pool of lenders than we have in the past ... in all parts of the country,” says Bob Simpson, vice president of the seniors and affordable multifamily mortgage business at Fannie Mae. “I think there are just more deals.”
A combination of stronger banks, stronger real estate markets, and low interest rates helped lenders close affordable housing transactions in massive volumes in 2012.
In addition, a flood of aging affordable housing properties are eligible for refinancing and recapitalization, creating a boom in preservation deals.
Over the last few years, banks have recovered from the financial crisis and are ready to lend.
“All the major banks have returned to lending. They are generating a lot of capital,” says Kyle Hansen, executive vice president and head of the community lending division of U.S. Bank.
That means more competition, with a growing number of lenders trying to make their underwriting process more attractive.
Some lenders are doing that through a one-stop shop approach. For example, a few offer debt and equity investments in affordable housing developments through a combined platform that offers simpler underwriting and a smoother negotiation process.
Other lenders are simply loosening their underwriting. During the boom years, underwriting terms loosened to the point that 40-year amortization became relatively common for permanent 10-year loans, along with debt-service coverage ratios (DSCRs) as low as 1.1x. All that ended in the crash as amortization dropped back to the standard 30 years and DSCRs rose to 1.2x.
Now lenders increasingly offer 35-year amortization. DSCRs also are beginning to creep downward toward 1.15x.
“We’ve seen some irrational pricing or credit terms,” says Ed Sigler, head of Chase Community Development Real Estate. “If someone wants a deal badly enough to lose money for 18 years, that’s OK ... Those are deals we have to pass on ... We have Community Reinvestment Act goals, but we also have share-holders.”
Conservative lenders like Chase set their underwriting standards based on long-term projections for an affordable housing property. That means that a new tax credit property should be able to refinance in 15 years, at whatever interest rates are available in that environment. “How will the markets look in 15 years? You could well be underwater on year 15 if you have relatively flat rent growth,” says Sigler. “It’s a fine art not to over-leverage.”
Throughout 2012, borrowers benefitted from record low interest rates. Many lenders now offer interest rates for permanent loans to affordable housing properties in the 5 percent range. These low rates offered a tremendous amount of capital to affordable housing deals by effectively increasing the amount that properties can borrow.
“These deals pencil out better with low interest rates,” says Fannie Mae’s Simpson.
But the good times can’t last forever. Interest rates are likely to rise, for example, as soon as the recovery begins to accelerate. “It’s hard to imagine interest rates going down ... What happens when interest rates rise?” asks Sigler. “Bank capital is going to get more expensive for long-term deals.”
No one expects interest rates to rise suddenly. The Federal Reserve has committed to keep its benchmark, short-term interest rates low until unemployment drops significantly. But interest rates are still likely to rise if the economic recovery heats up.
“There is a concern that rates could go up,” says Bank of America’s Barry. Starting around the fourth quarter, a growing number of the bank’s community development customers have been asking for tools that lock in interest rates for their floating-rate construction financing, such as swaps and caps.
Most affordable housing pros also expect that the prices investors are willing to pay for low-income housing tax credits (LIHTCs) will sag by several cents on the dollar in 2013 as economic investors demand a yield that makes economic sense.
The combination of slightly lower tax credit prices and slightly higher interest rates could deliver a one-two punch to the budgets of affordable housing deals. “That’s when the crunch will be felt,” says Sigler. That would put even more pressure on underwriting standards.
“You’re going to have more pressure on lenders to stretch their underwriting,” says Steven Fayne, managing director for Citi Community Capital.
The prospect of higher interest rates probably accounts for one of the financial products still relatively unavailable to affordable housing developers: the forward rate lock.
“The forward-rate product is the piece missing in the market,” says Sigler. “There is such a gap between immediate funding rates and the two-year forward.”
Of course, there is a real possibility that permanent interest rates will be significantly higher in two years. Lenders have to consider those potentially higher rates in the pricing they offer.
The volume of affordable housing lending was also pushed higher by worry. The “fiscal cliff” mandatory spending cuts and expiring cuts set for Jan. 1 had many affordable housing experts worried that the federal LIHTC could be sacrificed as part of a grand bargain to solve long-term projected federal budget deficits with a huge package of government spending cuts and new revenue.
“There was an acceleration to get deals financed in 2012 because of some of the uncertainties in 2013,” says Barry.
That uncertainty has eased after the events in January, affordable housing experts say.
Technically, Congress and the president could make a grand bargain at any time. The federal debt limit has only been extended by three months. However, the consensus is that programs like the tax credit aren’t going to be savaged in the immediate future.
“The whole idea that we will see something dramatic has been put off by the outcome of the fiscal cliff,” says Sigler.
Banks eager to lend found many qualified borrowers with deals to preserve existing affordable housing properties.
“Preservation is becoming much more important now than two or three years ago,” say Fannie Mae’s Simpson. “All types of preservation deals—it was nonstop in 2012.”
Low interest rates have helped make these deals work, by providing relatively low-interest financing to aging affordable housing properties.
Several major lenders grew their businesses to preserve older affordable housing properties built under federal programs like Sec. 8 and Sec. 236. Lenders who expanded their permanent lending to Sec. 8 properties by more than a third in 2012 include Citi Community Capital, which lent $216 million; Greystone, which lent $183 million; and Bellwether Enterprise Real Estate Capital, which lent $156 million.
But the biggest part of the boom in preservation deals was loans to aging properties originally financed as affordable housing with federal LIHTCs.
Affordable housing experts have been preparing for these properties to come to the end of their 15-year LIHTC compliance periods for years. But the preservation boom has been even larger than anticipated. “It’s been about twice what we thought,” says Citi’s Fayne.
A surprise change is federal regulation that has allowed the limited partners in these properties to sell their interest after they have taken their 10 years of tax benefits, but before the 15-year compliance period is complete.
Some of these deals recapitalize LIHTC properties with a new infusion of 4 percent LIHTCs and tax-exempt bonds, often credit-enhanced by a major financial institution. “There are lot more mod-rehab loans with credit enhancements,” says Simpson.
Other properties are simply refinanced with relatively straightforward permanent commercial mortgages. Several lenders tell AHF that they closed hundreds of millions of dollars in “non-LIHTC permanent loans” to residential properties in 2012. Preservation loans to aging tax credit properties account for a significant number of these loans—in many cases, these permanent loans may outlast the income restrictions on the properties.
The flood of these preservation deals is expected to continue through 2013 and beyond. “More of this 15-year product is hitting the market,” says Fayne. “It’s almost exponential.”
The number of affordable housing properties hitting year 15 will certainly increase. Back in 2001, Congress increased the volume of LIHTCs available every year, which funded a greater number of properties.
Early recapitalizations should also continue to extend the rush of refinancing activity.
“There will be a fair amount of properties and portfolios changing hands,” says Chase’s Sigler.
Once again, Citi Community Capital reported the largest total for 2012, with $2.6 billion in lending to affordable housing properties, including construction loans for affordable housing and permanent loans for 9 percent LIHTC projects, Sec. 8 housing, and bond credit enhancements.
Citi has held the top spot on AHF’s Top Lenders list for six of the last seven years.
The biggest part of the total was $1.4 billion in construction loans to affordable housing—a huge amount of loans, but still less than the $1.8 billion in construction loans that Citi racked up in 2010.
“[In the recent past] we had more balance sheet lending because of the flexibility, with a heavy concentration in construction lending,” says Fayne.
Citi also closed $865 million in credit enhancements for tax-exempt bond financing for affordable housing developments. That’s down from $940 million in 2011. Credit enhancement will probably be less common in 2013, as lenders and developers increasingly focus on private-placement tax-exempt bond deals offered by the largest money-center banks. “We are one of very few banks that will do private-placement deals,” says Fayne.
Wells Fargo continued its strong showing from last year, with $2.4 billion in lending to tax credit and tax-exempt bond properties, including $1.2 billion in credit-enhancement business, $885 million in affordable housing construction loans, $245 million in permanent loans to Sec. 8 properties, and $47 million in permanent loans to 9 percent LIHTC properties.
In addition, Wells Fargo made another $1.2 billion in loans to non-tax credit residential properties. The lender also closed an additional $315 million in permanent loans to New Markets Tax Credit properties.
Bank of America Merrill Lynch expanded its affordable housing lending business from $1.6 billion in 2011 to $1.8 billion in 2012 entering new markets—sometimes far away from the hot coastal real estate markets.
For example, Bank of America has entered the Colorado market and expanded its business in states like Arizona and New Mexico.
It also increased its community development lending in major markets including New York City, Washington D.C., Massachusetts, and Texas.
Bank of America provided nearly $68 million in construction financing and equity to Park 7 Apartments, a mixed-use project in northeast Washington, D.C., that includes 377 affordable apartments and 20,000 square feet of retail space. The financing package included a $45.25 million construction loan, a $1.75 million bridge loan, a $900,000 letter of credit, and a $20 million direct investment in federal low-income housing tax credits.
U.S. Bank came in sixth on the list. The lender’s affordable housing lending volume rose to $950 million in 2012, up from $725 million in 2011.
“We had the ability to do some really large transactions in 2012. That’s the primary reason for our increased volume,” says U.S. Bank’s Hansen. “We formed a strategy to get in front of these types of customers.”
For example, U.S. Bank provided $52 million in tax-exempt bond financing to developer St. Anton Partners for the construction of La Moraga Apartments, a 275-unit mixed-income community in San Jose, Calif. La Moraga is scheduled to open its doors by mid-2014.
A few of the largest affordable housing lenders joined forces with big multi-family lenders in 2012.
Walker & Dunlop bought CWCapital, an arm of CW Financial Services. The enlarged Walker and Dunlop closed $262 million in affordable housing loans in 2012, up from $161 million in 2011.
Enterprise Community Investment also merged with Bellwether Real Estate Capital, LLC, to launch Bellwether Enterprise Real Estate Capital, LLC, at the end of May.
The volume of tax credit lending by Bellwether Enterprise more than doubled in 2012 to $210 million from $104 million.
Bellwether Enterprise also closed more than $570 million in non-tax credit permanent loans to residential properties.