After sitting vacant for years, a historic downtown St. Louis building has been turned into 86 affordable apartments for artists.
The $20.8 million Leather Trades Artist Lofts is one of several tax-exempt bond (TEB) deals that Dominium, a major affordable housing developer, has closed in the past two years.
The financing of Leather Trades includes about $14 million in bond financing and about $7 million in 4 percent low-income housing tax credits (LIHTCs). The project also utilizes state housing credits and federal and state historic tax credits.
Historic rehabs, which often have higher costs because of the environmental and retrofitting work involved, are one area where Dominium is using the 4 percent credit and TEB combo platter. The other is in the resyndication of older 9 percent deals, says Mark Moorhouse, senior vice president of development.
Overall, 11 LIHTC syndicators surveyed by AFFORDABLE HOUSING FINANCE report a jump in bond activity this year while six others say they are seeing about the same or fewer transactions than in 2011. A benefit of bond financing is that it is usually more available and comes with an as-of-right allocation of 4 percent credits. However, the main concern is their high leverage.
“We are doing bond deals on a selective basis,” says Jeff Weiss, senior vice president, investor relations, at Hunt Capital Partners. “We are not shying away from transactions simply because they are bond financed. What we are looking at are ”˜de-levered' deals, where the permanent bond debt looks and smells like what you would see on a 9 percent LIHTC transaction. By that I mean low leverage financing.”
It's not unusual for a typical bondfinanced 4 percent LIHTC deal to have twice as much debt per unit as a 9 percent transaction, according to Weiss, who says his firm is being conservative on the debt per unit.
“The market is much more active, and investors are very receptive,” adds Neil Socquet, CEO of IFG Capital.
He is closing 4 percent deals in New York, California, and the Midwest that involve expiring Department of Housing and Urban Development loans. He agrees that an area of concern is the high leverage of some bond deals.
“The way to mitigate that is to underwrite them at 1.20 debt-service coverage ratio (DSCR) instead of 1.15x,” says Socquet, who has some deals at 1.30 DSCR.
He says investors are asking for a greater level of rehab. “Investors would like developers to spend a minimum of $25,000 per unit in rehab,” he says. “That's up from last year when people were saying $20,000.”
Investors want that higher amount to make sure the property will be a strong development for many years.