Affordable housing developer Volunteers of America (VOA) had to switch lenders twice before it could sell tax-exempt bonds backed by the loan to Sierra Manor, a Sec. 202 community affordable to lowincome seniors in Reno, Nev.

“The bonds are not selling,” says Patrick Sheridan, VOA's senior vice president for housing development. Lowincome housing tax credit (LIHTC) prices have also dropped sharply.

Affordable housing developers have struggled for years to recapitalize and preserve thousands of properties originally financed under the various generations of the federal Sec. 202 program. Only a year ago, the biggest obstacles to closing a deal were layers of inflexible regulations. But since the capital markets crisis erupted last year, these deals have become almost impossible to finance using the available tools of tax credits and tax-exempt bonds. Developers attempting to make Sec. 202 deals work with competitive 9 percent LIHTCs also have difficulty.

Many Sec. 202 projects are already starved for cash, with long-deferred capital needs. With the financing to recapitalize these communities hard to find, thousands of apartments could fall into disrepair, says VOA's Sheridan. Hundreds more could potentially leave their programs as their affordability agreements expire.

Refinancing no longer enough

Hundreds of thousands of apartments were built between 1974 and 1992 under the Department of Housing and Urban Development's (HUD's) Sec. 202 program, which provides capital to build or rehabilitate housing for lowincome seniors. Only about 10 percent of these apartments have been refinanced so far, according to housing leaders.

“There are hundreds of affordable senior housing communities that are hitting 25 to 35 years of age,” says Michelle Norris, senior vice president for National Church Residences (NCR). “These are great assets to their communities, but like any real estate, they need to be recapitalized, weatherized, and ”˜seniorized' with new amenities.”

For several years, developers had brought new capital to larger Sec. 202 deals by refinancing their mortgages with new, low-interest, tax-exempt bond mortgages insured by the Federal Housing Administration and supplemented with equity from the sale of 4 percent LIHTCs that come with the taxexempt mortgages.

However, these deals are now more difficult, if not impossible, to close. Developers are having a difficult time finding investors for 4 percent LIHTCs, and investors continue to avoid light rehabs, small deals, and small markets.

“Since the investor market is now about 50 percent or less than what it was last year, any investor will have the ability to ”˜cherry-pick' the very best deals,” says NCR's Norris.

Even developers in larger cities such as Boston and Seattle are reporting that the few remaining LIHTC investors in the market have stepped away from their planned Sec. 202 refinancings. “We have deals that are getting no bids,” says Bob Snow, vice president of National Affordable Housing Trust, Inc. (NAHT), an industry group representing affordable housing developers.

Tax-exempt bond refinancing typically only pays for light rehabs in which developers spend as little as $10,000 per unit in hard construction costs, unless the developer finds extra financing. However, LIHTC investors are looking for deeper rehabs, in which $30,000 to $40,000 per unit in construction costs will cover all of a property's projected capital needs for the full tax credit compliance period.

“They want the property to be set for 15 years,” says Snow.

As a result, investors tend to be skeptical of most proposed 4 percent LIHTC deals, in part because the 4 percent LIHTCs that come with a taxexempt mortgage provide a more shallow subsidy, which pays for a lighter rehab than 9 percent LIHTCs.

The capital crisis also has made some housing finance agencies hesitate to issue bonds backed by loans to affordable housing developments, for fear the investors will not buy the bonds.

Capital markets difficulties like these make VOA's Sierra Manor one of the very few Sec. 202 recapitalizations to recently close its financing, say housing leaders.

To sell the tax-exempt bonds backed by the loan to the Sierra Manor property, VOA had to give up its original plan to publicly offer the bonds to investors with a letter of credit provided by a bank. Instead, VOA sold the bonds directly to Citibank, which plans to resell them. The financing costs of the deals added up to $2 million, and the process added 140 basis points to the interest rate of the $23 million development's $7.2 million tax-exempt mortgage. Citi Municipal Mortgage, Inc., provided the loan at a fixed 7 percent interest rate, plus fees, for both the two-year construction period and the 30-year permanent period of the loan.

Built in 1978, the 147-unit property will receive a deep rehab costing $48,500 per unit in hard costs, paid for in part with a $5.6 million “seller's note” to the property provided by an affiliated entity of VOA, the original owner of Sierra Manor, using cash from the proceeds of its $9 million sale of the property to the new tax credit partnership.

The project also received $7 million from the sale of 4 percent LIHTCs to NAHT, based in Cleveland, Ohio, which agreed to pay $0.92 on the dollar for the project's tax credits, holding a price agreed on earlier in 2008. The deal was helped by the interest of Wells Fargo, one the investors in NAHT's tax credit fund, to participate in the Reno market.

In light of the difficulties of 4 percent financing, seniors housing experts are lobbying finance agencies to reserve a larger share of 9 percent LIHTCs to recapitalize Sec. 202 properties, especially since many states are likely to have 9 percent LIHTCs returned by developers of affordable family projects who are unable to use them.

“I think the state agencies are being way too passive,” says Bill Kelly, president of nonprofit housing coalition Stewards of Affordable Housing for the Future. He feels that with a little advanced planning by officials, Sec. 202 projects could use returned LIHTCs, which otherwise may have to be sent back to the national pool. “These Sec. 202 properties are deals that could close quickly in good locations and with strong sponsors,” he says.