Although most of 2017 revolved around the uncertainty of tax reform, the affordable housing market adjusted to the threat to get transactions done.
“The headline of 2017 was tax law change. The specter of the tax code change impacted the entire year,” says Richard Gerwitz, co-head of Citi Community Capital.
However, lenders navigated through the disruption and stood by their borrowers throughout the year.
Overall, the AHF Top 25 affordable housing lenders lent almost $30.5 billion to affordable housing developments with formal income restrictions, including permanent and construction loans. This is up from the AHF Top 25 lenders’ $27 billion in 2016 and $22.9 billion in 2015.
Once again, Citi leads AHF’s list, having lent $4.71 billion to affordable housing properties in 2017. That’s down from $5.75 billion in 2016.
“We feel quite proud of our response last year in terms of working with other industry participants and our clients, being very transparent about what was happening, and acting to mitigate the potential consequences of the House bill for our clients,” says John Heppolette, co-head of Citi Community Capital. “Given what was going on in Congress and the administration, we feel comfortable with what we were able to accomplish last year.”
Wells Fargo remains No. 2, lending $4.31 billion in 2017, followed by Bank of America Merrill Lynch, KeyBank Real Estate Capital, and Walker & Dunlop.
“We’ve been in this business for over 30 years and are very committed to the development of affordable housing and working with our clients,” says Maria Barry, community development banking national executive at Bank of America Merrill Lynch. “We had a very strong year in 2017. A lot of that is attributable to being able to quickly respond to our clients after the 2016 election. We gave them consistent tax credit pricing that they could count on for their deals in 2017.”
Industry threats in 2018
The biggest threat for the affordable housing industry this year will be the devaluation of low-income housing tax credits (LIHTCs) and tax-exempt private-activity bonds due to the new, 21% corporate tax rate.
“Now that we got our answer [regarding tax reform] heading into 2018, it’s a slight adjustment down of where the market had normalized. We already knew that the value of the LIHTC would be down and production would be down. Going into 2018, it feels like people are in a wait-and-see mode,” says Alice Carr, head of community development banking at JPMorgan Chase Bank.
Frank Baldasare, managing director at Walker & Dunlop, says the industry is seeing what he calls the “triple threat” to affordable housing.
“We’re seeing rising construction costs, coupled with at least a 4- to 5-cent drop, now, on tax credit pricing and the elimination and reduction of gap programs. It’s making it more and more difficult, especially with 4% LIHTC deals, to make those transactions work,” he says.
Gerwitz adds that the 2017 hurricanes in Texas, Florida, and Puerto Rico, as well as the wildfires in California, are contributing to rising construction costs. “The natural disasters had real impact on people’s lives and will also continue to have an industry impact, driving up costs of labor and materials. It’s caused a lot of difficulties for some of our clients.”
However, he says he’s encouraged by the number of cities and states around the country that are using funds in their budgets for affordable housing.
“We’ll need to see greater partnerships with local city and government for soft money, real estate tax abatements, and the like,” adds Al Beaumariage, affordable housing program manager for KeyBank Real Estate Capital.
Rising interest rates are another concern for 2018.
“We think interest rates are going to continue to rise, but it will not be so extreme that it will preclude deals from getting done,” says Carr. “We are expecting that short-term interest rates will rise 55 to 65 basis points over the next four quarters. Longer-term rates (seven-year and 10-year Treasuries) are expected to rise a bit less, at 20 to 30 basis points.
“That may squeeze projects a bit and exacerbate some of the gaps that the projects are experiencing due to the lower LIHTC value caused by the lower corporate tax rate,” Carr adds.
Bellwether Enterprise Real Estate Capital’s Philip Melton, executive vice president and national director of affordable housing and Federal Housing Administration (FHA) lending, says he expects to see more demand from borrowers to rate-lock transactions earlier in the lending process, in order to mitigate or hedge against interest-rate risk.
Regardless of the threats, the core issue at hand is the significant housing crisis the nation is facing, says Rob Likes, national manager of KeyBank Real Estate Capital’s Community Development Lending & Investment.
“The work must go on, and we’ll do everything we can, not only to help provide the capital for new affordable housing but also to preserve the existing affordable housing stock.”
“Tight budgets due to rising rates, falling LIHTC pricing, and continued high construction costs will continue to squeeze deals, especially large bond deals,” says Dan Smith, senior vice president at U.S. Bank. “This could result in fewer deals being undertaken and those undertaken being done with tighter budgets and smaller underwriting cushions.”
However, Smith says he thinks developers will find plenty of capital construction and perm lending in the affordable housing industry.
Construction financing, along with 4% and 9% LIHTCs, primarily will continue to be the most popular execution for new construction and acquisition–rehabs, according to lenders.
“We’ll continue to offer construction lending, permanent financing, and tax credit investing, and we’re also focused on FHA loans, which will particularly help this year as developers are looking to fill financing gaps,” says Bank of America’s Barry, citing the agency’s affordable underwriting guidelines, pricing, and amortization.
Barry adds that Bank of America Merrill Lynch believes the FHA will continue to be the most utilized product for preservation and expects to see it as a source of new 4% transactions and Year 15 and non-LIHTC preservation opportunities.
Tim Leonhard, managing director of affordable housing at JLL, says Fannie Mae and Freddie Mac fixed-rate taxable loans will continue to be popular for the acquisition of refinancing loans.
For bond financing, Leonhard predicts a combination of bank direct-placement bond loans in high-demand Community Reinvestment Act markets as well as the Fannie Mae MBS Tax-Exempt Bond (MTEB) structure and the Freddie Mac Tax-Exempt Loan (TEL) program being used on a more nationwide basis.
Justin Ginsberg and Andy Weil, managing directors at Pillar Financial, a division of SunTrust Bank, add that they think borrowers will also focus on long-term financing in 2018, saying, “With the increase in short-term interest rates, floating-rate short-term financing has become less desirable.”
Many lenders say more focus will be devoted to creating workforce housing and preserving naturally occurring affordable housing (housing without subsidies) in the year ahead.
“Both Fannie Mae and Freddie Mac have come out with workforce housing programs to advance their missions,” says KeyBank’s Beaumariage. “Whereas in years past, affordable housing has been very rigidly defined in accordance with Sec. 42 [at or below 60% of area median income], we’re seeing loan programs today that really target the 80% to 120% of the area median income affordability band.”
Carr says JPMorgan Chase is looking to expand term debt products to nonprofits and affordable housing developers to increase their efforts to acquire and preserve naturally occurring affordable housing.
“We have a big commercial term-lending portfolio; we finance low- and moderate-income properties,” she says. “Where that can fall short is when you don’t lock in the affordability. We want to take that to the next step and see how we can preserve affordability in existing housing without needing to access the limited LIHTC tools that are already oversubscribed.”
Some lenders are also anticipating a significant volume of recapitalizations or refinancings in the coming year. “Given the large volume of redevelopment and new construction of affordable housing in the early 2000s, [we’re] anticipating a significant volume of refi opportunities as these properties exit their compliance periods,” says Cody Langeness, president of Red Stone Tax Exempt Funding.
Gerwitz says Citi Community Capital, too, expects a steady increase in recaps of older deals. Other lenders expect an increase in Rental Assistance Demonstration (RAD) program transactions.
“One thing we’re seeing more and more of is the number of our for-profit developers partnering with public housing agencies on the RAD program, so we’re working on six deals this year,” says Walker & Dunlop’s Baldasare.
Top 25 Lenders of 2017
|Company||2017 (in millions)||2016 (in millions)|
|1. Citi Community Capital||$4,709.1||$5,750.4|
|2. Wells Fargo||$4,305.5||$3,780.5|
|3. Bank of America Merrill Lynch||$2,832.0||$2,437.0|
|4. KeyBank Real Estate Capital||$1,761.0||$1,422.0|
|5. Walker & Dunlop||$1,729.2||$622.4|
|6. JPMorgan Chase Bank||$1,477.9||$1,828.0|
|8. JLL Capital Markets||$1,291.0||$1,222.9|
|9. Capital One||$1,253.0||$890.0|
|10. Bellwether Enterprise Real Estate Capital||$1,169.9||$560.0|
|11. Stifel, Nicolaus & Co.||$1,079.0||$872.0|
|12. SunTrust Commercial Real Estate and Pillar Financial, a division of SunTrust Bank||$992.0||$768.5|
|13. PNC Real Estate||$968.6||$$860.8|
|14. Rockport Mortgage Co.||$838.0||$578.6|
|15. U.S. Bank||$735.0||$719.0|
|16. Red Stone Tax Exempt Funding||$580.8||$334.4|
|17. RBC Capital Markets||$515.1||$545.9|
|19. Red Capital Group||$448.6||$507.7|
|20. PR Mortgage & Investments||$445.1||$299.3|
|22. Berkeley Point Capital||$379.0||N/A|
|23. Gershman Mortgage||$251.0||$210.0|
|24. Love Funding||$205.4||$378.5|
|25. Century Housing Corp.||$145.9||$143.5|
Totals include construction loans for affordable housing and permanent loans for 9% LIHTC projects, Sec. 8 housing, and bond credit enhancement.
Note: The Top 25 rankings reflect only those companies that provided Affordable Housing Finance with figures. If you'd like to be considered for next year's rankings, please contact Christine Serlin at [email protected].Source: Affordable Housing Finance survey, January 2018