While the need for affordable housing across the country has never been higher, the availability for tax-exempt bonds associated with 4% LIHTC, the most used vehicle to create affordable housing, has been dwindling as an increasing number of states are making this process more competitive. This erosion of these bonds and associated 4% LIHTC availability has led to the percentage of deals being awarded tax credits to continue to fall.

David Lott
David Lott

Simultaneously, lost between the highly trafficked industries of market-rate housing and traditional affordable housing, the demand for workforce housing assets has continued to grow, and with it the interest of investors due to its strong investment returns and stable occupancy. Further driving this rush to workforce housing is the volatile macroeconomic market. With future rent growth more uncertain for the first time in years, the high-end properties loaded to the brim with amenities are in line to give way to those projects designed for working-class singles and families previously resigned to older suburban rentals.

With the decreasing availability of bonds, and the siren’s song of workforce housing, both affordable housing veterans and conventional market-rate developers are eager to utilize fresh techniques to finance the new construction and rehab of these projects without the benefit of tax credits.

Mod-Rehab Without Tax Credits

Over the last three to five years, the government-sponsored enterprises (GSEs) have rolled out programmatic rules for a product that enables a sponsor to complete a moderate rehab of an affordable property without the use of LIHTCs while still receiving some of the sizing and pricing benefits that a tax-exempt loan may receive. These loans are typically constrained at 1.20x debt-service coverage ration (DSCR) and 80% loan-to-value (LTV) and can benefit from extended amortization periods.

Fannie Mae and Freddie Mac will entertain amortization levels ranging up to 35 and 40 years, depending on the level of affordability, strength of the market, sponsor, planned rehab, and property condition. This structure has been utilized most for project-based Section 8 properties, where either the properties do not score well for tax-exempt bonds or the timing of an acquisition doesn’t allow for a full bond execution to occur.

As noted by Michael Fox, managing director of JLL’s Affordable Housing Investment Sales team, “Many high-growth, Sun Belt states are oversubscribed for bond cap, and an acquisition/rehab with credits is not feasible. A mod-rehab with conventional debt and equity allows a buyer to benefit from an immediate contract rent increase and close comparatively on a much quicker timeline. Concurrently, sellers are able to maximize pricing while limiting risk from market volatility."

A case study for a typical transaction that may fit this mold is detailed below:

· A 150-Unit Project-Based Section 8 Transaction located in Los Angeles, California that is currently owned by the Sponsor with existing debt on the property;

· Current as-is Housing Assistance Payment (HAP) net operating income (NOI): $2,776,560;

· Current as-renovated HAP NOI: $3,331,872

New Loan (5.11% Rate / 1.20x / 35-Year Amort)

$ 45,221,000

Existing UPB and Prepayment Penalty

$ 32,500,000

Renovations ($20,000/unit)

$ 3,000,000

Closing Costs / Transaction Costs (Est. at 1.75%)

$ 791,367.50

Total Uses

$ 36,291,368

Cash to the Sponsor

$ 8,929,633

· Upon completing a mark-up to market with as-renovated rents, the sponsor may secure a relatively shorter term fixed-rate agency execution (versus the typical 15- to 18-year tax credit loan), which is sized on these higher as-renovated rents. While the ability to underwrite to these higher rents does forfeit the ability to secure an interest-only period, the sponsor can effectively complete a mark-to-market with as-renovated rents without any additional partners or outside equity plus potentially take cash out of the transaction.

Workforce Housing Forward (Non-LIHTC Forward)

The regulatory framework for both Fannie Mae and Freddie Mac has incentivized the agencies to expand their activities in the arena of the missing middle, each offering a unique product that helps eliminate long-term interest rate risk on new construction workforce housing transactions by providing a forward-rate lock prior to construction. This forward-rate lock and associated permanent loan commitment also gives construction lenders greater certainty on their takeout, allowing them to offer more aggressive loan terms on affordable properties. While the program has been in existence for several years, both agencies now have greater flexibility to do forward business because the Federal Housing Finance Agency has excluded forwards from the volume cap requirements, allowing them to be more aggressive on both pricing and credit terms. Properties with as few as 20% of the units restricted may be eligible for the program. A detailed summary of

Fannie and Freddie’s program parameters can be found here.

We expect to continue to see the non-LIHTC forward executions utilized most in conjunction with the following state programs:

· California Welfare Exemption: One of the country’s most tried and true exemptions, the California Welfare Exemption allows for a tax exemption for the percentage of units that meet 80% of the area median income (AMI) or below income levels. This exemption calls for these restrictions to be memorialized by a regulatory agreement as well as require a non-profit to serve as the managing general partner. In combining one of the agency’s sponsor-initiated affordability programs with a non-LIHTC forward would enable the sponsor to remove interest rate risk, as well as benefit from the 100% exemption.

· Florida Exemption (Bill 102 / Live Local Act): Signed into law March 29 by Gov. Ron DeSantis, the new affordable exemption will allow for newly constructed properties as well as properties built within the last five years to benefit from a real estate tax exemption. Under the new law, properties that have 100% of the units restricted at 80% of the AMI or less will benefit from a 100% real estate tax exemption, while properties that have units ranging from 80% to 120% of the AMI will benefit from a 75% exemption for those units. While the bill is newly executed, the requirements of both the new exemption and the non-LIHTC forward seem to be similar allowing for these products to be used on new projects in the state. This is in addition to Florida’s other well-utilized exemption that allows for a 100% exemption for tax credit properties past year 15 of their compliance period as long as their Florida Housing regulatory agreement remains in place.

· Texas PFC Exemption: A program that has been the source of much coverage and debate over the last 12 to 24 months is the public facilities corporation. (PFC) exemption that exists throughout the state of Texas. Under this program, a for-profit developer will partner with a PFC or HFC (housing finance corporation), which is a nonprofit entity typically with ties to the local government / housing authority. The for-profit borrower would enter a long-term ground lease with the PFC and agree to restrict a minimum of 50% of the units at 80% of the AMI (it should be noted that many PFCs across Texas are now calling for lower set-asides to meet the backlash associated with the exemption). This set-aside requirement allows properties utilizing the PFC exemption to also qualify under the non-LIHTC forward program.

Recycled Bond Transactions

To maintain tax-exempt bonds that would otherwise be retired or paid off, many municipalities are moving to develop bond programs that enable bonds to be recycled to finance additional affordable housing projects. Originating in the Northeast following the release of Housing and Economic Recovery Act rules in 2007-2008, developers and issuers began to utilize short-term bonds that were paid down and reallocate them to new transactions. Since the proliferation of competition on 4% LIHTC and tax-exempt bonds throughout the country, the recycled bond program has begun to expand westward. While these recycled bonds do not allow for the sponsor to get the benefit of the 4% LIHTC equity typically associated with the tax-exempt bonds, the sponsor will enjoy the lower tax-exempt rate (estimated at 30 basis points of savings today) and attract additional lenders to compete for the business.

Some key rules associated with recycled bond transactions:

1) Bonds can only be recycled once;2) Recycled bonds must be used within six months of the original bond repayment;
3) Use of the recycled bonds must happen within four years of the original issue date of the first transaction; and
4) Recycled bonds cannot have a maturity that is more than 34 years beyond the original maturity.

All bond requirements should be followed, including Tax Equity and Fiscal Responsibility Act requirements. Additionally, many municipalities give a benefit to utilizing governmental funding, including bond financing in the form of subordinate debt, tax exemptions, etc. This exemption can be seen in states like Washington and Oregon, where the exemption requirements include state or federal funding. Because these recycled bonds allow the property to qualify for this federal funding; while still also not being dependent on the availability of tax credits, many sponsors are opting to utilize the recycled bond structure to allow for not only the lower interest rate but the ability to qualify for the tax exemption.


The affordable housing crisis remains a constant, and many creative solutions are needed to address the problems. Governments, developers and capital sources are all working to help by providing new and innovative structures.

The agencies, Fannie Mae and Freddie Mac, continue to be committed to providing and preserving affordable and workforce housing. Both offer good financing solutions for the new construction or moderate rehab of properties with affordability ranging from the very lowest income levels to the missing middle. The above guidance is not absolute but rather general guidelines on how these transactions are completed and subject to change without notice.