James Vanar
James Vanar

The Federal Reserve’s recent decision to forestall tapering its bond-buying program has provided a temporary respite for affordable housing developers worried about rising rates. Despite lingering economic uncertainty, there is no question that the Fed will eventually take its foot off the gas pedal and allow interest rates to resume their climb higher. It’s just a matter of when.

For affordable housing developers and owners, rate increases are coming at an inopportune time. Over the next eight years, more than 1 million apartment projects backed by low-income housing tax credits (LIHTCs) could leave the affordable housing stock, according to the Department of Housing and Urban Development (HUD).

What is behind this? A large number of LIHTC properties that were financed over the past 15 years are coming to the end of their compliance periods. When that occurs, owners will have to decide whether to convert those properties into market-rate units or maintain them as affordable housing.

If a large percentage of the affordable housing stock converts to market rate, it will exacerbate an already acute shortage of affordable housing options nationwide. While homeownership is starting to recover, middle-class and low-income renters are finding it harder and harder to afford suitable accommodations. According to HUD, the number of renters with worst-case housing needs swelled to a record 8.48 million in 2011, the latest data available, from a previous high of 7.1 million in 2009. Since 2007, there has been a 43 percent increase in those ranks. These worst-case housing needs are defined as renters with very low incomes (below half the median in their area) who do not receive government housing assistance and who either paid more than half their monthly incomes for rent, lived in severely substandard conditions, or both.

Suffice to say, affordable housing development just is not keeping up with demand. According to the Harvard Joint Center on Housing Studies, the supply of housing that low-income renters can afford has remained stagnant. In 2011, there were only 6.8 million affordable rental units for roughly 12.1 million extremely low-income renters, or those earning 30 percent or less of area median incomes. Due to the factors spelled out above, that significant gap is not going to get any easier to fill in the years ahead—at least, not without some help.

Fortunately, that help exists. Last year, HUD unveiled a new pilot program to test an accelerated approval process for the purchase or refinance of LIHTC multifamily rental properties. The program has been such a success that HUD has expanded it nationwide, and some applicants are receiving HUD commitments in less than 30 days. In fact, HUD’s Los Angeles office took only 25 business days to process the applications and commit to insure for two properties I recently helped a client acquire in California. Added up, total application handling time between my company and HUD came in just over four months, which could come as a welcome surprise to anyone who has used HUD’s loan programs in the past.

The pilot program serves as affordable property owners’ and buyers’ best line of defense against higher rates because it avails borrowers of the same financing terms that make other HUD loan insurance programs so appealing: the lowest rates around, non-recourse financing, amortization up to 35 years, and up to 85 percent leverage on straight affordable housing projects (or 87 percent for Sec. 8).

But what is more, the pilot program increases allowable repairs tied to hard construction costs from approximately $17,500 per unit to $40,000 per unit. This is a significant inducement for property owners who were once constrained by the lower repair allowance. In the transactions mentioned above, my client was able to use this allowance to undertake renovations such as kitchen and bathroom upgrades.

The LIHTC program is perfect for any owner or developer looking to refinance or acquire LIHTC apartment properties of three key types:  affordable housing projects with 90 percent or more of the units covered by a Sec. 8 HAP contract, older properties that had LIHTCs that are now re-syndicating with new LIHTCs, or newly constructed LIHTC properties less than three years old.

If you are in this group and you have not explored this exciting opportunity, there could not be a better time.

James Vanar is a senior director at Love Funding. Based in the firm’s Los Angeles office, Vanar is responsible for the origination of FHA-insured construction and permanent loans for developers and owners of apartments, senior living and health-care properties.