Robust Building Activity Creates Wrinkles

The affordable housing industry is feeling the squeeze as overall construction activity picks up steam.

“The conventional market has been extraordinarily busy, which is driving a lot of what’s going on in our market since affordable developers access the same material suppliers and contractors,” says Richard Gerwitz, managing director and co-head of Citi Community Capital. “It’s put a lot of pressure on the business.”

A National Association of Home Builders survey in June showed a growing construction worker shortage. The most common effects of the shortages have been causing builders to pay higher wages/subcontractor bids (reported by 66% of single-family builders), forcing them to raise home prices (61%), and making it difficult to complete projects on time (58%). 

Other bank executives are also closely watching what happens in the larger building market.

“When you combine the fact that you have higher project costs with the fact there’s generally less soft money available, it’s making projects more economically difficult to pencil,” says Robert Likes, national manager of community development lending and investment at KeyBank.

Fortunately for developers, low-­income housing tax credit (LIHTC) prices have been high to provide a healthy amount of equity to deals. But, some new wrinkles are developing.

“Equity providers commit to the equity up front, at the closing of the construction loan, but they’re not wanting to put as much in as early, delaying their equity installments to increase their yields,” Likes says. “This is causing an increase in construction loans and sometimes the need for equity bridge loans.”

The bank leaders are also seeing other changes. “Construction loans tend to be floating rate, but we’ve seen more interest in fixed-rate alternatives given how low interest rates are right now,” says Gerwitz.

Gerwitz has also been seeing draw-down construction loans, which are typically used in bond transactions.

“Historically, in a bond transaction, all the bonds are issued up front, put into an escrow, and held by a trustee,” he says. “The developer is paying interest on the entire amount from day one, less any reinvestment earnings. When a draw-down structure is used, interest is only paid on the amount drawn and outstanding, resulting in less total interest during the construction period. We’ve been successful in gaining acceptance of these structures by issuers in many parts of the country.”

Citi recently provided a $37.8 million construction loan and is the LIHTC investor in Blossom Plaza, a 237-unit development in Los Angeles. The project’s 53 income-restricted units are integrated throughout the larger market-rate development being developed by Forest City Enterprises. Designed by architectural firm Johnson Fain, the project is a public–private joint venture with the city.

In Seattle, the Low Income Housing Institute and University District Food Bank have broken ground on University Commons, which will feature 49 apartments on three upper floors. The second floor of the building, which was designed by Runberg Architecture Group, is designated for 15 homeless young adults. New and expanded space for the food bank will be on the first floor. 

A year ago, Rob Hoskins, managing principal of developer NuRock Cos., would have turned to a larger bank for a construction loan, but as the competition has grown over the past 12 to 14 months, regional banks are feeling more pressure to fulfill Community Reinvestment Act requirements.

Hoskins says that as the competition becomes more aggressive, his company looks for flexibility and usually that’s found with a regional bank’s products.

“A lot of larger banks, although we do business with them and have nothing against them, have a tendency to be more rigid in the loan programs they offer,” he says.