Affordable housing developers fight hard to buy older affordable housing properties —finding the capital for these acquisitions is one of the toughest financing challenges of 2020.
“We have market-rate developers coming into the space,” says Jim Flinn, vice chairman of the debt and structured finance team at CBRE Affordable Housing, based in Seattle. “We have all kinds of buyers—from mom and pop buyers to large private equity funds.”
Developers who buy older affordable housing properties often plan to keep the apartments they buy affordable—80% to 85% of the buyers of properties originally financed with federal low-income housing tax credits (LIHTCs) have experience owning and managing affordable housing properties, according to CBRE’s data on the deals it participates in.
But a significant number—roughly 15%—explicitly plan to raise the rents at the properties they buy as soon as they can.
Pressure Rises on Older Affordable Housing Properties
Affordable housing developers are eager to buy and recapitalize these aging properties.
Many older properties offered for sale were originally financed with 4% federal low-income housing tax credits (LIHTCs), and have an extended period of time they are committed to keep their rents affordable to low-income renters, in addition to the 15 years of affordability required by law by the LIHTC program. However, market-rate buyers can still operate the properties as affordable housing until the time runs out on the extended affordability requirements and they can raise the rents, often a few years after they purchase the property.
Many older affordable housing properties also need renovations like new roofs, and the cost of construction continues to increase, says Flinn. “The cost to operate apartment properties is also rising but the income from affordable rents may not always rise at the same pace and often doesn’t.”
Developers Seek Financing Solutions
Local and federal programs that once provided gap financing to affordable housing projects have often had their budgets cut. State housing agencies are also using up their supply of tax-exempt bonds more quickly each year.
Most (80%) older affordable housing properties originally financed with 4% LIHTC are simply recapitalized with a new, permanent mortgage through the programs of Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA), according to CBRE’s data on the deals it participates in. The other 20% are recapitalized with 4% LIHTCs and a tax-exempt mortgage, also often through the programs of Fannie Mae, Freddie Mac, or FHA.
In most of these scenarios, borrowers are eager to get as large a loan as they can. The affordable loan programs of Freddie Mac and Fannie Mae provide lower interest rates and higher leverage than conventional multifamily financing which increases the amount of debt the properties can afford to take on, says Flinn.
Affordable FHA loans can also provide high levels of leverage, and often provide the lowest interest rates with reduced mortgage insurance premiums but FHA loans can take much longer to close. However, CBRE routinely provides bridge loans which can be used to purchase the property quickly and allow the buyer the time needed to close the FHA transaction according to Flinn.
For more information on financing solutions for affordable housing developers, visit CBRE Affordable Housing.
