Yes you can get started in affordable housing

[Laura Janosko]

In the forums, I've seen some confusion about how affordable housing is defined. For some it means anything below market rate and for others it means LIHTC or Section 8. From a lending perspective, affordable housing includes LIHTC, Section 8, workforce housing and any other form of subsidy. Any project that qualifies as affordable housing qualifies for better terms than a market rate multifamily projects, and, because the definition is broad, it's easier for new developers to get into affordable housing than you may think. As an underwriter, I've seen market rate developers move into the LIHTC space by working with an affordable housing consultant, and I've also seen workforce housing projects with units restricted to 80% of AMI qualify for affordable housing loans. In order to solve the affordable housing crisis, we need all types of housing, so it's important for developers to understand how affordable housing is defined and financed. Note that this is only applicable for commercials loans for 20+ units.

Below are distinctions between the different types of affordable housing:

1) Workforce housing: Generally rent to tenants who have incomes ranging from 80% to 120% of area median income, as defined by HUD. Rents are generally at or close to market rate. Banks offer construction financing, and HUD offers mortgages for these types of properties. The same bank that provides the construction financing can generally place the permanent mortgage as well.

2) Section 8: Section 8 HAP contracts are given to properties by HUD. They are typically 20 years in length, and rents in the contract are generally set at market rate levels. Tenants living in Section 8 units pay 30% of their income towards rent, and HUD pays the difference between the Section 8 contract rent and the tenant's portion to the landlord. Banks offer construction financing and HUD, Fannie and Freddie offer mortgages for these types of properties. The same bank that provides the construction financing can generally place the permanent mortgage as well.

3) 4% Low Income Housing Tax Credits (LIHTCs): 4% LIHTCs are much more complicated than the two types of properties detailed above. However, experienced developers can partner with affordable housing consultants to secure 4% LIHTCs for a deal. Rents for these deals are set well below market and need tax credits in order to be viable. The 4% LIHTCs are awarded to projects each year and only limited by the amount of tax credits awarded. So, if your project meets all of the tax credit requirements, and the funding limit for that year has not been reached, your project will be awarded the credits. The amount of funding varies from state to state. Novogradac has excellent resources for learning more about 4% LIHTCs along with a list of affordable housing consultants. HUD, Fannie and Freddie offer mortgages for these types of properties, banks offer to buy the tax credits in the deal and will also provide construction financing.

4) 9% Low Income Housing Tax Credits (LIHTCs): 9% LIHTCs are the most competitive and typically only awarded to the most experienced developers with the highest scoring projects. Rents for these deals are set well below market and need tax credits in order to be viable.
Novogradac has excellent resources for learning more about 9% LIHTCs. HUD, Fannie and Freddie offer mortgages for these types of properties, banks offer to buy the tax credits in the deal and will also provide construction financing.

Any market rate development can be converted into affordable housing (as defined in #s 1-4). There are acquisition/bridge loan products that provide financing of existing market rate developments that will be repositioned as affordable housing developments.

If you're interested in learning more, I'd suggest attending this free webinar hosted by KeyBank on 3/25/21 from noon to 1pm EST https://bit.ly/3rOPZHz and/or reaching out with any questions. Getting affordable housing developed is my passion, so I'd be happy to assist in any way.