All Forum Posts by: Laura Janosko

Your professor is correct that there is fierce competition in the affordable housing space. There’s competition to acquire properties and stiff competition for 9% LIHTCs. In some states there is also competition for 4% LIHTCs when there are more projects than tax credits. My suggestion would be to develop workforce housing, purchase a property with an existing Section 8 contract or acquire an underperforming market rate property and work with an affordable housing consultant to reposition the property for a 4% LIHTC allocation.

The purchasers of tax credits are typically banks and insurance companies looking to offset their taxes. The price these companies are willing to pay for the tax credits varies based on the corporate tax rate, but they are typically close to a dollar for dollar transaction. As long as there’s a corporate tax of more than 0%, there is still going to be value in buying a dollar worth of tax deduction for less than a dollar. Additionally, banks need Community Reinvestment Act (CRA) credits, and one of the ways to get CRA credit is to purchase tax credits in a CRA market. This all a long-winded way of saying that there is still value in purchasing tax credits, which is primarily driven by the corporate tax rate and CRA credits.

Completely agree that an easier way to break into affordable housing is with a subsidized property. HUD sets rents contract rents at the same level as market rate and generally increases them slightly each year. The subsidized properties perform the best out of all asset types in terms of vacancy (averaging 3%) and also perform better in terms of collections, as a large portion of rents are guaranteed by the government. To a lender, it's significantly less risky than a market rate or even a LIHTC deal.

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.

Hi Briana. I was looking at something similar in a social impact start up competition. Our business mentor suggested that our start up join an established non-profit, rather than try to start our own. She said it would be difficult to get funding when competing against established non-profits. 

In affordable housing, it's very common to have for profit developers partner with a non profits to get the grants in order to secure tax abatements, grants and subsidies. The for profit developer typically gives the non profit some ownership. cashflow and developer fee.

Happy to help you brainstorm ideas, if you'd like to PM. Love seeing people getting in to the affordable housing space :)  

@Joseph Cacciapaglia

Completely agree that zoning and appraisals are some of the biggest hurdles to getting a container deal done. Lenders and developers are doing more container deals because most work can be completed in a warehouse, largely eliminating weather delays, which saves time and money. It’s becoming especially prevalent as an affordable housing solution, which localities are typically more flexible with in terms of zoning density and tax exemptions.

@Yaz Furukawa

I used to write affordable housing market studies/demand analyses at Novogradac and currently work in KeyBank’s affordable housing division. I’d be happy to put some information together for you.

If you’d like to get information on your own, many appraisal firms offer preliminary studies that are essentially “light” versions of a market study at a lower cost. An alternative would be to talk to a lender who has access to CoStar and REIS and will provide information for free or in exchange for quoting the deal.

Lenders typically calculate $250-$500/unit (lower being new construction/newly renovated and the higher being older with little no renovations)

Hi Shawn! Congrats on getting started! The affordable housing space has more moving parts than a typical real estate development. Getting funding is typically competitive and an affordable housing development may need several funding sources to work. Because the funding is a competitive process, they typically get awarded to those with experience in the industry. My recommendation is to get started by partnering with an organization that can walk you through the process. After you’ve found your first deal to invest in, you can then decide how best to structure the entity, rather than trying to find a deal or partner that fits with your existing entity structure.

Good catch @Patti Robertson I should have checked the date before posting. The only energy efficiency financing on a national scale is Fannie Mae's Go Green loan program (https://multifamily.fanniemae.com/sites/g/files/koqyhd161/files/2019-10/go-green-flowchart.pdf). Additionally, this website https://www.dsireusa.org/ allows you to search for rebates by state.

Here are two helpful links for $ to upgrade Section 8 housing:
https://www.sapling.com/8600722/section-8-landlord-grants

https://www.thebalance.com/use-these-home-improvement-grants-to-cover-your-next-project-4584633

Home Depot, the Federal Home Loan Bank and the Weatherization Assistance Program only give funding to non profit entities, but it looks like individuals and for profit entities qualify for HUD's Green Retrofit Program. You can also call your local housing authority to see if there are any grants or low interest loans that aren't published online.

Congratulations! Was this your first deal??