A New Fund Provides a Lifeline for Cash-Strapped Developers — And Enticing Incentives for Investors

For developers of Low Income Housing Tax Credit (LIHTC) projects, the increasing unpredictability of development costs is a growing concern. However, a new fund aims to provide a financial cushion and keep the pipeline of high-quality affordable housing projects flowing.

Called the Affordable Housing Accelerator Fund, the resource was recently launched by SolPacific, a Duluth, MN based private equity firm. Rather than seeking large commitments that may leave investors in deals for decades, the fund draws from private investors for short-term commitments in order to provide projects with timely sources of gap financing.

The fund fills a niche in what the industry sometimes calls “gap funding” — a collection of smaller grants, loans or other subsidies — aimed at preserving the viability of deals when larger funding sources are not enough, or when unexpected costs have made a project no longer pencil.

Gap funding strategies take a variety of forms, often novel and creative. For example, one increasingly popular financial product for securing gap funding is known as mezzanine debt, wherein additional capital is obtained via an issuance of subordinate debt secured by a pledge of the direct or indirect equity interest in the borrower held by the owner, and not by a lien on the property. Mezzanine debt can be an attractive option for parties that have reached their borrowing limits, but do not want to diminish their own equity in a project.

However, mezzanine debt brings some risk and drawbacks, most notably its typically high interest rates, which often reach the teens. Additionally, mezzanine debt and other gap financing options may leave investors leveraged for a project’s entire LIHTC compliance period, which can last 15 years or more, deterring some from entering the market.

Accelerating Funding with Private Equity
In steps SolPacific’s Affordable Housing Accelerator Fund. Greg Borash, the firm’s co-founder and chief compliance and investment officer, hopes that the fund will attract a variety of private investors who are passionate about expanding affordability while providing crucial funding to get projects over the finish line.

“The fund is designed to take a second secured position on the property. We fund a property level loan secured by a Deed of Trust on the assets, so we’ve got a level of security with the asset that the mezzanine debt wouldn’t have,” Borash explains. “We operate off of available cash flow, or residual receipts. So the first secured lender gets taken care of based on their debt coverage criteria.”

“The objective here is to assemble a fund that will hold debt for multiple properties, creating a diversified portfolio with investor capital that’s willing to wait until the maturity of the bond. We have crafted features within the fund that provide investors options for liquidity that are shorter in duration than the maturity of the bonds.” Borash says that the fund gives an uncommon amount of flexibility in relation to typical LIHTC investment. “The maturity of this offer gives investors some flexibility; it creates some liquidity, some flexibility and really some diversification within the portfolio to have more than one asset.”

Refining the Pitch
So far, Borash says, the fund’s investor focus has been financial institutions, but the team at SolPacific is looking to retail investors next, with a renewed effort underway this month. For “high net worth individuals or family offices that could possibly be looking for a yield position,” Borash hopes the fund will prove an attractive and flexible opportunity to invest in affordable housing. “We’re continuing to refine our sales pitch and our sales conversation. There’s some investors that we haven’t even approached yet. We’re really exploring where the interest of capital is.”

The motivation to invest, Borash says, can vary vastly among institutions and individuals.

“It could be social investing, but not necessarily,” Borash muses. “The institutional investors have different reasons. It could be a community reinvestment project. It could be other welfare investments. It could be access to business relationships. It could be marketing reasons, it could be PR reasons. It really could be trying to figure out how to help get affordable housing into the communities that they have a presence in.”

Similarly, he predicts that some individual investors will respond positively to the fund as a targeted initiative to channel capital into affordable housing projects. “We think the retail investors could be two categories as well. You’re going to have the social investor. Maybe it’s a more mission-based intention and purpose for investing,” he says. But, SolPacific also hopes to cater heavily to “regular” investors. “If it’s a regular retail investor who’s going to be all about yield, maturity, liquidity,” Borash says, “we need to make it appealing to the people that are listening.”

Directing Investment Toward Social Need
With the advent of the Affordable Housing Accelerator Fund, Borash hopes that private capital will gain another avenue to invest in affordability at lower risk. “There’s a market need out there that’s really slow to get satisfied, and that’s contrary to marketplace actions,” he explains. “If there’s a need in the marketplace that capital can go and produce value from — and an economic benefit — capital typically flocks to there.”

“Affordable housing is subsidized by definition: It’s got to get help from somewhere. The question is, where does that come from? And who cares about that?” Borash says this fund is trying to provide that extra subsidy while also building an energized base of investors committed to the process. “Food and shelter are unmet needs that we all have. Access to that is a challenge, but access to quality is really the objective here. To be able to create quality housing for communities — any community — it takes a commitment,” he says.