State: California

8 min read

New Mixed Income Program and Other Incentives From New Administration 

After eight years of struggling for the attention of Governor Jerry Brown, who seemed to prefer speed rail to housing, the affordable housing industry appears to be more of a priority of the administration of Governor Gavin Newsom, who took office in 2019. The nation’s most populated state includes five of the country’s ten most expensive cities to live in along its coast. In most non-coastal areas throughout the state, overall incomes (average median income levels) annually have been escalating so rapidly in many communities, people previously considered middle-income are now in lower income categories, their own income is stagnant and they have no new capacity to pay rising rents. In response, the state government is implementing a new set of affordable housing funding initiatives for a wider stretch of income levels.

“The housing crisis, which historically has affected households below 50 percent area median income (AMI), is now extending to a broader group of income levels at both ends of the affordability spectrum,” says Chris Saur, information officer for California’s Housing Finance Agency (CalHFA). “This is necessitating apartment development for households from 30 percent to 120 percent AMI. The intention is to incentivize development that serves a broader range of incomes by providing financing at the higher AMI levels where resources have been unavailable historically.”

Earlier this year, California’s new Mixed Income Program (MIP) went live with the CalHFA launching a Notice of Financial Availability (NOFA) in April and preliminarily committing about $40 million in July. Eight developments producing 1,379 new apartments will receive permanent subordinated loans in an amount up to $40,000 for each rentable apartment, with a few exceptions. It supports developers building shovel ready new units funded with tax-exempt bonds or these bonds combined with four percent Federal and/or State Low Income Housing Tax Credits. MIP incentivizes them to serve a mix of incomes by subsidizing apartments that serve households making between 50 to 120 percent of AMI.

In late November, just six months into the program, CalHFA restructured MIP. Now, applications are submitted over the counter instead of via a NOFA. Eligible loan sizes grew to $50,000 to $100,000 per unit, depending on affordability to households in the 50 to 120 percent AMI ranges. An opportunity to piggyback MIP with other state-provided subordinate debt and subsidies now is available, on a case-by-case basis, at the discretion of CalHFA, based on subsidy and cost containment reviews. MIP otherwise cannot be combined with other state sources, except for state tax credits for which MIP has a special set-aside of up to $200 million, as described below. Since these changes, CalHFA has received 13 applications requesting about $75 million in MIP loans to help finance more than 1,800 affordable units with a mix of income ranges.

Previously, most affordable apartments that used state funding served AMI levels at 50 percent and below since they had to satisfy California funding requirements for serving the lowest levels. The MIP marks the state’s first deep effort to subsidize apartment affordability for teachers, nurses, firefighters, public workers and others considered the “Missing Middle Income” population.

Among those incentivized is Pacific West Communities whose president is Caleb Roope. Awarded $17.55 million of MIP funds for two of the first projects approved, this December they applied for $17.6 million more for another four developments that will produce 367 new apartments.

The 2020 MIP funding pot from which Pacific Communities West and others are applying is projected to be $40 million. Appropriated annually, the pot size equals 15 percent of the Build Homes and Jobs Fund approved by the state legislature in 2017.

Additional New Sources
Two other new funding sources available in 2020 will augment and leverage MIP, likely boosting its popularity. They are part of the $2.75 billion investment in housing and homelessness initiatives funded in the current state budget, complements of aggressive efforts by Governor Newsom, the legislature and organized housing stakeholders. These sources are:

  1. $500 million more State LIHTCs, of which up to $200 million are set aside for use with MIP. This extra allocation is about a five-fold increase over the state’s regular annual allocation and almost three times as economically powerful. It raises the credit percentage of financing for new buildings that receive four percent Federal LIHTCs from 11 to 30 percent.

Availability beyond 2020 of bonus state credits will require future approval by the legislature. But it is the intent of the legislature  that the new pool of state tax credits will be an ongoing resource, according to Tia Boatman Patterson, senior advisor on Housing in the Office of Governor Newsom and executive director of CalHFA.

  1. $500 million in one-time funds allocated to CalHFA for use, over four years, to fund low- and moderate-income housing. CalHFA will use $140 million of this capital to augment the 2020 MIP program to $180 million.

In 2020, MIP users will have a potentially huge financial advantage over other developers because they can tap into the $200 million of state bonus credits specifically set aside for the new program, assuming they also win the competition for award of federal tax-exempt bonds. Demand for the bonus state credits is anticipated to be huge in 2020 due to the extra equity dollars, if first round applications are an indicator. In November 2019, some $350 million was requested by developers for the combined $150 million of available state credits and $53 million of the MIP set aside to be awarded January 2020. Another $150 million of the state credits will be allocated in May with MIP projects allowed to receive funding from their own separate pot in any round.

CalFHA mandatorily serves as the conduit issuer of the tax-exempt bonds for all MIP users. Roope believes, “This saves me the cost and time of pursuing additional support from localities, plus CalHFA handles processing of the bond application through the Debt Allocation Committee.”

One-stop Shops
CalHFA hopes to become a one-stop shopping source to more multifamily developers. In 2019, it also tweaked its permanent loan program in an effort to become more competitive with conventional apartment lenders. The verdict is still out about how many MIP users will opt to use CalHFA as their first lien lender. If they do not, it will cost them an extra 0.35 percent annual fee they must pay to CalHFA, based on the declining balance of the first mortgage originated by their alternative lender. Like a restaurant corkage fee for bringing your own wine, this charge helps CalHFA fund its staffing costs whether or not you want to buy their product. For 2020, at least, developers have upfront extra financial incentives from CalHFA to weigh against this long-term expense.

Future viability of MIP will depend upon availability of bonus state tax credits beyond year 2020 or ability to piggyback other non-state subsidy sources to the program. More support from localities may be needed. However, localities not yet subsidizing their “missing middle” population typically require deep income targeting to reach households below 50 percent AMI. Whether it makes time and economic viability sense for MIP users to start seeking more local subsidies is an analysis to which California developers have grown accustomed. Avoiding need for multiple layers of outside subsidy is a stated reason why developers like the MIP.

As a capital source, several MIP projects without state tax credits include privately placed tax-exempt B bond mezzanine debt repayable from residual receipts. This resource, more often available to well-established large volume developers, is most viable for developments located in high rent coastal communities or other spots able to charge rents catering to 81 to 120 percent AMI households.

How well MIP users fair in 2020 in securing awards of tax-exempt bonds will be clearer after a few award cycles. In 2020, bonds will be awarded competitively. Joint tax-credit and bond applications will be separately ranked and evaluated respectively by the two allocating agencies that each have their own ranking criteria. This differs from the past several years when low demand enabled sponsors meeting minimum thresholds to receive tax-exempt bond awards. That soft demand readily accommodated issuance of B Bonds, supporting residual receipts capital structures used by Pacific West Communities and other federal tax-exempt bond users. If competition forecloses, use of B Bonds sufficient for economic viability, alternative capital sources will be needed to fill the void.

According to Patterson, the state currently is also investigating options for a bond recycling program. If the state develops a robust program for recycling its bonds, as have other states, including New York, it will support more housing development and preservation, enabling continued use of B Bond capital structures and greater fulfillment of the increasing bond demand.

How competing priorities for available funding resources are reconciled amongst California’s for-profit and nonprofit developers and state agencies remains a work in progress.