The Big “What If?”

7 min read

Building affordable housing without tax credits 

Imagine a world without tax credits. No Low Income Housing Tax Credit. No New Markets Tax Credit. No Historic Tax Credit. Where would the affordable housing industry turn to get development and preservation money?

There are many possibilities out there already. Some of them, both subsidized and unsubsidized, have already proven to be successful on their own and might be accelerated in a post-tax credit world.

There are already alternative sources of subsidized funds present in most tax credit deals, so a first glance might be to look at these to see if they could be expanded to fund higher proportions of development. But federal sources, like the HUD HOME program or the Affordable Housing Program of the Federal Home Loan Banks, are almost always just gap financing. And any government program would have to be considered subject to changing attitudes towards public policy (the HOME program is a good example). Plus, the AHP program is taken from the profits of the district banks and is thus subject to market forces. No profits, no program.

Three substantial possibilities are spotlighted by Stockton Williams, executive director of the Urban Land Institute’s Terwilliger Center for Housing. Low-interest debt funds, private equity vehicles and some real estate investment trusts are effective vehicles he sees for preserving multifamily and workforce housing. Acquisition of such properties, whether federally subsidized or naturally occurring, would be a key component of the industry’s strategy, as would converting some market-rate units to affordable.

The Acquisition Market
So, how many units are available for acquisition? According to CoStar, there are 5.5 million naturally occurring affordable housing units in the nation’s cities. One- and Two-Star properties make up 36 percent of the total. But affordable housing entities also face some stiff competition from those trying to convert them into market-rate projects, CoStar notes.

Private equity vehicles “use private capital to acquire and rehabilitate multifamily workforce and affordable housing properties, delivering a range of returns to equity investors, while maintaining the properties as affordable for lower- and middle-income renters—typically those in the 80-100 percent of AMI range,” according to Williams.

These vehicles have the potential ability to attract lots of capital for affordable acquisitions. The Jonathan Rose Companies of New York City has an active effort to raise private equity funds to preserve housing all around the country. Managing director of acquisitions Nathan Taft says the firm “is accelerating the pace of acquisitions of affordable housing properties,” focusing on capital formation without the use of tax credits or bonds.

But while the firm is working without federal programs, it still looks to state and local municipalities to partner with.The Rose Affordable Housing Preservation Fund IV acquisition (partnering with the Schochet Companies) of Glen Meadow, a 289-unit development in Franklin, MA, also partnered with MassHousing and the state’s development unit on low-interest debt financing to allow a 25 percent set aside of affordable units. The $51 million deal included 88 one-bedroom and 200 two-bedroom units averaging 907 square feet at the garden-style property, built in 1971.

About 75 percent of the Glen Meadow units fit the workforce housing model, Taft says.

Sustaining Affordability
Another aspect of acquiring and preserving affordable housing is preventing units from being acquired and turned into market-rate units. A project in Washington, DC was in a gentrifying neighborhood, but the Rose fund helped keep some of the units affordable. Channel Square Apartments in southwest/waterfront Washington, a neighborhood of rapidly rising multi-use construction, received soft monies from the district to help facilitate rooftop solar panels. It ended up being structured at three levels, with its 221 units divided into market-rate, some units for up to 80 percent of area median income, and some for 60 percent or below AMI.

“The Fund is preserving and improving this mixed-income housing community at risk for conversion to market-rate housing, by designing and implementing a capital improvement program to meet community needs and enhance value,” according to the company.

There is also 4,625 square feet of retail space at Channel Square along with the residential units, which are garden-style and tower townhomes. But the ownership isn’t really interested in commercial clients. They are converting those to rental apartments.

The Rose Company’s fund has an emphasis on green building and that can also provide affordable housing subsidies. Fannie Mae has a Healthy House Reward initiative, which provides a discount interest rate for green building. Rose’s fund has received one from Fannie Mae.

“Our tool is very flexible and allows us to move at the speed of the market,” he says.

Below-market debt funds “blend government and foundation monies, in the form of grants or low-interest loans, with conventional debt from financial institutions, mostly banks and insurance companies. The government and foundation capital acts as a credit enhancement for the conventional debt, enabling loan products that can support higher risk activities and more advantageous terms to the borrowers than would otherwise be possible,” Williams writes.

An example of the low interest debt funds is the Seattle Future Fund, an effort of Bellwether Housing of Seattle. Here, investors get an interest rate of two percent to provide funding for  affordable housing projects.

Amy Besunder, fund development manager, says the fund has been used to raise money for two preservation projects to date. These are partial fundings for projects that also have LIHTC money in the mix.

For the Parker Apartments project, $1.8 million was raised from private investors, 20 percent of a $10.8 million total project. The investors put up $25,000 to $250,000 apiece to invest in property renovation and rehab. The five-year notes have an option to renew for another five years at 2.5 percent, or the funds are returned to the investor.

Besunder describes the fund as an opportunity to do good through social investing. The project’s 50 units are one-to-three bedrooms for incomes of 50-60 AMI. Besunder said the original units, which were part of a student dormitory at a local university, could be considered market-rate.

The second effort raised $2 million for Anchor Flats, 71 one- to two-bedroom units at 50-60 percent AMI.

The fund came about about when a top executive of Bellwether Housing saw it employed in other areas. “They adapted it into affordable housing after vetting it in our community. They saw there was a good opportunity for investors who want to invest in keeping Seattle affordable,” she says.

“We plan to keep doing it. We absolutely have found success with it,” she comments.

Real estate investment trusts provide another alternative to tax credit financing. The Terwilliger Center’s Williams describes two of them in a 2015 report he wrote about preserving affordable and workplace housing.

He notes, “Some REITs acquire or develop properties directly, some acquire equity positions in properties, some offer private debt, and some pursue a blended approach, combining debt and equity investments with direct development.”

Two that he highlighted focus exclusively on affordable multifamily. The Community Development Trust, based in New York City, provides financing for the production and preservation of subsidized affordable housing.

“CDT works with local and national partners to make long-term equity investments and originates and purchases long-term mortgages that support the development and preservation of affordable housing for low- to moderate-income families,” Williams writes.

CDT has invested over $1 billion of debt and equity capital in properties in 42 states and regions to date—creating or preserving over 36,000 units.

The second, the Washington, DC-based Housing Partner Equity Trust, raised $80 million in total equity, which comprises foundation program-related investments, investment capital from financial institutions, and investment from HPN and the 12 members of the trust. To date, HPET has purchased seven multifamily properties across the country, representing more than 1,500 affordable rental homes and $150 million in value, according to Williams’ report.

Asked if alternative sources of affordable rental finance will continue to increase in the years ahead, Williams says, “The answer is a definite yes. Affordable housing needs more capital from a wider array of sources.”

Story Contacts:
Amy Besunder
Director of Fund Management, Bellwether Housing, Seattle

Stockton Williams
Executive Vice President of ULI, Washington, BC and
Executive Director of the Terwilliger Center for Housing

Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.