President & CEO of The NHP Foundation, not-for-profit provider of affordable housing.
In recent years, we at The NHP Foundation (NHPF) have successfully closed a variety of Low Income Housing Tax Credit (LIHTC) tax-exempt bond deals as well as numerous projects with Section 8 subsidies. Nationally, our foundation has been awarded approximately $77 million in development subsidies from federal and local sources other than FHA loans and tax-exempt bonds, which make that number much greater. The lessons we have learned in that time apply to new investors in the space: They can make a social impact project feasible; advise a religious institution seeking to convert unused space into affordable housing; or offer municipality assistance to house homeless individuals.
The most important lesson? To preserve older affordable properties and construct new affordable housing, complex, multilayer financing is necessary. Also needed? Thorough knowledge of the requirements of local, state and federal government financing sources and the resources to compete in the often-intense bidding process. Investors seeking to help house America’s low- and middle-income families and seniors must master these basics. Joint venturing with an experienced developer partner can accelerate the learning curve.
If you find yourself watching a blockbuster film today (likely on a streaming service) compared to one that was made a few decades ago, you will notice an interesting phenomenon with parallels to the affordable housing industry. Previously a film was financed by a studio, such as Paramount Pictures, the same way an affordable housing project would be underwritten and financed by one financial institution.
Today’s films are financed by multiple partners, producers and investors (just watch the credits). They are sharing the risk that a single studio just doesn’t have the appetite for. The same can be said for today’s affordable multifamily housing deals, which are also made possible by several investment sources willing to share the risk and the rewards of this asset class. According to ThinkAdvisor, “affordable housing offers the opportunity to invest in an asset class that has the potential to produce market rate returns or better, that also enables mission-based or impact investing in the service of ESG considerations.”
Enabling the preservation and construction of affordable housing in today’s market requires a set of specific strategies that NHPF has in its DNA. First, it is important to break down the financing sources:
1. Low Income Housing Tax Credit (LHTC): According to the Tax Policy Center, LIHTC “provides a tax incentive to construct or rehabilitate affordable rental housing for low-income households.” It has been the most successful tool for affordable housing development since its inception in 1986, offering 9% and 4% tax credits with different award processes, benefits and financing structures. Both produce newly constructed and rehabbed affordable rental properties with the same income eligibility standards and affordability requirements per the U.S. Department of Housing and Urban Development (HUD). The IRS allocates 9% credits to states annually for eligible projects through a competitive process via state housing finance agencies. These credits are highly competitive, with many more projects requesting credits than can be funded. The 4% credits typically are given “as of right” when private activity bonds are used.
2. Section 8 subsidy: HUD administers the Section 8 program, which “allows private landlords to rent apartments and homes at fair market rates to qualified low-income tenants, with a rental subsidy administered by Home Forward.” Section 8 refers to the HUD-funded Housing Choice Voucher Program. Vouchers can be either project-based or portable.
3. Federal and local development subsidies: Per the Tax Policy Center, “the federal government distributes grants to states and localities for many purposes, but the bulk are dedicated to health care. Some grants are restricted to a narrow purpose but block grants give recipients more latitude in meeting program objectives.”
4. FHA loans: The Federal Housing Administration, the largest mortgage insurer in the world, providing over $1.3 trillion in mortgage insurance on mortgages for single-family homes, multifamily properties and healthcare facilities. Additionally, Fannie Mae and Freddie Mac, traditional banks and other institutions all provide affordable housing financing. While all these sources can be available, there needs to be a strong, savvy team to convert them into funding.
This is where new investors can tap into their affordable housing DNA and join organizations like ours in the pursuit of sustaining a full pipeline of affordable housing preservation and development opportunities. Here’s how:
• Put together multidisciplinary teams: Competition for financing can require jumping through many hoops, including preparing detailed responses to requests for proposal, demonstrating the viability of your financing plan and articulating your vision succinctly. Comb through your staffers’ bios to see if there are “hidden gems” with backgrounds in architecture, development, law, business or even journalism who might help in your next proposal.
• Build and maintain relationships: The minute your team receives an opportunity to bid on a project, do they pore through every name involved, seeing “who knows who?” If not, they should. Often, a simple reminder of how a team member worked successfully with someone in the past is a helpful stepping stone to more work. Encourage staff to stay in touch, dropping an occasional line or emailing a relevant article to nurture important relationships, particularly important today when getting together physically is difficult.
• Market yourselves: This can be as easy as keeping your website up to date. But leading people to your website and ultimately to award work to you requires marketing techniques that include public relations, advertising, social media and, when able, trade show and conference appearances. Conduct an audit of your resources and where you can make improvements, then look at what your competitors are doing. See if your firm can budget for more intensive efforts.
• Stay informed: Finally, factor in tax and other compliance regulation changes from year to year. Those who stay knowledgeable on all zoning, construction and preservation codes and laws have an edge in this complex and competitive world of affordable housing.
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