By Jeff Banker

Government agencies and Government Sponsored Enterprises are continuing to help fill the credit void in the wake of the credit market meltdown, remaining committed to providing liquidity and bringing stability to the industry, even during this volatile market.

Demand for flexible financing and liquidity support options remains high, especially as developers of multifamily affordable housing find themselves facing a challenging market to secure commitments for permanent financing, or term loans coming due in a tight credit environment. Fortunately, various loan products are specifically tailored to provide affordable housing projects with permanent financing for new construction, rehabilitation, acquisition or refinancing.

While many affordable housing transactions involve projects with 4% or 9% low-income housing tax credits, most loan products for affordable housing are not restricted to tax credit projects, and most affordable housing projects that carry an affordability restriction are eligible to use them. Examples of funding elements that include such affordability restrictions are HOME funds, local government funding or Community Development Block Grants.

Loan products specific to affordable housing can provide solutions to multiple issues, as they can be used, depending on the product, for immediate fundings, forward commitments (take-out financing) and as credit enhancement for both fixed- and variable-rate tax-exempt transactions, along with liquidity support for variable rate transactions.

Forward Rate Lock Option: A solution when permanent financing cannot be found
A forward rate lock provides a fairly versatile option to lock in a permanent financing interest rate prior to the completion of construction. This can help protect the borrower from interest rate fluctuations because the interest rate can be locked up to 30 days prior to construction completion. When construction is complete, permanent financing with a fixed interest rate for the term of the loan will be in place, eliminating the uncertainty of obtaining permanent financing and concern about unfavorable interest rates. The forward rate lock option can be used for new construction projects or substantial rehabilitation projects.

Immediate Funding Option: A solution when borrowers need to replace a permanent funding commitment.
Many affordable housing projects have changed considerably since they closed on construction financing. In many instances, financial institutions that had committed to permanently finance projects upon completion have been unable to provide the permanent commitment. This problem creates a domino effect: Equity pay-ins may be predicated on the project delivering permanent financing, so any delay in obtaining permanent financing can delay or stop equity payments at a critical time. Further complicating matters, the construction lender is eager to have its loan repaid, and as most construction loans are recourse, this can create a thorny situation for the borrower.

The immediate funding option can be an excellent fit in this situation. In many cases the project has been built and has leased up, or will soon. This makes the underwriting of the take out loan much easier because actual financials can be used with appropriate accruals, and most of the information required to complete a loan is readily available. Processing time is typically faster than other loan programs, which means the borrower should be able to secure financing in the current low interest rate environment.

Credit Enhancement
For projects using 4% tax credits, various loan products can be used to provide credit enhancement for both fixed-rate and variable-rate transactions. In the case of a variable-rate transaction, this same enhancement structure will also provide liquidity support for puts by the bond holders.

Preservation Tools
Projects approaching their initial compliance period can turn to affordable housing-specific loan products as a preservation tool. Typically the investor is interested in “winding up” its investment, and the term loan that was originally placed on the project is more than likely coming due.

Many projects still have some use restrictions in place as part of the extended use period, even if the initial compliance period has expired. Affordable housing-specific loan products that refinance existing debt are an excellent fit for this fact pattern. They can be used to refinance and perform deferred maintenance while keeping the development within its respective portfolio. Additionally, they permit equity take-outs.

Loan products designed for affordable housing can also be used in a more straightforward approach to reduce debt service. They can be utilized to simply refinance a higher interest rate, provided breakage fees from the current lender are not too onerous.

Processing Time and General Requirements
These transactions have the advantage of being fairly fast. It typically takes less than 60 days from initial mortgage banker engagement to loan package submission. As a delegated underwriter, the mortgage banker ensures the loan fits within stated guidelines. If it fits the guidelines, approval should come quickly.

Loans completed in this manner do not require prevailing wage, and they can allow for subordinate financing in some cases. Subordinate financing can include “must pay” amounts or deferred payments made out of available cash flow. The subordinate loans will need to conform with program rules.

Financing solutions that fit well with each phase of the development of an affordable housing project are still available even in this market. From permanent financing to refinancing or renovating a stabilized project, these affordable housing-specific products provide an excellent resource amid credit market uncertainty.

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