It’s Preservation’s Time: New Funding Sources, Emerging Initiatives Provide More Opportunities
By Caitlin Jones
6 min read
Quietly, and without a lot of fanfare, preservation of affordable multifamily rental housing is gaining importance. New funding sources are changing the profile of preservation deals, while emerging new legislative and policy initiatives promise more and different future transaction opportunities for developers, owners, and funding partners.
“Assisted housing preservation is finally about to have its day in the sunshine,” says Martin Schwartzberg, founder and chairman of the National Foundation for Affordable Housing Solutions, Inc., Rockville, Md. “Like everything else, things go in cycles, and now is it’s time.”
Much of the opportunity lies with the current portfolios of aging existing multifamily rental projects that are federally assisted or insured. This inventory includes 1.6 million units assisted or insured by the U.S. Department of Housing and Urban Development (e.g., Section 8, Section 236); 2.1 million low-income housing tax credit units built since 1987; and huge numbers of rural rental units financed by Rural Development and its predecessor Farmers Home Administration. Add to this affordable properties financed or subsidized under state programs.
Michael Bodaken, executive director of the National Housing Trust, notes as many as 900,000 HUD units are at risk of potential loss from the affordable housing stock; their current rental assistance contracts are set to expire by 2014. Most vulnerable, he suggests, are properties in good locations near mass transit.
Preservation projects – the acquisition and rehabilitation of existing properties using tax credits and other resources – is a key priority for state housing credit agencies in their LIHTC programs. According to the National Housing Trust, more than 40 state housing credit agencies have a priority or set-aside of credits for preservation projects in their qualified allocation plans.
Deals Still Being Done
A popular traditional method of funding acquisition/rehab projects has been combining tax-exempt financing and 4% housing credits. This approach has become more difficult the past two years, largely due to less interest by tax credit investors in 4% deals. Still, strong, experienced developers with the right deal and market are managing to do these projects.
One example is Dominium Development & Acquisition, a Midwest-focused affordable and market-rate developer/owner/manager that has done a lot of tax credit preservation projects, especially of Section 8 properties. “Fortunately, one of the things that has happened over the last two years is that experienced sponsors are given credit for their experience,” says Paul Sween, a managing partner of the Minneapolis area-based firm.
One current Dominium project, for instance, involves the acquisition and rehabilitation of an existing historic building in downtown St. Louis into 86-loft style affordable apartments, called Leather Trades Artist Lofts. Arising from a failed condo project, the development is using bond financing, 4% housing credits, and soft dollars. “We have a money center bank which is interested in taking down the credits,” says Sween.
There are some encouraging signs regarding investor appetite for 4% credits. “It was a dormant market, and now it’s beginning to see some stirrings,” says Bodaken, whose group both advocates preservation policies and develops preservation projects in a partnership with Enterprise Community Partners.
New Funding Sources
New funding sources are changing the profile of preservation projects and providing new opportunities. Among these are large chunks of federal Weatherization Assistance Program (WAP) and Neighborhood Stabilization Program (NSP) dollars made available by the 2009 stimulus act. In addition, the John D. and Catherine T. MacArthur Foundation operates a $150 million program that funds state and local initiatives that foster housing preservation and helps finance preservation.
A number of states – believed around 12 or so – have set aside a portion of their WAP funds to help owners and developers finance weatherization improvements – better insulation, air sealing, etc. – to affordable multifamily rental units.
The Pennsylvania Housing Finance Agency, a leader in this area, is combining $21.2 million in WAP funds with other dollars to help finance energy audits and energy-efficiency improvements (“retrofits”) at older multifamily properties in its portfolio. Under PHFA’s Preservation Through Smart Rehab Program, owners can apply for assistance to help pay for an energy audit of their building and to help fund audit-recommended improvements that are approved by PHFA and have a payback period of less than 10 years.
PHFA executive Dave Evans said 14 to 20 energy audits have been completed so far, six projects approved for funding, and 80 audits are underway. Financial assistance for audits and retrofits can be provided as a loan or grant, depending on the source of funds and project’s financial situation. PHFA hopes to fund energy-saving improvements to roughly 10% of its portfolio affordable rental units (HUD, LIHTC, RD) within three years. More than 50% of its 139,000 total units were built over 25 years ago. “Anything 25 years or over has issues that can be helped through weatherization and energy retrofits,” says Evans.
Other funding sources for preservation deals including other types of federal tax credits, state tax credits, TCAP and exchange dollars, HOME funds, and proceeds of bonds issued through the New Issue Bond Program. A growing number of developers are also preserving affordable properties through the acquisition of general partnership interests and through workouts of troubled existing properties owned by others.
New Initiatives
Emerging legislative and policy initiatives promise even more opportunities.
One is long-awaited housing preservation legislation (H.R. 4868) introduced on March 17 by influential Rep. Barney Frank (D-Mass.). The measure, which Chairman Frank is expected to eventually guide through his House Financial Services Committee, would provide a number of tools and incentives to preserve federally subsidized rental housing units, while strengthening tenant protections. “If we don’t act, we will have a diminution in affordable rental housing units,” says Frank. “Their preservation should be of the highest priority.”
The Obama Administration, meanwhile, has proposed $9.4 billion for project-based Section 8 rental assistance to preserve approximately 1.3 million affordable rental units nationwide in its proposed HUD budget for FY 2011.
Also proposed is a new Transforming Rental Assistance (TRA) initiative, requiring legislation to establish, which is designed to create a uniform single funding stream for public housing and HUD-assisted multifamily properties and to consolidate 13-plus existing HUD rental assistance programs into one.
Barbara Sard, Senior Advisor for Rental Assistance at HUD, said the budget requests $350 million for the initiative’s first phase. “We estimate that that can cover roughly 300,000 units.”
At present, public housing agencies annually receive capital grants and operating subsidies for their public housing properties. The initiative, in the first year, would give PHAs the option to convert any multifamily property that they own – public housing or other – to a single funding stream with tenants paying rents. This conversion, along with documentation changes, would enable PHAs to leverage tax credits, debt, and other resources to help finance the renovation of these properties. “We estimate that if 280,000 public housing units convert in the first year, that the transformation for them alone would leverage over seven billion dollars in additional funding to help address the capital needs,” says Sard.
