Affordable multifamily properties’ mid-life crisis

Many of us appreciate the role that affordable apartment properties play in providing housing to Virginians who wouldn’t otherwise be able to afford it, but few genuinely understand what goes into preserving those meaningful living quarters in the state’s affordable housing supply. It’s an information gap that needs to be closed soon: During the next five years, more than 25,000 affordable apartment units reserved for tenants with incomes at or below 60 percent of an area’s median income and financed by the Virginia Housing Development Authority (VHDA) will conclude their mandatory 15-year lockout period, the compliance period during which a property that received federal low-income housing tax credits (LIHTCs) must maintain a certain amount of affordable units. At that point, many owners may need to invest heavily to modernize their properties or sell them to offload the financial burden.

The challenge at hand goes to the way such properties originally were financed. The federal low-income housing tax credit (LIHTC), created under the Tax Reform Act of 1986, accounts for nine out of every 10 affordable rental units developed in the United States. The program allows property owners to take a federal tax credit equal to a percentage of the cost incurred for developing low-income units. The credit is then sold, or “syndicated,” to an investor or group of investors in exchange for a capital contribution.

For a property to qualify for LIHTCs, the owner must agree to lock up a certain percentage of low-income units for a 15-year period.  The VHDA went a step further by requiring developers who received LIHTC subsidies to agree to an extended compliance period of an additional 15 years.

In signing on, many property owners simply did not envision what would be required to preserve the quality of the affordable housing stock. Today, many of the 265 some multifamily properties about to come out of the original 15-year lockout period are in need of extensive renovation, and yet the fact that they will have restricted rent flexibility for another 15 years limits their ability to pay for them and remain profitable at the same time. Faced against the prospect of higher debt costs to pay for these improvements, many are mulling a sale to new owners who will inherit the challenge.

As they consider their options, current owners should be apprised of all of the financing alternatives available to them, whether they employ them or include such information in their sales pitches. After all, would-be buyers will be much more likely to move on a property when they can see the path ahead for improving it without eroding their potential to profit.

Those options start with refinancing the existing mortgage and obtaining new LIHTCs or re-syndicating existing LIHTCs. Two years ago, the U.S. Department of Housing and Urban Development introduced a program, known as the LIHTC Pilot, to test an accelerated approval process for the purchase or refinance of multifamily affordable rental properties. The use of the LIHTC Pilot program is subject to the project meeting one of the following eligibility requirements:  1) at least 90 percent of the units have a Section 8 HAP contract and new LIHTCs are being introduced; 2) existing LIHTCs are being resyndicated; and 3) project is newly constructed with LIHTCs and building permits were pulled before Sept. 18, 2014. In addition to providing loan commitments in 60 days or fewer, HUD increased repairs tied to hard construction costs from approximately $17,500 per unit to $40,000 per unit. This is a significant inducement for property owners who were once constrained by the lower repair allowance or were discouraged from buying a property because of it.

When needed renovations require more work than that, borrowers can turn to HUD’s 221(d)(4) loan insurance program. The program provides nonrecourse, assumable financing for up to 40 years for the substantial renovation of existing affordable apartments. A property can qualify for substantial rehabilitation if the cost of repairs exceeds the greater of 15 percent of estimated replacement cost after repairs or $6,500 per unit times the local high cost factor for that area.  A project can also qualify as a substantial rehabilitation if two or more major building components are being substantially replaced, regardless of the cost. The program may be a particularly good fit for properties built before VHDA began imposing minimum design and construction standards for affordable properties in 2005.

In addition, VHDA has attractive refinancing options under its own budgetary authority. The agency offers straight refinancing for affordable properties that aren’t in need of substantial renovation. The new loans come with lower than market interest rates and include a new 10-year lockout period. The agency may even waive existing prepayment penalties. When substantial renovations are required, VHDA offers refinancing and rehabilitation loans as well.

As the details involved with FHA and VHDA options can be complex, it’s critical that property owners partner with lenders who have intimate knowledge of FHA and VHDA financing alternatives. In fact, both agencies require borrowers to work with preapproved lenders that have been vetted and handpicked. Your lender should take the time to get to know your specific situation and tour the properties in question, so that they have firsthand knowledge of any challenges that may stand in the way of a seamless transaction.

With the Federal Reserve preparing to finally push interest rates higher soon, borrowing costs won’t be this low for much longer. Virginia affordable multifamily property owners owe it to themselves to explore their financing options now, whether they ultimately make use of them or help clear a path for buyers looking to take on the responsibility for preserving attractive housing options for low-income Virginia families.

Laura Saull-Smith is a senior director in Love Funding’s Washington D.C. office. Ann Bolen is a director in the company’s Norfolk office. Love Funding is a fully-approved HUD LEAN AND MAP lender, as well an approved VHDA lender.