Demand Drives Preservation Deals

The?need?to preserve affordable housing is greater than ever.

Competition for these deals is also great, driven by new programs from the?government-sponsored enterprises?(GSEs), Community Reinvestment Act obligations,?and ultra-low interest rates.

The government’s hand in?affordable housing?is voluminous as the GSEs?aggressively seek deals.

Freddie Mac?missed the mark on fulfilling affordable housing volume last year and is starting to be more competitive in the preservation space this time around, says Jeff Kearns, a vice president at Irvine, Calif.-based Johnson Capital.

“They’ve been a little more aggressive,” he says. “You see the evidence in their rate structure and introduction of new programs, like the?tax-exempt loan program.”

The Department of Housing and Urban Development (HUD) is being extremely aggressive in trying to save affordable housing stock by?updating existing buildings.

Betsy Vartanian, head of Federal Housing Administration?(FHA) mortgage lending at New York-based Greystone, says the agency has been moving in the right direction over the last year by expediting deals and allowing borrowers to do more capital improvements without taking out new substantial loans.

“They’re not letting the borrowers spend a lot more in capital improvements with a routine refinancing,” Vartanian says. “They’ll give you a better interest rate, close more quickly and then it doesn’t require you to use Davis-Bacon wages.”

Additionally, the Rental Assistance Demonstration (RAD) program has had great success since being rolled out early last year. The program allows owners to leverage millions of dollars in debt and equity to address capital needs and preserve affordable units.?HUD officials have received applications for more than 180,000 units?for the improvement program but can only service 60,000 units. HUD Secretary Julian Castro noted in an address that the department has asked Congress to lift the cap for next year's budget.

“They could do?all different kinds of different things [with this program],” Vartanian says. “It offers [owners] a 30-year long-term contract. It’s going to open the market to a lot of repositioning and refinancing.”

Vartanian stands behind FHA deals and says that’s the best option for refinancing.

“FHA rates are going to be lower than Fannie or Freddie,” she says. “They’re not just going to be lower but better. The product itself, too—the loan is going to be … 35 to 40 years as the full term of the loan [depending on permanent financing]. It’ll be a fully amortizing, non-recourse loan.”

Kearns recently worked on a deal in Hayward, Calif., where an owner could have opted out of his Sec. 8 contracts at any time. But a local housing nonprofit wanted to preserve that property as affordable housing and save 50 units. So, Kearns used FHA-insured financing with HUD’s tax credit pilot program to get the deal’s debt worked out.

“If you are an owner of affordable housing and have the ability to opt-out of the affordability, you have options,” Kearns says. “HUD has been very aggressive in incentivizing owners or buyers, potential buyers, of that housing to keep it affordable.”

Low-income housing tax credit (LIHTC) developers are also?working to get equity put into preservation deals.

“The pricing of the tax credits is very healthy,” Kearns says. “So a company can raise a lot of money by selling the LIHTC to investors that need the write-off. And the pricing of those credits fluctuates. Sometimes you don’t get as much money per credit. But right now, it’s very robust and healthy because there’s a great demand for affordable housing.”

Meanwhile, low-interest rates mean right now is the time to strike a deal. While interest rates may have hit a historical low of about 2?percent and have crept up in the last year, Vartanian doesn’t feel it will hinder the business.

“In my opinion, they’re going to stay low for quite some time–even if rates go up 50 basis points or 75 basis points and they theoretically could, given everything that’s going on,” she says. “But I don’t think they’re going go up to make it so you’re not able to refinance your property. They’re so ridiculously low, historically low, stay that way for the next two or three years.”

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