The affordable housing crisis has been pressuring almost every city across the U.S. for decades. But recent policy changes under consideration, such as zoning reforms and the expansion or relaunching of several finance programs proposed by the Build Back Better Agenda, could make it easier to increase the affordable housing supply.
Multi-Housing News checked in with Pharrah Jackson-Rowell, vice president of affordable lending at Greystone, about the outlook for affordable housing development and finance.
Greystone ranked as the top HUD lender in 2021, originating more than $3.3 billion through the MAP program, significantly above the 2.4 billion volume recorded in 2020. In total, Greystone originated $18.3 billion across all lending platforms, including FHA, Fannie Mae, Freddie Mac, CMBS and bridge.
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How would you characterize liquidity for affordable housing today? Is it getting easier to preserve and build affordable housing?
Jackson-Rowell: First, I believe that there is a strong level of liquidity for affordable housing in the market right now. More states and cities are encouraging the construction and preservation of affordable housing and supporting it with state tax credits, real estate tax incentives (PILOTs and tax exemptions), soft financing, grants, rental subsidies and favorable ground leases to help to aid in these efforts.
Another big boost to the liquidity available for affordable housing is the additional tax credit investment that Fannie Mae and Freddie Mac are allowed to make thanks to the increase from FHFA last summer. Now they can both invest up to $850 million annually in federal low-income housing tax credits with a large portion of that being in markets that have traditionally had difficulty in attracting investors.
But, even with the additional liquidity available, there are new and rising challenges that continue to make it difficult to preserve and develop affordable housing. Current challenges include increasing construction and labor costs, supply chain constraints and the lingering effects of COVID-19 that add timing issues to transactions that already require long timelines. The effects of these challenges are that most affordable transactions now require multiple layers of subsidy (rental and/or financial). In addition, affordable transactions are becoming more complex.
How are these challenges and risks impacting the underwriting process for affordable housing projects?
Jackson-Rowell: I think that lenders and borrowers are going to look for ways to mitigate the ongoing construction challenges that we are seeing. Fixed price contracts, buying out materials as early as possible and building in extensions to allow timing flexibility are some of the ways that these can be addressed. But lenders are going to have to work with borrowers, and I believe that the IRS is going to take the lead on this. Earlier this year, the IRS released a notice that further extended widespread relief for timing related to LIHTC and bond transactions for the 10-percent test, the minimum rehab period, and the placed-in-service deadlines (among others) to account for the issues that these transactions are encountering.
How do you expect deal volume to shape up for Greystone this year?
Jackson-Rowell: Our 2022 pipeline is already very strong, and we believe that we should continue to grow at roughly the same pace. Additionally, our new joint venture with Cushman & Wakefield should yield additional debt volume as we work to meet property investors’ needs from a sales or financing point of view.
How does HUD financing compare to other government-backed financing options?
Jackson-Rowell: HUD financing is very competitive against the other government sponsored executions. The HUD rates, long loan terms and amortization periods really can’t be beat, but it is a more time-consuming execution and does have HUD specific underwriting requirements that do not work for every transaction.
Greystone is a lender that offers HUD, Fannie Mae, Freddie Mac, CMBS, bridge financing as well a private placement bond execution. We tell borrowers that it is always best to tell us what they are trying to achieve and then let us look at the transaction utilizing all of these resources rather than limit it to just the execution that they think is right for their transaction. Many borrowers are surprised at what loan product actually gives them what it is that they are ultimately looking for—lower payments, interest only or prepayment flexibility for example.
What are the main points you consider before deciding if a multifamily property is eligible for the HUD financing program?
Jackson-Rowell: I think that many people are surprised to learn that most properties are eligible for HUD financing, especially now that HUD has lifted their three-year rule (that previously required three years of post-construction occupancy of properties when applying for HUD financing).
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What markets will see more affordable housing development this year? Why?
Jackson-Rowell: I believe that rural housing and markets outside of major metros will see more affordable development this year and in coming years. I think that the workforce shift from the pandemic, with more workers being able to work remotely, will help to drive this. But I also think that this is going to be a function of the increasing costs of housing in general. People are going to have to travel further out to find affordable housing for rental and home ownership.
There’s a new emphasis on addressing the need for middle-income and workforce housing as well. What are some of the financing options available for these housing segments?
Jackson-Rowell: Most middle-income and workforce housing transactions are treated like traditional conventional multifamily housing. But, if the borrower has rent or income restrictions imposed or is willing to self-impose restrictions, there are products available for these property types. Freddie Mac offers preservation options for naturally occurring affordable housing owned by non-profits as well as a non-LIHTC Forward program, while Fannie Mae offers products for sponsor-initiated affordability and for properties that meet their requirements for Special Public Purposes. Both agencies are currently offering favorable pricing for properties that have “affordable rents” in line with the mission driven requirement of FHFA.
There is also a greater focus on equity in housing and correcting past inequities—environmental and other. Are you encouraged by what you are seeing?
Jackson-Rowell: As a woman of color myself I am very encouraged by what I am seeing with the focus on equity in housing. There is a focus now on including minority and women-owned business enterprises in development plans, especially in markets that are predominantly minority.
There is also a new focus on not losing the historical nature of a community with redevelopment of those communities, an issue that gentrification has exacerbated. I think that there is a lot more thought being put into development of housing—not just affordable housing—and the impact that it might have to the existing community. I am truly excited to see the direction that this is going, and I hope that it is not a short-lived trend.