Multifamily housing development is a hot market for the very few willing to explore it, says Jeff Englund, managing director and head of the affordable housing group of Greystone, a national provider of multifamily and health care mortgage loans.
As a sign of this, developers are competing with each other for investors who are willing to buy federal multifamily tax credits.
Return of demand for multifamily development loans is motivating lenders to expand commercial mortgage loan financing options outside of the government-sponsored enterprise market. At the same time, post-crisis demand for affordable housing has never been this much higher than supply and harder to meet unless lenders diversify their products.
As the affordable housing market matures, “there are few competitive financing solutions available,” Englund says, which is why
Historically multifamily financing has been mostly GSE product “up until the great recession” when they retrenched, he explains, creating a financing gap very few lenders have been willing to fill.
To invigorate the market the Housing and Economic Recovery Act of 2008 set a 9% minimum tax credit rate that helped attract investors. The American Taxpayer Relief Act of 2012 further
Developers have access to two forms of incentives distributed through two separate LIHTC programs.
The 9% LIHTC program grants tax credits financed by a fixed, annual allocation of credits from the Treasury that is roughly the same amount every year. Even if the 9% rate is not extended again in 2014, investors see opportunity in the 4% LIHTC tax-exempt bond financing options. As prices for 9% LIHTCs continue to climb, and yields continue to drop, more investors are considering 4% LIHTCs.
“There’s no limit, per se” on the bond credits, which depend on how many bonds the government can issue within their volume cap, says Thom Amdur of the National Housing & Rehabilitation Association, a trade group of LIHTC housing developers.
“There’s more growth potential in the bond financing market because there’s a private activity gap. For the most part it’s being underutilized in every state.” Last year, he says, most states did not use all of their tax and bond caps, “so there’s opportunity to expand in that particular space.”
It is a new trend spreading in many states that are facilitating additional bond financing options for affordable housing development.
Tennessee is one example. The state is adopting two new ways to administer the 4% LIHTC program, Amdur says. One of these initiatives allows investors to pool multiple properties into a single bond issuance following a financing model that has already been implemented in a few other states. Its goal is to create economies of scale.
Separately, Tennessee is also planning to create a gap-financing bond program. The state is exploring how to extend the existing bond program to generate additional funds for LIHTC multifamily bond deals.
“I definitely see the upside in this market,” he says.
Demand is fueled by good rental housing and affordable housing fundamentals, “but bond pricing is the main reason why tax-credit equity is a very attractive market” that has continued to grow, albeit unevenly, since the bottom of 2008 and 2009, Amdur explains.
Low interest rates and “the relative strength” of multifamily mortgages as investments were the main drivers of lenders’ appetites in 2012 and the first half of 2013, according to insiders, including Jamie Woodwell, MBA’s VP of commercial real estate research. But by the end of the third quarter 2013 FHFA acting director Ed DeMarco’s decision to cut the GSEs’ multifamily business by 10%, which coincided with interest rate increases, caused a retreat. Multifamily originations dropped 16% compared to the second quarter, according to the MBA.
Right now the primary multifamily development financing mechanism is securitization. An unanswered question in multifamily lending is housing finance reform and how it will affect the GSEs and affordable housing finance.
“Non-governmental entities have a rich history of affordable, multifamily housing construction, but the role they will play going forward is not yet clear,” says Amdur. LIHTC origination volume is cyclical because the amount of tax credits available tends to be more or less the same each year, yet developers do feel “some interest rate uncertainty for 2014.”
LIHTC and market-rate multifamily financing “are two different animals,” explains Englund, which is why most of Greystone’s multifamily lending competitors do not prefer to play in the LIHTC space and are missing out on the opportunities it offers.
Loan size is another lender turnoff. At under $3 million, LIHTC loans are deemed small within the commercial market context and often overlooked by lenders, he explained. Many companies have minimum loan sizes at above the $3 million mark “and would not lend in that space.”
Greystone’s recent experience, however, has been positive. Englund is bullish about the LIHTC multifamily affordable housing investment market.
“The timing is good. There’s still tax-credit equity in the market, and there’s equity investors looking for this business,” he says. “Also, there’s not a lot of competition in offering this product from a debt providers standpoint that allows us to capture additional market share.”
Greystone’s new nonagency affordable loan program offers 15-year and 30-year term nonrecourse mortgage loans of $1 million to $7 million on LIHTC designated properties with loan to value ratios that can range from 80% to 85%. Its fixed-rate multifamily financing structure is specifically designed to fulfill demand for financing during market fluctuations, Englund says.
LIHTC lending is a long-term business, not a window of opportunity that will close in one or two years, he says. There is market share to capture, so Greystone is in the LIHTC multifamily business “for the long haul.”
