The affordable housing industry has long required multifamily developers and owners to be creative in structuring ﬁnancing for their developments given a seemingly endless need for limited resources to create and preserve these properties. In today’s environment of increased competition for scarce resources and rising costs, it is of paramount importance for developers to be innovative in maximizing each capital source on every transaction. Each additional dollar generated aids in development or rehabilitation.
Boston-based Barkan Development (“Barkan”) recently displayed ﬁnancial creativity with the acquisition and rehabilitation of Wood Ridge Apartments in North Andover, MA. The 230-unit apartment complex was originally constructed in 1979 and contains a mix of one, two, three, and four bedroom apartments. Residents range from elderly singles to large families with many school-age children. The project is a Cooperative, with 100 percent of the units beneﬁting from a project-based Section 8 contract. The rehabilitation will allow the owner to invest $8.9 million into the property for improvements which will help maintain vital affordable housing to the residents of North Andover.
Founded in 1964 by Mel Barkan, Barkan Development is an established developer, owner and manager of multifamily housing with over 20,000 units under management.
To facilitate the acquisition and rehabilitation of the property, Barkan utilized the familiar “cash-collateralized” tax-exempt bond structure. The cash collateralized structure originated in the late 2000’s, when exempt rates far exceeded prevailing taxable rates for the same loan term. The increased cost of capital, created a strain on developers who had traditionally utilized tax exempt bonds and 4 percent LIHTC for affordable housing development or rehabilitation. To combat the inefﬁcient tax exempt market, developers have been utilizing short-term tax-exempt bonds paired with a long-term taxable loan, typically from Fannie Mae, Freddie Mac or FHA/GNMA, who offer attractive long-term taxable ﬁnancing for affordable housing. The TE bonds are used to satisfy the 50 percent test for tax purposes, and are “cash collateralized” by proceeds from the taxable loan or other transactions sources, such as LIHTC equity, subordinate ﬁnancing, etc. After construction completion and lease-up, the bonds are retired, and the permanent taxable loan stays in place. This structure allows borrowers to take advantage of historically low taxable permanent rates, while meeting all tax exempt bond requirements to earn the 4 percent LIHTC. It has been utilized at great length since the late 2000’s by LIHTC developers, who have depended upon long-term ﬁnancing from Fannie Mae, Freddie Mac and FHA as these govern-mental agencies provided efﬁcient taxable ﬁnancing terms for affordable housing not replicated in the private sector.
The beneﬁts of the cash collateralized structure include:
- Low permanent ﬁnancing rate and maximum ﬁrst mortgage leverage
- Long-term, fully amortizing permanent loan options
- Elimination of or signiﬁcant reduction of negative arbitrage due to draw down bond structure and/or GIC earnings to offset interest carry on cash collateralized bonds
- Maximum leverage up to 90 percent LTC under FHA programs and 90 percent LTV under Fannie or Freddie programs
- Short-term bond issuance, which enables the 50 percent Test to be passed.
The unique aspect of Wood Ridge, is that instead of utilizing Fannie, Freddie or FHA for the long-term permanent taxable ﬁnancing, Barkan used a new resource for permanent lending – the Federal Financing Bank (“FFB”).
The FFB was created in 1973 by Congress to reduce the cost of federally assisted borrowing from the public. The entity operates under the U.S. Treasury and initially was not authorized to buy loans from Housing Finance Agencies (“HFA”). However, in 2008, as a part of the HERA legislation, the FFB was authorized to begin to provide ﬁnancing for multifamily housing. The change was made in response to the increasing demand for affordable housing during a time when private ﬁnancial institutions maintained tight lending parameters.
The FFB permanent loan structure offers the same beneﬁts of standard cash-collateralized structure, and does not require adherence to Davis Bacon Wages, which further reduces costs and improves the economics for the borrower when compared to a traditional FHA structure.
For Wood Ridge Apartments, the FFB worked with the local HFA and Mass Housing, to fund the permanent loan. Mass Housing issued $24 million of short-term tax exempt bonds to serve as a “construction” loan to allow the borrower to meet the 50 percent Test requirements associated with 4 percent LIHTC transactions. The bonds were cash-collateralized by the FFB permanent mortgage until the property reaches stabilization, at which point the bonds will be retired.
The $34.5 million taxable permanent mortgage features a 90 percent LTC ratio, minimum DSC of 1.10 times and carries with it a 40-year fully amortizing term and an all-in interest rate of 3.89 percent. In comparison to a traditional credit enhanced tax exempt structure where the all-in permanent rate would be approximately 5.00 percent or more, this unique structure allowed the borrower to generate an additional $5,050,000 in ﬁrst mortgage proceeds when compared to an FHA structure and, the elimination of Davis Bacon wages reduced the borrower’s total construction costs.
Originally published in Tax Credit Advisor by Paul Smith