Originally published in Affordable Housing News by John Sabatier
Last November, one of the world’s largest commercial real estate and professional services firms, JLL, acquired Oak Grove Capital, one of the nation’s longest standing providers of debt financing for multifamily construction loans and seniors housing properties. With the acquisition, the firm expanded its scope to provide greater full-service mortgage lending and mortgage banking capabilities, including an expertise in the affordable housing market. The company quickly set itself apart in the industry by expanding its financing business to include deeper multifamily and seniors housing debt and equity capabilities across the firm’s Capital Markets platform, together creating a consolidated and focused approach to the multifamily sector.
JLL works in concert with a number of public-private partnerships, and the firm consistently delivers on affordable housing deals, regardless of the complexity. The firm secures short- and long-term capital across the entire capitalization stack, including debt and equity solutions for new developments and for the rehabilitation of older affordable housing communities. Via the use of various forms of subsidy including but not limited to low income housing tax credits, tax exempt bonds, subordinate financing, real estate tax exemptions and abatements, and various other forms of subsidies provide by local, state and federal sources.
“The developments we secure financing for are socially targeted and provide a great service to communities in need,” says John Sabatier, Executive Vice President of JLL.
Through it all, the team at JLL has performed incredibly well, Sabatier says. “We continue to penetrate markets and are seen as one of the leaders in this crucial space.”
The proof is in the numbers: the firm completed 2015 as the number one Fannie Mae lender in total loan volume of Delegated Underwriting and Servicing (DUS®) affordable housing loan originations and the number one Freddie Mac affordable housing lender in total number of closed affordable housing loans.
Understanding the affordable housing climate
Despite all of this success, JLL must contend with the same struggles that all of those who work in the affordable housing lending space on a daily basis, including intense regulation and a lack of available subordinate funding. These factors mean that the finance professionals at JLL must constantly find creative ways to move affordable housing efforts forward.
The National Low Income Housing Coalition (NLIHC) estimates that there’s a deficit of about 7.2 million affordable housing units nationwide.
“The current level of need is so great in this country and right now, the supply is just not there,” Sabatier says. “Even with all that is produced annually, we fall behind as the need for affordable housing continues to rise.”
The Joint Center for Housing Studies (JCHS) data analysis shows that at least 40 percent of renters are paying more than 30 percent of their income on rent in all but three states, while at the same time, the Urban Land Institute’s Terwilliger Center for Housing noted that the United States loses 125,000 affordable rental units each year.
In recent history, one of the biggest problems has been acquiring funding to build the new developments, especially with budget cuts at the federal and state levels through the recession period.
A cost comparison
According to Sabatier, there are similarities in costs between building affordable housing versus market rate, with land and construction costs on the rise again. However, union wage thresholds, accessibility requirements and other regulations tend to be much more stringent for affordable developments compared to their market-rate counterparts.
“The world does not see the difference between affordable housing and market-rate deals,” Sabatier says. “The costs are no different when you’re talking about concrete, rebar, plumbing, electrical or any of your primary building materials and systems.”
The main difference between affordable and market-rate housing comes in the finishes and design of the units. A market-rate apartment usually has higher-quality finishes, resulting in higher costs, and developers can afford to pay more for land in desirable locations.
Sabatier says, “The basic building elements of each of those projects are going to be about the same cost.”
According to Sabatier, contractors and subcontractors are not lowering their costs just because they’re working on an affordable development versus a market-rate deal. They have to earn a return or they could not sustain their business.
“In the end, the basic construction of an apartment community, whether it’s affordable or market-rate, is apples to apples,” Sabatier says.
Of course, finding land for any development can be a potential challenge, as well.
“People think that the land in a market-rate deal is going to be a lot more expensive than the land on an affordable deal,” Sabatier says. “That’s true in that affordable developers have a lot of trouble competing for the land in the more desirable market that’s prone to attract market-rate developments….but they want to.”
Affordable housing developers also experience challenges quickly moving projects forward. This can be an issue as “many land owners are not patient enough to sit around and wait for an affordable housing developer to pull all of the funding mechanisms together,” Sabatier says.
From dealing with the ever-expanding need for affordable housing to putting together the funds to build the housing, JLL and the affordable developers with whom they work face an uphill battle. One new product creating a level playing field, allowing affordable housing developers and owners to compete with traditional cash-on-cash/conventional developers and owners, is Freddie Mac’s Bridge-to-Resyndication program.
The program gives affordable housing buyers time to position properties for preservation via a re-syndication transaction using low income housing tax credits (LIHTC) and simultaneously allows them to secure long-term, fixed-rate, tax-exempt financing. JLL partnered with Freddie Mac to design the program and has funded more than $205 million in Bridge-to Resyndication financing since 2015.
Finding funding and structuring deals
Earlier this year, the Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac to become aggressive on multifamily product where rents hit 50 percent or below area median income (AMI) levels. In May, the agency announced a lending cap increase of $4 billion for each government-sponsored enterprise (GSE).
The creation of affordable housing product is structured through tax credits, tax-exempt bonds and equity. Securing these funds is a highly competitive business, particularly for organizations looking to build brand-new developments.
Despite these notable challenges, JLL has been successful in securing financing for new affordable housing developments throughout the country. In fact, the firm recently secured $38.2 million in financing for a 338-unit affordable housing community in a suburb of Los Angeles. At a time when funding for affordable housing is at an all-time low, particularly in California, it was a major win for the future residents of the Palms Apartments.
In Texas, JLL recently executed two Freddie Mac tax-exempt loans (TELs), featuring 36-month-forward interest rate locks. A $31 million TEL will be allocated to Terrace at Walnut Creek, a proposed 324-unit multifamily property, while a $27 million TEL was secured for McKinney Denton, a proposed 322-unit property located in the Dallas suburb of Denton.
Although the creation of new affordable housing is important, so, too, is preserving existing properties. In March, JLL helped secure a $25 million bridge loan from Freddie Mac, along with a $34 million TEL. The money will be used to help restore a 455-unit affordable housing apartment property in Kennewick, Washington.
According to Sabatier, JLL has furthered efforts for development and redevelopment efforts by working with local housing authorities, which have secured funds through the U.S. Department of Housing and Urban Development (HUD) Rental Assistance Demonstration (RAD) program.
“[Housing authorities] have seen some of the challenges of closing transactions and working through bigger deals,” he says. “I think RAD will continue to be something that people will focus on moving forward. We will use the RAD program to secure financings for a combination of preservation, renovation and new construction.”
Looking ahead to a brighter future
Although it may seem like the affordable housing market cannot keep up with the demand, JLL is confident that the supply of housing will eventually reach equilibrium.
“We continue to watch the evolution of an ever-changing affordable housing market. We’re executing transactions with great certainty and playing a role in the development and execution of innovative products,” Sabatier says.