Affordable Housing Finance FAQ

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 Financing for affordable housing communities can get tricky. It oftentimes requires a combination of debt and equity sources and a complex analysis of available financing tools. Love Funding has done it all. Our team has extensive experience underwriting HUD-insured loans involving tax-exempt bonds, low-income housing tax credits (LIHTCs), historic tax credits, new market tax credits, Section 8 rental contracts and various government programs for subordinated loans or grants. Here our experts answer some of the most common affordable housing finance questions:

 

The property accepts Section 8 tenant based vouchers so our rent collections are sometimes higher than lease rents due to additional subsidy. Can you underwrite to the higher rents for those units?

No. The subsidy must be attached to the unit and not the tenant.

How do I renew my HAP contract?

Contact the project’s Account Executive for more information. The process involves submitting a contract renewal application. In most cases, borrowers utilize the services of an attorney to put the application together.

Current Section 8 rents are below market. What is the mark up to market rent increase process?

Contact the project’s Account Executive for more information. This involves an application process similar to the HAP renewal. It will also require the commissioning of a Rent Comparability Study (RCS) to set the requested mark-up-to-market rents, which will be reviewed by HUD.

DID YOU
KNOW?

Between 2005 and 2015, the number of rental units costing less than $800 per month declined while the number costing over $2,000 per month jumped by 1.5 million.

Section 8 rents are higher than market, so why can’t these be used in underwriting?

Per HUD Guidelines, underwriters are to use the lower of market rents or Section 8 contract rents. Because Section 8 contract rents are subject to periodic review and potential reductions, this practice is considered risk averse. One exception is the option to underwrite a B-piece with the gap between the market rents and the amount of the Section 8 rents that are above market can create additional loan proceeds.

What triggers a 0.35 versus a 0.25 MIP for affordable properties?

The property’s affordable status:

  • Broadly Affordable Transactions (0.25 MIP): Projects with 90% or greater of the units covered by either a Section 8 Project Based contract or affordability use restriction under the Low Income Housing Tax Credit Program with achievable and underwritten tax credit rents at least 10% below comparable market rents.  Either scenario requires a recorded regulatory agreement in effect for at least 15 years after final endorsement of Note.
  • Affordable* Transactions (0.35 MIP): Projects with between 10% to 90% of all units covered by either a Section 8 Project Based contract or affordability use restriction under the Low Income Housing Tax Credit Program. Either scenario requires a recorded regulatory agreement in effect for at least 15 years after final endorsement of Note.
    *HUD’s definition of Affordable has been broadened to include properties with inclusionary zoning, density bonus set-asides and other local affordability restrictions meeting the required tests.
  •  

  • What are the pay-in requirements for my LIHTCs?

BENCHMARKS FOR EQUITY INSTALLMENTSMINIMUM EQUITY INSTALLMENT

223(f): On or before closing
221(d)(4): Initial endorsement20% of Total Equity

223(f): At 65% completion of repairs
221(d)(4): Construction completion37.5% of Net Equity

223(f): 100% completion of repairs
221(d)(4): Final endorsement62.5% of Equity

DID YOU
KNOW?

Nationwide, there were only 35 affordable and available units for every 100 extremely low-income households and 55 units for every 100 very low-income households in 2015.

 

Can I bridge my tax credits and if so how does this affect my pay-in requirements?

Equity investors may fund all or part of the required equity pay-ins, with the exception of the first 20% payment, with equity bridge loans subject to certain requirements. However, Investors may not substitute any grant or loan funds, other than funds in the form of Equity Bridge Loans for equity payments.

 

What does HUD require for debt service on affordable transactions?

NEW CONSTRUCTION / SUB REHAB

Section 8 HAP Contract (90% +), and Section 241(a) loans1.11x

Affordable (20% at 50% of AMI, or 40% at 60% of AMI, or less than 90% Section 8 HAP Contract)1.15x

Market Rate1.176x

REFINANCE/ACQUISITIONS

Section 223(a)(7) loans with 90% + units covered by Section 8 HAP Contract1.05x

Section 8 HAP Contract (90% +), and
Refinances of Section 202 direct loans, and
Section 223(a)(7) loans (except as specified above)1.11x

Affordable (20% at 50% of AMI, or 40% at 60% of AMI, or less than 90% Section 8 HAP Contract)1.15x

Market Rate1.176x

 

What are the LTV or LTC limitations on affordable transactions?

NEW CONSTRUCTION / SUB REHAB (LTC)

Section 8 HAP Contract (90% +), and Section 241(a) loans90%

Affordable (20% at 50% of AMI, or 40% at 60% of AMI, or less than 90% Section 8 HAP Contract)87%

Market Rate85%

REFINANCE/ACQUISITIONS (LTV)

Section 8 HAP Contract (90% +), and Refinances of Section 202 direct loans90%

Affordable (20% at 50% of AMI, or 40% at 60% of AMI, or less than 90% Section 8 HAP Contract)87%

Market Rate85%

Source: Joint Center for Housing Studies of Harvard. (2017). The State of the Nation’s Housing 2017.

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We’re here to answer any questions you have about HUD-insured loan programs. Let us know how we can help.

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