Navigating the Complexities of Affordable Housing Finance

By Corey Carlisle

Financing housing development has many challenges, but keeping that housing stock within reach of a growing segment of low- to moderate-income households can be nearly impossible. The chief culprit here is the widening gap between construction and maintenance costs and the rents most can pay. To bridge this divide, affordable housing developers and lenders turn to various (often scarce) subsidies.

To showcase just how complex and difficult it can be to underwrite these projects, or ensure they “pencil out,” the National Housing Conference and Urban Institute released a new interactive feature in July, “The Cost of Affordable Housing: Does it Pencil Out?” On the site, which uses real data from the Denver metro area, users can input various data points to achieve a positive net operating income on a typical 50- and 100-unit apartment building. Trying several scenarios, they quickly learn that an enormous amount of subsidy is needed to keep rents within reach for those with modest means. Give it a try here.

TD Bank, winner of the ABA’s 2016 Community Commitment Award for community and economic development, has been working to positively change market conditions in East Baltimore by using its housing investments to drive neighborhood improvement. The $266 billion asset bank—along with its partner, TRF Development Partners—began in the Oliver neighborhood, known for the suffocating crime and blight famously portrayed in the HBO series “The Wire.” Despite these obvious obstacles, the bank believed an opportunity to resuscitate the market existed; specifically, that Oliver’s proximity to the Johns Hopkins University medical campus created a unique opportunity to rebuild an area encompassing more than 600 properties.

Using a combination of tailored financial instruments and federal historic tax credit equity investments from the bank, the redevelopment work has already created 175 new and or rehabilitated homes on formerly abandoned buildings and consolidated more than 100 vacant lots. In the next year, TD expects to complete an additional 75 rehabs. This will drop the overall vacancy to about 5 percent of all properties; in 2008, the vacancy figure was 45 percent.

For many community banks, funds from the Federal Home Loan Banks’ Affordable Housing Program provides the critical X-factor for ensuring these projects stay affordable, or get approved at all. The AHP is a competitive grant program enacted by Congress in 1989 and is administered regionally by each of the 11 Federal Home Loan Banks. Through 2014, AHP has disbursed more than $4.8 billion towards the purchase, construction or rehabilitation of more than 758,000 units of affordable housing.

For the $353-million Essex Savings Bank in Essex, Conn., AHP funds from the Federal Home Loan Bank of Boston led to funding Essex Place, a 22-unit elderly housing project, serving residents starting at 80 percent of the area median income, with some units reserved for those below 50 percent. And at the $1 billion Washington Financial Bank, based in Washington, Penn., a $270,000 AHP grant from the Federal Home Loan Bank of Pittsburgh provided the gap needed for 27 low- and moderate-income homeowners to make repairs and improvements to their properties as part of partnership the bank has with the Redevelopment Authority of the County of Washington.

Finding ways to make decent housing accessible low-income residents is a complex job, requiring just the right pencil.