Developing affordable rental housing these days is a lot like putting together a puzzle – when the financing pieces are all in place, a thing of beauty results, but when there’s a piece missing for the puzzle—or in this case a piece missing from the finance package for rental housing—the project just doesn’t work. The result is fewer new affordable rental homes developed and more existing rental homes transitioning into market rate housing or being demolished. The bottom line: families who need affordable rental housing may have a lot harder time securing the homes that they need.
Getting all of the financing pieces for affordable housing is difficult because nonprofit developers usually have to tap multiple sources of capital, either from one or more private sector banks, or from local or federal government sources such as community development block grants or state housing finance agency money. Essentially, nonprofits have to find all of the pieces to make an affordable rental housing project work.
However, often the private and public sources of financing needed to piece together an affordable rental deal want to see the developer have equity or “skin in the game” before they make the loan or approve the government financing.
That’s tough to do because even large nonprofit owners and developers of rental housing operate at very thin margins on existing projects that leave little room for the accumulation of excess capital to deploy to new projects.
This is why NeighborWorks America has been a long-time proponent of grant makers finding ways to make operating level or flexible funding available. After working with nonprofit rental housing developers for many years, NeighborWorks America knows that a nonprofit developer that has obtained general operating support and flexible money for qualified project on the books or in the planning stages has a leg up on securing other money to get the project done.
Rick Goodemann, chief executive officer of Southwest Minnesota Housing Partnership based in Slayton, Minn, and the owner and developer of nearly 900 affordable rental homes explained the value of early capital this way: “Patient, flexible capital, though limited, is available through such sources as foundations, financial institutions and housing finance agencies. Capital of that nature is extremely valuable and absolutely essential in supporting early feasibility analysis, due diligence activities, and securing real property. But it's most valuable when used to leverage debt, attract investors and provide a level of development and operational risk mitigation.”
Providing nonprofit developers with early funding that they could show other financial supporters is a core community development strategy at NeighborWorks America. Nonprofits that could tap flexible capital from other sources such as national or community foundations, community development financial institutions (CDFIs) or state housing finance agencies enhances the ability of the organization to move quickly and build new or sustain existing affordable rental housing.
For example, in July of this year, the Massachusetts Housing Finance Agency provided just this kind of capital. Mark Dinaburg, the director of real estate development for nonprofit owner Codman Square Neighborhood Development Corp. said to a local newspaper, “With their help, we have finally been able to refinance and rehabilitate this 80-unit BHP-1 property. Previous to this, we had made multiple efforts to bring together an adequate financing package, while the properties slowly decayed, physically, socially, and financially. Indeed, the entire portfolio was threatened with foreclosure in the dark days of 2009. MassHousing’s willingness to step up with bridge financing, and to participate in a permanent financing package, was key to turning this around.”
Codman Square received more than $200,000 from NeighborWorks America to use as early, flexible capital for its rehab project that helped it secure state HFA funding.
Whether flexible funding helps to hire a development manager, an architect or exists as an early investment that attracts larger supporters, organizations that are able to secure this kind of financing have the best chance of getting a new affordable rental project done or to sustain an existing one.
NeighborWorks America encourages all of the potential sources of early, flexible and first-loss capital to be earlier participants in affordable housing deals. These sources of capital have to be the ones to take the first steps and jump-start affordable rental housing. Without their increased participation, too many deals that could be put together, won’t be completed, leaving some families by themselves to piece together their own affordable housing solutions.