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What Lenders Seek in Affordable Developers

Carrie Rossenfeld Residential & Mixed Use

Lake Forest, California–based Clearinghouse CDFI has secured money from the U.S. Treasury to create or preserve 250 units of affordable housing. The firm is seeking projects throughout the Western U.S. SoCal Real Estate sat down with Douglas Bystry, president and CEO of Clearinghouse CDFI, to discuss the main points developers should be aware of when it comes to affordable housing and how lenders view affordable developers.

SoCal Real Estate:What are the main points developers should know about financing affordable housing?
Bystry:
Some of this may sound rather basic or absolute, but understanding construction budget numbers when they come for a loan is key. They need to present the sources and uses for what will be the predevelopment costs, construction costs, and permanent-phase costs of a project, really having thought through all of them and having their numbers tight. Some borrowers haven’t done a good job of thinking through everything. Understanding these numbers and really having them locked down before coming in for financing is very important.

What do lenders look for in affordable developers?
One of the things they look for is experience in working in layered financing — understanding what sources and programs are going to be used and if the borrower has experience in working with those programs. It’s hard to do affordable housing without utilizing some sort of government assistance, so we look for experience in working with government programs and awareness about compliance and the complexity of these programs, especially the reporting requirements.

We’ll ask them, “Have you ever worked with HUD in the past?” and they’ll say, “No, but we’ve read about it.” You need to have knowledge of the funding sources and have utilized those, done monitoring of government-funding requirements, and have a balance sheet in line with the project being developed. If construction costs go higher than expected, what will you do? Working with a non-profit, for example, you can get property taxes waved — it can happen, but it doesn’t happen overnight; it’s slow.

They need to learn, to educate themselves, and to understand how these sources and uses really come into play. If you get free money for your project, understand really what that means. Now, you have to make sure your rents are affordable to very low, but will that change the income side of your balance sheet? If you want to rent to teachers and nurse practitioners, but your sources have a program that requires to renting to 60 percent of the area median income, that will not match up. What are the strings attached to free money or a subsidy?

What other aspects of affordable developers are turn-offs to lenders?
If you don’t have a good project manager, you don’t have good infrastructure to manage a project — and that goes for both affordable housing and market-rate housing. Also, borrowers that expect us to give them a low interest-rate loan simply because they’re doing affordable housing, who expect a 2 percent to 3 percent loan. We’re here to support the community, but we have a business to run, and we have to lend at certain rates to run that business.

The other part of it is that the borrower may come in and say, “We will use all city and government. money as equity.” They’ll have no money of their own in the project. That’s a red flag because they have no skin in the game. What’s their incentive to stay and not walk away if construction costs triple from start to finish time?

Also, they may think, “Once we build this, we will have no trouble leasing it out.” But if you’re out in Perris and across the street from a gas station and a recycling center, you may not lease as easily. If somebody has the attitude that they’re going to lease up regardless of these factors, it’s kind of a turnoff to us.

Also, they should really be able to prove to us that they are committed to this project, can talk to us about it and explain all aspects of it. Spend the time to show us that they’re not doing this just to make a quick buck, but that they understand affordability levels and restrictions and are in it for the long haul vs. being absent and having a broker handle everything. Not being transparent about their plans and having us fill in the gaps is a turnoff.

What else should our readers know about this topic?
Know that affordable-housing financing is not easy. It sounds easy and seems easy — the lure of free or available money for affordable development. It’s very attractive, but there are a lot of other restrictions, requirements, and regulations that come with it.

Also, they should really understand the political climate: know the government agencies and issues with NIMBYism. Talk to the planning committees and invite residents to a public hearing. If you have not done your work and have not reached out and made sure you’ve got the political support, it doesn’t matter how strong you are, how good your numbers are, or how good your balance sheet is: the neighbors will say, “We don’t want this in our neighborhood.” You really have to do your political homework early on in the process.