Solving the Affordable Housing Shortage One Development at a Time
Affordable housing offers real estate developers a range of financial advantages while also helping local communities. We examine the issues and solutions that can help you navigate this complex field.
Like many communities, Cincinnati, Ohio, is struggling with a shortage of affordable housing units for its residents. When two large affordable housing communities, both more than 43 years old and in need of significant renovation became available, it was another example of the challenges in maintaining safe and quality affordable housing for the long term.
The acquirer and developer, Related Companies, had to work diligently to obtain all of the financing tools needed to purchase, redevelop and preserve 409 units of affordable housing in the Avondale and Alms Hills Apartment properties.
“We were able to provide an all-encompassing financing solution to redevelop the properties, preserve the long-term affordability and improve the quality of the properties and lives of the residents,” says Robert Likes, National Director of KeyBank’s Affordable Housing group.
Between the two developments, KeyBank provided $21 million in Low-Income Housing Tax Credit (LIHTC) equity, $38 million in construction financing and $28 million in Fannie Mae M-TEB forward-commitments. The tax-exempt bonds were issued by the Ohio Housing Finance Agency. KeyBanc Capital Markets (KBCM) underwrote the publicly offered tax-exempt bonds.
“There are so many different types of innovative financing options we can provide,” Likes explains. “It’s not a cookie cutter approach.”
Developers and owners currently in this sector or those looking to expand in it need to consider the financing options carefully—and they need a committed banking partner to help them do it.
No Place to call Home
According to the Harvard Joint Center for Housing Studies, 11 million households—roughly a quarter of all renters in the United States—spend more than half of their income on housing. The definition of affordable housing, meanwhile, is housing that costs no more than 30% of one’s income.
“Affordable housing provides stability in people’s lives,” Likes says. “If you’re spending more than 30% of your income on housing, you don’t have money for a lot of other important necessities.”
There is now a shortage of 7.2 million affordable and available rental units for extremely low-income renters, reports the National Low Income Housing Coalition. The lowest income households, those living below the poverty level or earning 30% or less of their area’s median income (AMI), face the most severe shortages. And yet, three-quarters of this population have difficulty accessing housing assistance.
While extremely low-income households face the biggest shortage, even families with more means are feeling the housing squeeze since prices have soared over the last decade. The problem is widespread.
“There’s a housing crisis in big cities, in small cities and in rural communities,” explains Likes.
Stephanie Hoopes, national director of the ALICE Project at the United Way of Northern New Jersey, notes that “housing is usually the most expensive line item for most families. The shortage of affordable housing is on a magnitude that people aren’t even working on.”
The ALICE Project, which stands for Asset Limited, Income Constrained Employees, is a bi-annual report measuring the financial struggles of working, low-income families.
Less Money, Fewer Houses
It’s hard to square an affordable housing crisis with a robust economy. And yet both realities co-exist. While there’s been tremendous growth in many industries, booming wages for highly skilled workers haven’t filtered down to low-wage sectors like leisure, retail and hospitality. Pay for these workers hasn’t kept pace with the rising cost of living.
“The housing situation has gotten worse because the demand has surged,” says Mark Stivers, the former executive director of the California Tax Credit Allocation Committee. “And we haven’t built enough new units.”
Because higher wage workers can afford a wider range of housing, when there’s a shortage they can edge out renters with fewer resources. Housing that was once deemed “affordable” is getting snapped up by people earning well above the AMI.
“Even as we continue to build more units, the population continues to grow and create demand that outpaces our efforts.,” explains Alexander Beaumariage, program manager and senior vice president with KeyBank Real Estate Capital.
Public officials continue to recognize the importance of developing and preserving affordable housing units, by introducing new laws to ease zoning requirements and provide additional benefits to affordable housing developers.
The Public-Private Fix
There is no single solution that can address the dire need for more affordable housing, says Likes. However, government and developers are the key to finding workable options. Each side brings something to the table that helps the other deliver more affordable housing units.
For example, the Low-Income Housing Tax Credit program is a federal subsidy to finance the construction or rehabilitation of affordable rentals. The program gives investors 10 years of dollar-for-dollar reductions of their federal taxes in exchange for developing low-income rental units. The program provides the critical resources needed to develop and preserve affordable housing.
While attempts to expand the program to keep pace with housing needs have stalled, Likes says KeyBank is working with clients and other industry leaders to help create innovative and flexible solutions.
Balancing Mission and Margin
Under the Community Reinvestment Act (CRA), banks must provide lending to low- and moderate-income communities in the geographic areas where they are taking deposits. Depending on how well they comply with this requirement, banks are assigned an “outstanding,” “satisfactory,” “needs to improve” or “substantial non-compliance” rating.
With nine “outstanding” CRA ratings over 30 years, KeyBank has been on a mission to grow its affordable housing capability beyond its current 15-state footprint. “A couple of years ago we saw an opportunity to grow and scale the affordable housing team and take it to a national level,” says Likes.
To make good on that promise, KeyBank employs a number of financing solutions. So far, the results have been impressive. Since launching the expanded initiative in 2015, the program has grown by nearly 600%. KeyBank is now the fifth* largest affordable housing lender in the country.
There’s no easy fix for the affordable housing shortage. However, when financial institutions, developers and government work together, they can make significant progress toward a solution. These collaborative efforts are making a difference in dealing with the housing shortage—and they’re improving lives along the way. But, we are a long way off from solving the crisis