1 May 2024

Bridging the Gap: Opportunities in Short-Term Loans to Address Long-Term Affordability

By Andrew Zimmerman, Director & Portfolio Manager, Investments at IMPACT Community Capital

Owners and developers seeking to establish long-term affordability in the multifamily apartment space have long faced dual burdens: They have to compete against market-rate buyers while applying for government-sponsored housing credits. Higher borrowing and building costs, brought about by higher interest rates and inflation, have only made that harder.

Against this backdrop, it's more important than ever for sponsors to secure sufficient financing that not only meets their business plans but can also sustain them throughout the arduous process of applying for Low-Income Housing Tax Credit (LIHTC) program allocations or Section 8 Housing Assistance Payments (HAP) contracts.

Enter short-term affordable housing bridge loans, which buy time to lock in long-term affordability.

Affordable housing is an asset where supply and demand pressures are diverging – a dynamic that explains some of the growing investor demand. In good times, the inevitable rise in real estate prices drives the need for affordability. In difficult times, when the labor market weakens, demand continues to grow owing to financial distress.

That was the case during the Covid shutdowns, when the number of "cost-burdened" households, who have to spend more than 30% of their income on housing, climbed to a record 22.4 million in 2022. What's more – over the next two years from now, affordability restrictions that are currently in place on 448,000 federally assisted homes are set to expire. This comes as the U.S. is already facing a shortage of 7.3 million affordable and available rental homes.

Source: IMPACT tabulation of NHPD, retrieved September 2023. Source: IMPACT tabulation of NHPD, retrieved September 2023.

With an average size of less than $30 million and a typical maturity of less than five years, bridge loans can serve a critical function in maintaining affordability, especially in cases where existing owners may be looking to exit at the end of their current restriction period. But they can also play a pivotal role in attracting new investments through a short-duration vehicle to invest in a long-duration asset.

These loans, which are not rated, may be considered riskier than securitized debt, municipal bonds, and permanent loans from a credit perspective. However, the risk is offset by higher credit spreads, allowing for a relatively attractive risk/return profile. Moreover, thanks to acyclical demand and government subsidies, physical occupancy for affordable multifamily housing has remained above 96% since 2008, while the cumulative foreclosure rate for LIHTC properties and other housing with affordability restrictions hasn't exceeded 1% for the past 22 years.

Affordable housing bridge loans can appeal to a wide array of institutional investors looking to access this asset class, over the short term and in scale, while potentially earning risk-adjusted returns throughout an entire economic cycle.

Read more on this topic here: https://impactcapital.net/news/2024/02/bridging-the-gap-opportunities-in-short-term-loans-to-address-long-term-affordability

Footnotes:

1 "Affordable Housing Gap Spells Opportunity," Private Equity Real Estate. June 5, 2023.
2 "America's Rental Housing 2024," Joint Center for Housing Studies of Harvard University. https://www.census.gov/library/stories/2023/03/low-income-renters-spent-larger-share-of-income-on-rent.html
3 ibid.
4 Affordable Housing Credit Study: A Comprehensive LIHTC Property Performance Report. Cohn Reznick. November 2023.

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