Get Flexible CMBS Financing for Affordable Housing Properties
If you’re looking to finance an affordable housing development, a CMBS loan could be a great way to do it. The demand for affordable housing has never been greater, particularly in the United States, where more than 50 million Americans are heavily burdened by the cost of housing. All of this means that it’s an excellent time for investors to purchase or develop housing solutions with affordability in mind.
Currently, more than 9 million Americans, nearly 3% of the population, live in units subsidized by HUD, with 2.07 million living in units subsidized by the HUD Section 8 program, the nation’s largest affordable housing subsidy program. In addition to Section 8 and HUD subsidies, there are a variety of other programs that can help developers of affordable housing, most notably, the Low Income Housing Tax Credit (LIHTC) program. The LIHTC program allows investors in affordable housing to take a 10-year tax deduction against their federal income taxes in order to incentivize more affordable housing development across the United States.
In addition to CMBS and conduit loans, there are a wide variety of multifamily lending options for affordable housing borrowers, including HUD, Freddie Mac, and Fannie Mae multifamily financing, but these often come with strict net worth and credit score restrictions. That being said, a CMBS loan can act as a bridge financing before a borrower consolidates their financials and refinances with higher-leverage HUD or agency debt.
Common Uses for CMBS Retail Property Loans
Property acquisitions: Investors may be interested in acquiring a property with a Section 8 or other HUD contract in place, and a CMBS loan could be a great way to do just that. Properties, in general, however, must have little to no history of crime and generally must be located in lower-crime areas.
Refinancing: If you’re an affordable housing borrower currently stuck with high-interest debt from a bank or private lender, a CMBS loan could be a great way to lock in low-rate, longer-term, non-recourse financing. This may be able to significantly reduce your monthly debt service, increasing your project’s ROI and IRR.
Taking cash out: If you have a lot of equity in a property, many CMBS lenders will allow you to get a cash-out refinance. You can use those funds for anything you’d like, including increasing the size of your current portfolio or making necessary repairs on your property.
Affordable Housing Property Types Eligible for CMBS Loans
HUD Section 8 Properties: The HUD Section 8 program can be ideal for affordable housing investors, as Section 8 housing units are in high demand, meaning that vacancy rates for Section 8 properties are often close to zero. Potential tenants can sign up on an online waitlist on GoSection8.com or other similar online resources. Landlords are directly compensated for all or part of their tenant’s rent via direct payments from their state or local public housing authority.
This means that rents, or at least the subsidized portion of them, are always on time and paid in full. However, Section 8 property owners do have to submit to regular inspections, and, when it comes to getting financing, CMBS or other lenders will want to carefully review the property’s Section 8 contract before going ahead with the loan origination process.
In general, investors must have a fully-enacted Section 8 contract and in-place tenants before beginning the CMBS origination process, and will not be able to take on a Section 8 contract during the life of their loan, as this could change the core financial fundamentals of the property.
LIHTC Properties: Properties funded with LIHTCs can also be a great candidate for CMBS financing. LIHTC properties are generally required to keep their affordability for 15 years and must abide by a Land Use Restrictive Agreement (LURA). LURAs generally require an owner to set aside at least 40% of a project’s units to tenants who earn less than or equal to 60% of the area median income (AMI), or at a minimum of 20% of the development’s units to residents earning less than 50% of the area median income.
This strictly limits a landlord’s ability to raise rents during this period. Therefore, properties subject to LURAs must generally have particularly high DSCR to qualify for CMBS financing, as they will not be able to raise rents to market levels to compensate for unexpected expenses. Some CMBS lenders will not want to work with LIHTC properties due to the additional complexity and time it takes to analyze the legal ramifications of these complex contracts.
Unsubsidized Affordable Housing: Affordable housing doesn’t necessarily have to have a government program attached to it to be affordable. Many projects, such as workforce housing, are designed with affordability in mind but do not have a housing assistance payment (HAP) contract or carry with other affordability restrictions. These properties can serve an important niche for lower-income households, while they still allow landlords to raise rents to market levels.
Prospective Terms for CMBS Affordable Housing Loans
Unlike bank loans or life insurance company loans for commercial properties, or Fannie Mae, Freddie Mac, and HUD multifamily financing for apartment properties, CMBS loans have relatively lenient borrower requirements.
CMBS terms and requirements typically include:
Loan Size: $2 million+, no maximum loan amount
Loan Terms: 5, 7, and 10-year fixed-rate terms, interest-only (I/O) financing available for well-qualified borrowers
Amortization: Generally 25-30 years
DSCR/LTV: 1.25x -1.35x, 75% LTV
Eligible Properties:
Affordable housing properties with 5+ units
Single-family homes and portfolios are generally not permitted
Section 8 contracts must generally be in place
Properties must have a history of low or no crime
LIHTC properties with LURAs may be subject to additional restrictions
Loan Pricing: Pricing based on current swap rate or relevant U.S. Treasury rate, LTV and DSCR, as well as asset quality, rate buydowns available in some situations
Loan Assumption: Fully assumable pursuant to master servicer approval and a fee, generally 1%
Prepayment: Yield maintenance or defeasance
Recourse: Generally non-recourse with standard bad-boy carve-outs for issues like fraud, embezzlement, or international bankruptcy
Third-Party Reports: Third-party reports are paid for by the borrower, and typically include:
Full appraisal
Phase 1 ESA (Environmental Assessment)
Property Condition Assessment (PCA) is often required
Rate locks: Available at loan commitment, 30-day rate locks may also be available with lender approval
Replacement Reserves: Typically required and paid for by borrower on a per-year basis, may be waived or reduced in some situations, particularly for Class A assets
Lender Legal Fees: Generally $15,000 for smaller loans, larger for larger loans
Origination Fees: Generally 1%, can be higher in some scenarios