Community Investments
Volume 11; No. 1; Winter/Spring
1999
By Daniel M. Leibsohn, Community Development Consultant
 Many
people believe that there is “too much money chasing too few deals.”
Certainly, tax credit or other heavily-subsidized deals could be accurately
characterized this way. However, I believe the reverse is true for many
other types of community development projects . . . there are too many
deals chasing too few dollars. Projects like community facilities, day
care centers, health care facilities and non-profit buildings may be economically
viable, but financing for these deals is still very difficult to obtain.
Special needs housing1 also suffers from lack of available financing--especially
permanent financing. Certainly, the risks and layered financing structures
of these deals can be a lender’s worst nightmare. But remember how
complicated we thought tax- credit projects were just a few years ago?
Today, the use of tax-credits is commonplace, and developers have come
to rely on them as a primary source of multi-family finance.
If history repeats itself, there is some hope that special needs finance
will become routine. But for now, concerns related to the financial structure
and costs of operation in special needs projects are legitimate. Later
in this article, several underwriting options will be presented that could
mitigate a number of these concerns.
Most special needs developers support their operating budgets solely
through grants, fundraising, and if available, Section 8 financing. But
there is growing experience in special needs housing lending. As we review
the unique characteristics and challenges inherent in these developments,
keep in mind the tremendous lending opportunities that exist for financial
institutions seeking qualified community development loans. Acquisition,
construction, rehabilitation, bridge and permanent financing are all in
demand. There is also a need for operating lines of credit which help
provide working capital when public agency or foundation payments are
behind.
The Unique Attributes of Special Needs Housing
Effective participation in a special needs project requires an understanding
of the key differences between these developments and other single or
multi-family developments. Let us consider the most obvious differences:
In special needs housing, the income streams for development
and operations are different (sometimes idiosyncratic), and funding requirements
can vary greatly. For example, many of the sources that support
AIDS housing differ from those that support housing for the mentally ill,
emancipated youth or victims of domestic violence. These sources can vary
geographically within a state or among states; they may offer annual or
multi-year support; and, they will likely include a combination of federal,
state and local funding coupled with some level of private support. Examples
of these sources include: county marriage license taxes (for victims of
domestic violence), HUD funding, school system foster care funds and public
health monies. Regardless of the mix, each source comes with unique requirements.
The challenge is learning how to juggle, blend and balance the use-restrictions,
timing and reporting requirements of all potential sources.
Operating capital can also vary from project to project, depending
on the targeted population to be housed. For example, residents
in some developments pay rent from SSI, welfare payments or earnings from
part-time jobs. Other developments may be fully supported by subsidies
and fundraising, so tenants pay no rent at all. Foundations, corporations
and individuals, therefore, are also major sources of operations and capital
revenue.
The result is an extensive and varied financing framework for both development
and operations, each with its own, sometimes byzantine, set of guidelines
and requirements. For lenders, these conditions require a commitment of
time and patience to learn a new set of complex funding arrangements.
There are three different stages of housing, each with unique
development and operating conditions. For example, victims of
domestic violence often begin with a short-term stay in an emergency shelter,
usually from two-to-four weeks. They may then move to transitional housing,
for as long as two years. Afterwards, some form of permanent housing becomes
the final stage. Some of the key differences among these housing stages
include physical configuration and income stream.
If the physical layout is not easily reconfigured to appeal to a large
market, added risk and potential costs are created for lenders. This can
occur when a dormitory-style building is used as a shelter; when a mixed-use
property includes offices, clinics, and meeting rooms for services; or
when a five- or six-bedroom group home is located in a neighborhood of
smaller homes. The wide continuum of housing types--residential hotels,
single-family group homes, congregate housing, apartments, condominiums,
dormitories, etc., each comes with its own set of issues and risks.
The risk associated with special configurations has little to do with
the construction or operational phase of a project. Configuration becomes
an issue in the unfortunate event of a default or property foreclosure.
In addition, the location of the facility may cause problems for lenders.
Quasi-residential properties are sometimes located in non-residential
neighborhoods, largely due to neighborhood opposition from other, more
favorable locations.
Lenders and other investors must understand how the physical configuration
and location will affect the future marketability of a property. Furthermore,
they must have some idea of the costs associated with a reconversion,
which could become necessary for the successful sale of a property.
Low Income Housing Fund
Low Income Housing Fund (LIHF) was created in 1984 in the face
of a serious crisis in low-income housing. LIHF’s goal is to increase
access to capital for low-income communities, with a focus on low-income
housing, at affordable rates and terms. LIHF’s community lending philosophy
incorporates four principles:
- Projects should target the poorest and most vulnerable people;
- Work should be done in a very strong community development context;
- LIHF should help to build a nonprofit housing industry; and,
- Projects should be undertaken with a high degree of technical
rigor.
LIHF also assists various homeless and special needs populations
and, more recently, has been lending extensively for community facilities
and other community development activities.
LIHF operates within the private financial community and the nonprofit
community, and serves as a critical link between these two sectors.
LIHF’s capacity is demonstrated by a 13-year track record, using
very limited operating and capital resources to assist in the financing
of over 13,490 units, of which the large majority house very low-income
people.
The Low Income Housing Fund
74 New Montgomery St. #250, San Francisco, CA 94105
(415) 777-9804/www.LIHF.org
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The developers of special needs projects may differ from the
affordable housing developers to which lenders have grown accustomed.
While some may be experienced and savvy developers, others may
be new housing developers or social service providers with little experience
in housing development. This inexperience can be manifested in any number
of ways. For example, an inexperienced developer may create a project
budget that mixes all operating expenses together--with administrative
costs listed right after maintenance, followed by van costs and counselor’s
salaries. Other issues associated with property management or long-term
repayment strategies could also raise red flags. This is not to say that
inexperienced developers shouldn’t participate in special needs developments.
There are, however, a number of steps that investors and lenders can take
to strengthen a proposed deal, which can result in a “win-win” for all
concerned.
Underwriting Strategies
There are several ways to address the issues associated with special needs
housing. The first is a commitment to learn the field and its unfamiliar
requirements. The others that follow are examples of flexible underwriting
techniques that can be used when reviewing a special needs proposal.
- Separate income and operating expenses into housing, administration
and services. Then, determine whether low-income tenants could
still be housed in the facility if the core operating subsidies were
eliminated. This approach creates an “alternative use analysis”
that demonstrates the economic feasibility of other options.
- If possible, use a shorter amortization term. This
may require one or more of the operating sources to provide more support
for debt service. This option can work in many situations.
- Use different payment schedules over the term of the loan.
For example, use a very short amortization term during the first few
years of the loan if the project has a public-sector contract with a
high level of subsidy. This approach uses the public subsidy to pay
down the mortgage principal as much as possible in the early years of
the loan. To underwrite the later years, beginning with year four for
example, assume a reduction in income to a realistic level trended to
year four. Amortize the remaining balance over a longer period as needed.
If the subsidy is renewed in year four, continue the rapid amortization
employed during the first three years. If the subsidy ends after three
years, the loan has been paid down substantially, and the risk to the
lender has been reduced. In some situations, several payment schedules
(beyond the two phases illustrated here) may have to be developed, and
then built into the loan documents.
Shelter Partnership, Inc.
Shelter Partnership, Inc. is a nonprofit agency established in 1985
that provides assistance in the development and maintenance of short-term
and transitional housing programs, permanent housing, and supportive
services for the homeless and potentially homeless throughout Los Angeles
County. The organization serves as a sturdy bridge between frontline
agencies serving the homeless, public officials whose policy decisions
impact those agencies and their clients, and members of the private
sector who share its concerns. The following are the key services offered
by the agency.
- Funding and technical assistance for service providers which provides
resources such as the sponsorship of VISTA volunteers, the Training
Institute, and a $500,000 bus token program.
- The Shelter Resource Bank Project provides basic resources for
service providers to offer their clients. The free products are distributed
to nearly 200 frontline agencies serving the homeless and very poor.
- Creation of collaborative applications. Since 1994, Shelter Partnership
has garnered $200 million in federal funds for Los Angeles County.
- Needs assessment reports, most often commissioned by local policy-makers,
provide timely, invaluable assessments of the area’s critical
needs and resources.
Shelter Partnership receives general and project support from foundations,
corporations, local and county funding sources, and many generous individuals.
The organization utilizes these funds efficiently, spending less than
two percent of its expenses on administration.
Shelter Partnership, Inc.
523 West 6th Street, Suite 616, Los Angeles, CA 90014
(213) 688-2188 / www.shelterpartnership.org
Keep the loan-to-value ratio as low as possible in the beginning
or have it reduced as much as possible by the end of a short-term operating
contract. This way, if problems occur, other income and development
sources can be more easily attracted to participate in the deal by committing
additional funds or providing assistance in finding a substitute borrower.
If the problem is management rather than economic viability, the lender
can obtain the assistance of the appropriate public agency to replace
the borrower with a more capable sponsor; the loan documents should
allow for this assignment.
To strengthen a proposal, require additional reserves or third-party
guarantees. This option may be the most difficult to apply
since it usually means securing additional support from government agencies
or private funders who are already participating in the deal. However,
there may be public guarantee programs that can serve in a back-up capacity
on a case-by-case basis. If not, it may be worthwhile to create a state
or regional guarantee pool for special needs housing. This would provide
additional incentive for conventional loan support.
Make sure the developer has both a short- and long-term vision
for the project. While the construction and initial operating
years are critical, it is equally important to pay attention to the
longer-term issues of property maintenance and management, the viability
of public-subsidy contracts, and the maintenance of operating reserves.
Operating budgets should be forecast at least 1015 years out, and contingency
plans should be established to deal with any number of potential situations.
To lower costs and provide expertise, use the services of
specialized intermediaries. Organizations like the Corporation
for Supportive Housing, the Low Income Housing Fund, and Shelter Partnership,
Inc. can help through the provision of technical assistance to developers
and by their ability to structure and package complex financial deals.
It is important to remember that financing special needs housing, especially
in the start-up phase, is expensive. But the returns can be both socially
and economically rewarding in the long run.
The Corporation For Supportive Housing
The Corporation for Supportive Housing (CSH) is a national nonprofit
intermediary that supports and advances the work of organizations providing
housing and a link to healthy community life for the most marginalized
Americans--people who are extremely poor, and who face chronic health
challenges and multiple barriers to employment.
In its eight local offices, CSH works with nonprofits and government
agencies to:
- help local organizations gain the financial and technical assistance
they need to build housing with services;
- create cutting-edge demonstration programs and experiment with promising
models to test new ideas;
- facilitate sharing of successful techniques and strategies throughout
the industry; and,
- streamline and improve development and funding systems. As of December
1998, CSH had committed more than $34.4 million toward the development
of more than 8,200 supportive apartments. And, through the National
Equity Fund, CSH has placed over $140 million in corporate equity into
projects across the country.
Corporation for Supportive Housing
50 Broadway, 17th Floor, New York, NY 10004
(212) 986-2966 / www.csh.org
About the Author
 Dan
Leibsohn is presently the executive director of Community Development
Finance, a nonprofit financial and research organization, and the head
of Capital Flows, a consulting organization.
From 19841998, he was president, executive director, and founder
of the Low Income Housing Fund (LIHF). Prior to his work at the LIHF,
Mr. Leibsohn served as senior associate at the San Francisco Foundation
Housing Task Force, municipal loan coordinator for the City of Berkeley’s
Housing and Development Department, and worked for the League of California
Cities. He has also worked extensively with community organizations in
other parts of the country, and has published several articles and reports.
He serves on numerous boards including the Affordable Housing Advisory
Council of the Federal Home Loan Bank of San Francisco, the California
Community Reinvestment Corporation, the National Association of Affordable
Housing Lenders, and the Skid Row Housing Trust and the Property Management
Company.
Mr. Leibsohn graduated from the University of Michigan with a degree
in Economics and received a Masters in Public Administration from Harvard
University where he also studied city planning. He is a licensed real
estate broker.
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