CREJ

Page 10 — Multifamily Properties Quarterly — May 2022 www.crej.com Capital Markets A ffordable housing is often viewed as a specialty within the multihousing space, typically associated with low-income housing tax credits or Section 8 voucher pro- gram properties. However, oppor- tunities in affordable housing go beyond traditional tax credit financ- ing. We are seeing private inves- tors and operators; lenders; family offices; state and local housing authorities; environmental, social and governance-oriented capital; and various nonprofit entities fill this space by focusing on voluntary or naturally affordable workforce housing. Workforce housing can loosely be defined by rents at 80% to 120% of area median income lev- els, as defined by Federal Housing Finance Agency, and may or may not be accompanied by a regulatory or other restriction on rents. Due to the limited number of tax credit allocations available via the Colorado Housing Financing Authority, the supply of new afford- able housing is simply not keeping pace with demand. While LIHTC investments are highly profitable, they are limited in number and challenging to obtain. For new con- struction, investors have focused on Class A projects in order to achieve market returns. That is changing as we see investors pivot toward work- force housing opportunities. Private family office investors are frequently longer-term, cash-flow- focused with their capital. As we see construction costs rising, cash- on-cash metrics have trended down once stabilized. Workforce housing can help mitigate rising costs by building less ame- nitized projects, as well as providing a quicker lease-up timeline and lower downtime. Taken together with more favorable financing, cash-on-cash returns may be more favorable alongside less development risk. We are seeing a similar story unfold with traditional value-add business plans. Record-low cap rates and aggressive underwriting have resulted in higher cost basis, higher-risk value-add programming that will require even higher rents to achieve required returns. That is being reexamined as workforce housing may provide accretive financing options at the same time as increased equity is coming into the space due to similar risk-adjust- ed returns. There are real-world examples of private developers sourcing accre- tive private equity capital that is willing to forego excess returns in exchange for a positive impact on the community – i.e., building true workforce housing at the expense of developer profit. While this situ- ation is limited, institutional capital also is moving into this space. Some focus on LIHTC projects with near- term credits rolling, while others have allocated capital toward work- force housing as part of their ESG efforts. Workforce housing also may be accompanied by creative approach- es in programming, construction methodologies and financing structures. We have seen develop- ers successfully utilize modular or prefabricated construction meth- odologies on workforce housing in the Colorado mountain markets. Supply issues, a shorter construc- tion season, labor challenges and difficulty in sourcing materials in those markets create the opportune environment for success with mod- ular construction. Typically, rents at modular projects skew “naturally affordable” due to less amenitiza- tion and smaller unit sizes. Other creative programming includes blending LIHTC projects with a mixture of workforce housing units – i.e., 50% of units are LIHTC eli- gible while 50% are voluntarily deed restricted at higher, albeit afford- able, rent levels. In Colorado, we are seeing devel- opers partner with local housing authorities to create unique work- force housing opportunities as these municipalities grapple with affordability issues. We worked on a project in Winter Park, for example, whereby in exchange for certain incentives (land, permit fee waiv- ers, etc.), the developer voluntarily restricted rents. This enabled us to procure highly favorable financing, resulting in market cash-on-cash returns. Incentives come in many shapes and colors. For example, in the state of Colorado, if a housing authority is a 1% owner, there are various sales tax benefits on hard costs, as well as go-forward tax abatements available per Colorado statute. In the debt capital markets, the largest capital provider for mul- tihousing, the agencies (Freddie Mac and Fannie Mae) are focus- ing increasingly on affordability. If there is no deed restriction or rent restrictions in place at the property, the agencies may consider the rents “naturally affordable.” Due to the 2022 FHFA originations cap, afford- ability is the single largest driver of pricing. For 2022, at least 50% of the agencies’ origination must be “mission-driven affordable,” mean- ing naturally affordable at 80% AMI. Furthermore, 25% of new loans must be affordable to residents at or below 60% of AMI (up from 20% in 2021). Based on loan quotes we have received in the first quarter, we are seeing loans price up to 60 basis points (sometimes more) inside of similar profile loans when they qualify as naturally afford- able. We expect this trend to persist going forward. Freddie Mac and Fannie Mae also have forward commitment pro- grams that enable developers to obtain a forward permanent loan commitment upon stabilization, enabling construction lenders to Capital opportunities exist for workforce housing Rob Bova Director, capital markets, JLL Please see Bova, Page 30