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Opportunity Zones, HUD: Delivering More Workforce Housing

Rob Rotach Walker Dunlop

Many of today’s headlines about multifamily housing have focused on the market’s two extremes: homelessness and high-end penthouses. Meanwhile, a crisis has been growing in the “missing middle;” there is a shortage of affordable rental housing for middle-class workers like teachers, firefighters and police officers.

In recent years, middle-income families have been struggling with flat wages and rising childcare, education and healthcare costs. Not only are families being priced out of homeownership, but they’re finding fewer rental units in their price range.

Indeed, rents have been rising, particularly in cities with booming economies. Nationwide, only 37 percent of all available units rent out at or below $1,200 per month, according to the National Low Income Housing Coalition (NLIHC) Out of Reach report and the Joint Center for Housing Studies of Harvard University. Yet only in 13 states do workers earn an average of at least $22.96 per hour, the amount required to comfortably afford a $1,200/month apartment.

Charlotte is short 34,000 affordable housing units and Salt Lake City lacks 54,000. In total, there is a need for hundreds of thousands more affordable rental units.

The problem is a matter of supply as well as demand. Formidable obstacles currently impede the development of workforce housing, but combining opportunity zone incentives with new U.S. Department of Housing and Urban Development/Federal Housing Administration (HUD/FHA) programs can provide a creative solution going forward.

Rents and Subsidies Don’t Cover Rising Construction Costs

Many market-rate developers are interested in building housing for middle-income renters, so why aren’t more workforce housing properties being developed? In short: low incentives and high execution uncertainty.

Targeted programs — such as subsidies, tax incentives, Community Reinvestment Act tax credits and attractive debt options — have long been in place to develop properties for renters who earn less than 60 percent of a region’s area median income (AMI). On the other end of the rental housing spectrum is luxury. Home to renters with the income flexibility to accommodate rising construction and labor costs and higher rents, these properties have accounted for up to 80 percent of new supply during some cycles. In fact, some of these units replace the Class B and C stock typically tailored to renters earning between 60 and 120 percent of their region’s AMI.

Workforce housing often fails to qualify for the tax credits, subsidies and other benefits reserved for “traditional” affordable housing projects. The residents at this income simply make too much money to qualify for low-income housing. However, the amount they can reasonably afford to spend on housing each month is decidedly lower than the monthly budget of a market-rate or luxury renter. This means that developers of workforce housing have less flexibility to cover rising construction and labor costs with rent growth, as they might with a market-rate property.

These rising costs and the uncertainty of execution make it difficult for developers to obtain financing from private lenders such as banks and private equity funds. To compound the problem, if workforce housing is part of a program like a mixed-use development, the administrative complexities, environmental and noise restrictions and timelines for overcoming these obstacles pose further disincentives for financing. In many cases, private lenders limit the loan-to-cost ratio or simply decline to lend the money.

Public sector funding faces similar challenges with construction. Fannie Mae and Freddie Mac have successfully refinanced a significant amount of existing workforce housing stock, and their ability to lend $100 billion per quarter from fourth quarter 2019 through fourth quarter 2020 will enable them to continue to do so. However, government-sponsored enterprises (GSEs) do not have any programs for construction lending.

The Unfulfilled Promise of Opportunity Zones

Created in 2017, opportunity zones encourage long-term investments in affordable housing. In all 50 states, the District of Columbia, Puerto Rico and Guam, there are 8,700 opportunity zones located in low-income areas. Investors and developers can benefit from lower or deferred capital gains taxes, and full tax abatement on any appreciation after the initial investment (without recapture of depreciation for investments held over 10 years), as well as credits and incentives that lower lending costs.

With these cost savings, developers have a better chance of constructing properties that members of the middle class can comfortably afford. Unfortunately, thus far the benefits of opportunity zones have remained unrealized, in part because there is a time element to opportunity zone investments. Developers must declare their projects by a specified date within a calendar year to qualify for tax deferrals.

That’s where the HUD/FHA construction lending programs play a role, by streamlining the process and strengthening certainty of execution. Specialized expertise in HUD/FHA lending can also expedite the process.

Facilitating Construction, Incentivizing Development

Programs from HUD have evolved to fill the construction lending gap: new HUD/FHA programs combined with opportunity zone incentives make workforce housing both feasible and financially attractive.

The HUD 221(d)(4) program addresses this problem by insuring mortgage loans to facilitate the new construction or substantial rehabilitation of multifamily rental properties. Furthermore, a 2012 HUD pilot program to streamline FHA mortgage insurance applications — specifically applications to refinance mortgage debt — has been expanded to include new construction and substantial rehabilitation.

Compared dollar-for-dollar with conventional construction financing, FHA financing can yield twice the number of affordable housing units. Opportunity zone incentives sweeten the deal even more for workforce housing.

HUD Loans, Walker & Dunlop chart

In Tennessee, creative application of such programs accelerated over $11.5 million for Lewisburg Summit Apartments. Through HUD’s new Low-Income Housing Tax Credit (LIHTC) pilot program, the development was able to take advantage of 4 percent tax credits. Moreover, this affordable multifamily community is located within the bounds of an opportunity zone, meaning that the developer saves even more in terms of deferred/decreased capital gains taxes.

Walker & Dunlop used its extensive HUD financing expertise to work with the developer to ensure the financing terms were consistent with opportunity zone guidance. HUD reviewed and approved the application within 36 days and achieved a closing within 72 days of submission.

“HUD has continued its efforts with prioritizing and offering lower fees for both affordable tax credit properties and projects located within opportunity zones, which allowed for this complex, tax-exempt bond transaction to close expeditiously under the strenuously tight timeframes required,” said Walker & Dunlop Senior Vice President Rob Rotach.

A Creative Solution to an Urgent Need

As the middle class is priced out of rental markets nationwide, serious implications loom for America’s workers, families, economies and communities. Through the creative application of opportunity zone incentives and FHA financing, multifamily developers can be part of the solution.


— By Walker & Dunlop’s Sheri Thompson, Senior Vice President and FHA Group Head; Stephanie Wiggins, Senior Vice President and Chief Production Officer — FHA Finance; Keith Melton, Senior Managing Director — FHA Finance, and Jeremy Pino, Director — Capital Markets. Walker & Dunlop is a content partner of REBusinessOnline. For more articles from and news about Walker & Dunlop, click here.

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