UNDERSTANDING PUBLIC SECTOR FUNDING SOURCES

Securing financing is a critical piece of the development process and once you have a more complete picture of your financial feasibility, you can begin to explore sources of financing available. There are a number of public sector financing sources to develop land and construct housing available to affordable housing developers. Financing depends on a range of factors including capital needs, size, and location, to name a few. A list of the most common sources of funding for housing development can be found below.

Low-Income Housing Tax Credit (LIHTC)

The Low-Income Housing Tax Credit, commonly referred to as LIHTC, currently finances 90 percent of all affordable housing. Section 42 of the Internal Revenue Code (IRC or the Code) is the federal statute establishing the tax credit program. The overall process for receiving LIHTC credits includes:

There are two versions of the LIHTC program, the competitive 9 percent program and the non-competitive 4 percent program. The two programs allow investors to claim a credit equal to 9 percent or 4 percent, respectively, of their investment each year for ten years. Depending on market conditions, 9 percent credits could provide up to 70 percent or more of the cost of new construction or rehabilitation.

LIHTC alone does not typically fund an affordable housing development, even when paired with conventional debt. The primary reason for this challenge is that household income limits cap the amount of rent that can be collected. LIHTC can and should be paired with other financing sources such as:

Unlike other funding programs, under LIHTC, the developer does not need to repay the investor’s equity contribution like a loan. The investors are, instead, paid by the U.S. Treasury and developers may earn as much as 15 percent of the eligible project basis as a developer fee. Many grants may require that a portion of the developer fee is deferred or contributed back to the project to cover professional fees for consultants, accountants, lawyers, etc. That said, non-profits organizations don’t always include developer fees in their Development budget, but it is something that all types of entities consider, to ensure that staff time and other costs can be met and that you have funding for future pre-development.

The LIHTC program in Nevada is administered by the Nevada Housing Division. As the state’s housing credit agency, the Division is required to adopt a Plan describing the process for the allocation of low-income housing credits. In accordance with Section 42, each state allocating agency must have a Qualified Allocation Plan (QAP or Plan) which:

Strong leadership and management stability are critical to facilitating outside partnership and effectively navigating the LIHTC process. LIHTC properties often take many years so this stability can be difficult to achieve, but through consistent documentation of process and sustained internal capacity, even new developers can bring a LIHTC project to fruition. That said, if the organization does not have LIHTC expertise in-house, there are a number of consultants with LIHTC experience that can not only provide the expertise needed, but also build internal capacity and knowledge for future projects.

ACCESSING PRIVATE SECTOR FUNDING

In addition to public financing sources, affordable housing projects also can leverage private sector funds.

Commercial financing comes from the private sector, usually consisting of banks. Commercial financing usually takes the form of hard debt. There are mission-driven commercial financing options, such as Impact Development Fund, Enterprise Community Loan Fund, Mercy Community Capital, Capital Magnet Fund, and CDFIs, which offer more flexible development financing than conventional loans in order to support more housing development in low-income and underserved areas.

Philanthropic funding is funding from foundations, usually consisting of grants or in-kind support.

WORKING WITH LENDERS

Lenders decide whether to invest in a project by assessing how likely it is that they will not get paid back on a loan. They consider this risk in two ways: the risk that the project will not generate enough revenue to pay them back (“project risk”) and the risk that you, the developer, will not pay them back if the project is not completed (“borrower risk”). The riskier they perceive the project and borrower to be, the less likely they are to lend the money and the more likely they are to offer you unfavorable loan terms.

So, when you are seeking private financing, focus on reducing uncertainty and increasing confidence in you and your project. Here are some tips and tactics you can pursue:

• Proactively build your relationship with lenders. Reach out before submitting an application for funds to ask questions, hear from them about their loan process and requirements, introduce yourself and establish a relationship. This gives you the opportunity to build a network of others that can support your development, access information and assistance that can improve your project, and establish your credibility as a partner.

• Get support from other community leaders. Community support for your project can help address lender concerns and make lenders more comfortable with the project. Having a letter of support or bringing a community leader when you meet with lenders can help demonstrate their support for your project. This shows lenders there is community support and that others are willing to help make your project succeed.

• Provide a reasonable assessment of financial feasibility. Show how you will be able to make the project balance out financially (or “pencil out”) if you get access to this funding. Provide documentation for any assumptions you make and acknowledge where there are risks, so you can show that you are prepared to address them. Finally, summarize the analysis in a format familiar to the lender – generally, this means assembling or adapting your pro forma package using their templates or guidance. Lenders will review this package with two metrics in mind: the Loan to Value ratio (LTV) and the Debt Service Coverage Ratio (DCSR or DCR). Check if the lender has published maximum LTV or minimum DSCR thresholds and use your feasibility analysis to determine if you need to adjust your model to align more closely with these standards.

WORKING WITH INVESTORS

Unlike lenders, who expect to be paid back regardless of project performance, investors take on the risk that they may not get their money back when investing equity in a project. In exchange, they become partial owners of the property.

While a lender is looking for DSCR or LTV, investors are estimating their rate of return. And they will usually only invest when they believe they will see some positive return on their investment. They get this return from revenues generated by the project (i.e., rental income or capital gains from selling the property). In some cases, investors may also receive tax benefits from the property. If a project doesn’t generate revenue, they don’t get paid back.

Many of the same tips for building relationships with lenders also apply to building relationships with investors, including proactive outreach and networking, cultivating support from community champions, and clear financial analysis.

LAYERING FINANCING

There is not enough public funding to fully address housing shortages, so it is important to leverage federal dollars with other sources. This is sometimes called “layering financing” or “leveraging financing.” Leveraging or layering makes it possible for these dollars to go farther.

Building your Capital Stack

For further assistance with layering financing, you may wish to hire a consultant with experience in housing development.

Finally, always refer back to your pro-forma and development budget as funding is secured. Keeping these resources up to date will help you approach subsequent funders and demonstrate expertise.

Adapting programs to serve development goals

Public funding applications imply a certain order of events in the development process. For instance, you need a detailed concept ready before you apply for most development funds. Having flexible pre-development resources can help account for this.

You may have to navigate duplicative requirements. For instance, you may be asked to complete multiple environmental reviews to satisfy the standards of different programs when layering sources. If you identify these overlapping asks early enough, you may be able to create processes that satisfy multiple requirements at the same time and avoid duplicating effort.