11.15.2011 An Overlooked Option for Financing Multi-Family Affordable Housing: Obtaining Tax-Exempt Housing Bonds from a Local Redevelopment and Housing Authority and 4% Low-Income Housing Tax Credits from VHDA


One of the very few bright spots in the struggling world of commercial real estate has been the strength of the multi-family rental market.  While the construction of shopping centers, office buildings and industrial properties ground to an almost complete stop during the past three years, rising unemployment and foreclosures, the collapse of the single-family housing market, and the reluctance of many who could afford to buy a home to make such a sizable investment in this fragile economy have combined to shrink multi-family vacancy rates in existing properties and strengthen the pro forma bottom lines of proposed projects.  As a result, developers of multi-family rental projects have been busy the last few years with both acquisition/rehabilitation deals and the construction of new apartment complexes, and both construction and permanent financing have generally been available for these projects.


One challenge for these multi-family developers has been to match up the best mode of financing with their project.  In the past, this has often meant obtaining a privately originated loan backed by some form of federal government sponsored credit support (e.g., Fannie Mae, Freddie Mac or GNMA), but since the financial setbacks at Fannie Mae and Freddie Mac, developers have become interested in exploring other alternatives.  Some sophisticated developers have pursued HUD-insured 221(d)(4) financing, notable for its fixed rate, 40-year amortization schedule.  However, the HUD 221(d)(4) program typically takes a year or longer from the pre-application stage through closing the financing, and many real estate sellers aren’t willing to wait that long to close their sale.


Other multi-family rental housing developers have flocked to state-supported financing, provided in Virginia through the Virginia Housing Development Authority (“VHDA”).  VHDA’s long-standing AAA bond rating (as of October 1, 2011) and well-established multi-family bond financing loan programs[1] enable developers of both market-based and affordable (i.e., for low- and moderate-income tenants) rental projects to obtain financing.  The loans for market-based properties are financed with taxable bonds issued by VHDA for multiple projects, while the loans for the affordable housing properties are typically financed with tax-exempt VHDA bonds and accordingly bear a lower interest rate than the loans for market-based projects.


But VHDA does more than sell its bonds to fund multi-family rental housing loans.  It also serves as allocation administrator for the Commonwealth’s share of federal Low-Income Housing Tax Credits (“LIHTCs”), uniquely positioning it as a “one-stop shop” for financing affordable housing projects.  To VHDA’s credit, it operates a well-oiled machine, accessing the credit markets with large bond issues which fund its making loans for individual projects, and it has reduced the highly detailed application process for LIHTCs to a science.[2]  Through VHDA’s LIHTC program, a developer may apply for either (a) 9% LIHTCs (rationed according to a nation-wide annual cap on the dollar amount of LIHTCs that can be granted through a competitive once-yearly application process) or (b) the less lucrative 4% LIHTCs (available for projects financed with tax-exempt bonds).  With an award and subsequent sale of LIHTCs to an investor limited partner, the developer can raise substantial equity for injection into its project.


But how do LIHTC’s work, and what makes them so attractive to the developer of a multi-family affordable housing project?  While a complete explanation (232 pages!) of the program is available from the Internal Revenue Service’s web site[3], the key aspects of the LIHTC program can be briefly summarized as follows. 


For the competitive 9% LIHTC’s, VHDA allocates the available credits among several pools, some of which are geographic and others of which are sponsor defined (i.e., non-profit organizations and local Redevelopment and Housing Authorities (“RHAs”)). The 9% credit allows the investor to subtract from its tax liability, each year for ten years after completion and occupancy, 9% of the qualified basis in the project, which is roughly the cost to develop the project, less land cost (land cannot make up any part of the tax credit base).  For rehab projects, the acquisition of existing buildings will also qualify for credit, but at the 4% rate rather than 9%.  The 4% credit is indexed against the federal funds rate such that at the present time, the 4% credit actually yields 3.26%.


The tax credit investor, which typically “buys” the credit by contributing capital and becoming a limited partner in a limited partnership, or a non-managing member of a limited liability company, pays a discounted amount for the credits because of the time value of using the credits over the ten year period. Other benefits of owning an equity interest in the project, such as cash flow from operations and residual value on sale or refinancing, are negotiable between the developer and the tax credit investor.  The developer can expect to make personal guarantees to the investor that the credits will be received and the project operated free of deficits at least for some initial period.  Now about twenty years old, the tax credit program has matured, with a number of national syndicators as potential investors.


What’s the quid pro quo for this tax benefit?  To qualify for LIHTC’s, the project must (a) rent not less than 40% of its units to residents making not more than 60% of the HUD-established area median income (subject to adjustments for family size), and (b) fix its rent for its tax credit units at 30% of the metropolitan statistical area (“MSA”) median income.  MSA median incomes and allowable rents can be found on the VHDA website.[4]  Since tax credits (and equity dollars) flow only for qualified units, more often than not developers choose to apply the tax credit restrictions to 100% of the project.  Finally, the tax credit restrictions must remain on the project for a minimum of thirty (30) years.


Thus, the tax credit program provides an indirect subsidy for affordable housing.  The higher equity investment reduces the amount of project debt, and with lower debt service costs, the project can still prosper at the restricted tax credit rents.  The program does, however, require diligent property management, because failure to maintain occupancy by income-qualified tenants will result in recapture of credits during the first fifteen years after the project’s completion.


But even the finely-tuned programs which VHDA offers for its multi-family rental housing loans and 9% LIHTCs have some drawbacks.  Because of the federal volume cap on 9% LIHTCs, the application process for the 9% credits is very competitive, and most projects which apply fail to receive an award of 9% credits.[5]  Moreover, for those developers seeking 9% LIHTCs, news of the failure to receive an award of 9% credits comes after a five to six-month long application preparation, submission and review process, at which point they then have to retool their numbers and turn to “Plan B.”  Developers who also choose to use VHDA’s multi-family rental housing loan program may find the cost of those funds somewhat expensive.  While the transaction costs are cheaper than obtaining bond financing from an RHA, other factors run up the cost.  Because the VHDA loan pool is fully funded at closing, interest costs are higher, and because VHDA structures the loan to bear a single interest rate to maturity, there is no opportunity to take advantage of the lower, short-term interest rates which could be accessed during construction or rehabilitation if the financing featured a subsequent conversion to a long-term interest rate after completion and stabilization.  Finally, while there are many variables which enter into long-term interest rate pricing (e.g., loan-to-value ratio, term to maturity, projected occupancy rates, pro forma financials, competition in the project’s market, etc.), the authors’ recent experience involving the alternative financing structure described below found that when comparing “apples to apples,” VHDA’s interest rate was about thirty (30) basis points higher than the post-conversion long-term interest rate offered in a bank private placement.


In a recently closed transaction, our client signed a purchase contract on February 14, 2011 for the purchase of an existing 180 unit apartment complex in a Hampton Roads city.  The contract gave the buyer until June 30, 2011 to obtain its financing and close on the purchase.  As there was no time to apply for and wait out the 9% LIHTC award process at VHDA, and because the client was projecting an approximately 16 month, phased rehabilitation of the project’s buildings (along with the construction of a new clubhouse), it decided to seek other alternatives.  In this case, a bank offered to purchase tax-exempt bonds issued by a local RHA, and to structure the bond issue on a draw-down basis in which interest would accrue during a two-year construction period at a cheaper, LIBOR-based floating rate, and only accrue on the actual principal amount advanced to date.  When paired with the 4% LIHTCs that could be obtained from the state volume cap as a matter of right and sold to an investor limited partner, the financing structure became quite attractive, notwithstanding the fact that the associated legal fees would be greater.  (The higher legal fees were due to the need for the developer to retain its own bond counsel, together with the presence of bank counsel and counsel for the local RHA. VHDA closes its loans with a trained staff of in-house counsel at no cost to the borrower.)


What cinched the deal was the prospect that the tax-exempt multi-family housing bonds could be issued and the 4% LIHTCs could be sold in roughly four months’ time, starting from the contract date.  In early March, we began the bond issue public approval process, drafting and submitting to the local newspaper the Notice of Public Hearing[6] which had to run once a week for the two weeks before the RHA’s meeting at which the issuance of the bonds would be considered.  The following week, we prepared and submitted the bond financing application package to the RHA.  In addition to the RHA’s application form, the package also included an “official action” resolution of the RHA,[7] a “public approval” resolution for adoption by the City Council of the City in which the project was located,[8] and a Fiscal Impact Statement in the form required by Virginia law.[9]  In late March, the official action resolution was adopted by the RHA, and in late April, the public approval resolution was approved by City Council, positioning the project to apply to the Virginia Department of Housing and Community Development (“DHCD”) for an allocation from Virginia’s multi-family housing bond allocation, in its capacity as the multi-family housing bond allocation administrator for the Commonwealth.[10] 


While the local bond approval process was moving forward, the client and our law firm were also preparing the VHDA 4% LIHTC application book and negotiating with prospective investor limited partners to buy the 4% LIHTCs, as well as supplying due diligence requirements to the bank and the ultimately selected LIHTC investor limited partner.  Operating on such a tight closing schedule, we were vulnerable to the slightest delays, and ultimately, the slowness with which some of the bank-ordered third party reports (appraisal, environmental & engineering) were delivered became problematic.  Additionally, we suffered delays in obtaining our bond allocation from DHCD, due to the one condition precedent to the bond allocation award which was beyond our control – VHDA’s approval of LIHTCs for the project.  Due to our unfortunate timing, VHDA’s personnel were focused exclusively on wrapping up the separate, but parallel, competitive application process for 9% LIHTCs, and so our 4% LIHTCs application, and hence our bond allocation application, both were delayed to the very end of June.  Consequently, due to the imminent June 30 contract closing date, a short-term bridge loan from the bank for the acquisition of the project was obtained so the purchase could be concluded on schedule, and the bridge loan was then taken out at the closing of the bonds and LIHTCs two weeks later.  From signed contract to final closing, exactly five months elapsed.


But notwithstanding the higher transaction costs compared to a typical VHDA financing, the speed with which the financing could be concluded and the all-in cost of the financing still left the developer satisfied that the financing structure was, on a long-term basis, the best option for financing the acquisition and rehabilitation of the apartment complex.  In addition, this structure allowed a greater degree of negotiation of financing covenants than would have been the case in a VHDA or HUD-insured affordable housing loan program. 


Because developers have ties to different banks, we have surveyed our contacts at some of the leading national, regional and community banks in the Commonwealth as to whether they either have structured, or would structure, a multi-family housing project finance program such as the one described above, and found the following results (some lenders asked that their names not appear in the list or failed to respond to our inquiry):


·         Bank of America                  -           Yes

·         M&T Bank                              -           No

·         Monarch Bank                       -           No

·         TowneBank                             -           Yes

·         Union First Market Bank       -           No

·         Wells Fargo Bank                   -           Yes (starting early 2012)


Multi-family rental housing developers are fortunate that during this time of high demand for their product, there are multiple attractive financing vehicles from which they can choose.  As each project is unique, the determining factors (including whether the project will provide affordable housing) which dictate the selection and availability of financing vehicle will vary greatly from project to project.  Given developers’ preference to control as many of the factors in their financing as possible, however, we believe that in the case of affordable housing projects involving either new construction or substantial rehabilitation, the use of tax-exempt, draw-down multi-family housing bonds issued by a local RHA in a direct placement to a bank, together with 4% LIHTCs, can produce outstanding results for the developer in the critical areas of speed, flexibility of financing covenants, and most importantly, all-in cost.  Affordable housing developers and their counsel should give thoughtful consideration to this under-utilized combination of financing vehicles as they begin to explore their financing alternatives.


For more information about this topic, please contact William L. Nusbaum at 757.629.0612 or , H. David Embree at 757.629.0608 or  or any member of the firm’s Financial Services & Real Estate Team.


[2] See the VHDA website at Program/Pages/LIHTCProgram.aspx.

[3] See U.S. Department of the Treasury, Internal Revenue Service Market Segment Specialization Program, Low Income Housing Credit, Training Publication 3123-006 (6-99), TPDS No. 89018M, at

[4] See VHDA web site, Maximum LIHTC Gross Rents – VHDA, BusinessPartners/PropertyOwnersManagers/Income-Rent-Limits/Pages/Maximum-LIHTC-Gross-Rents.aspx.

[5] See VHDA web site, 2011 Low Income Housing Tax Credit Program:  Final Rankings, http://

[6] See Treasury Regulations §5f.103-2(g)(2),(3) and §15.2-4906, Code of Virginia of 1950, as amended.

[7] See Internal Revenue Code §147(f)(2) and Treasury Regulations §§5f.103-2(c)(2) and 1.150-2.

[8] See Internal Revenue Code §147(f)(2) and Treasury Regulations §5f.103-2(d),(e).

[9] See §15.2-4907, Code of Virginia of 1950, as amended, as made applicable to multi-family housing bonds by § 2, Chapter 514, Acts of Assembly of Virginia of 1983.

[10] See Virginia Private Activity Bond Allocation Guidelines issued by the Virginia Department of Housing and Community Development, at Guidelines.doc.   While multi-family housing bonds are subject to the state-by-state federal volume cap for private activity bonds under Internal Revenue Code § 146, in recent years, Virginia RHAs have not come close to using up the portion of the Virginia volume cap reserved for multi-family housing bonds issued by local housing authorities.



Copyright © 2011. The Fee Simple, William L. Nusbaum and H. David Embree. All rights reserved. Reprinted with permission. This material is taken from volume XXXII, number 1 of The Fee Simple, p. 76 (Nov. 2011). The Fee Simple is published by the Real Property Section of the Virginia State Bar and is available for purchase from the Virginia State Bar, Eighth & Main Building, 707 East Main St., Suite 1500, Richmond, VA 23219-2800, (804) 775-0500,