RAISING CAPITAL & FUNDING
Multifamily properties represent great opportunities for raising capital to investors willing to restrict rents on some of their units.
with a household income of 61 percent to 120 percent of the area median income (AMI) that the program is targeting is huge because that area of the state is so relatively unaffordable. The program does not even require that all units be priced to meet the needs of that population. As few as 20 percent of all the units can be rent-restrict- ed as long as the restriction is deeded into those units so they remain affordable for the foreseeable future. Many of these programs fund projects by offering forgivable loans for devel- opment. After a certain period of time, usually between ten and thirty years, the funding will be forgiven. Other programs will match private funding, and still others simply offer highly competitive loan rates and, sometimes, easier financing terms in exchange for this type of development. CASE STUDY: BOSTON METRO MULTIFAMILY DEVELOPMENT PROJECT 2017-2018 Sean Carpenter, CEO and president of Shamrock Development Associates, a full service real estate development, con- sulting, asset and property management firm, has been navigating the complicat- ed waters of funding multifamily devel- opments using government programs in part or, sometimes, in whole, for years. This case study demonstrates what is possible with the right combination of location, awareness of state and munici- pal housing programs, and the ability to convey that vision to the right program: “With our latest acquisition, we talked to the developer who was selling, and initially, he wanted about $7.2 million,” Carpenter recalled. “I told him, ‘You’re not going to get that in the marketplace,’ and I was right. He went out to bid, and the most he could get was $6.4 million. I was able to tell him, ‘I’ll still give you your $7.2, but I need you to give me time to have this under contract for more than six months because I’m going to turn these units over to the Workforce Housing Program.’”
UNDERSTANDING RENT RESTRICTION W hen Sean Carpenter accepted the Workforce Housing Pro- gram funding, he agreed to “turn over” a certain number of the units in his soon-to-be-renovated multifamily housing development to the program. “Essentially, we agreed to keep them rent-restricted, which means that at any given time, we have to keep rents at 90 percent of market rent or 80 percent of median income, and we have to do a mar- ket survey each year to enforce this. It’s a type of rent cap. “If we do that for 20 years, then our fund- ing is all forgiven and everyone is happy.” Carpenter noted that participation in this type of programmay require an investor to put in a fair amount of money early in the program to bridge the period of time
between when they get the property under contract and when the initial funding and additional requisitions come in. “At the end of the day, though, our cost basis will be nearly zero because the money that we put into this deal will come back to us, and then some,” he explained. “The loans will be forgiven, and those loans cover the money that we put in over the initial course of the project. Even better, since this is a rehab project, we actually have all of the units already occupied and paying rent during the renovation process.”
Funding MultifamilyDeals Using Government Programs ACTION ITEMS AND A CASE STUDY FROM BOSTON, MA.
Carpenter noted that getting his favored type of funding in place some- times requires more time than commer- cial developers typically prefer. However, in this case, he was able to offer the price that the developer wanted in exchange for an additional 18 months (for a total of a year time frame with an addition- al year extension) on the contract. “In that project, we had a few issues that we thought might take us a little longer to resolve before we could tie up our fund- ing,” he explained. “We had some tenants who did not have leases, lead paint, asbestos, all kinds of contamination, and we couldn’t get anybody to finance it, so we needed the extra time. “Once we had our contract with the developer, we went to the state. It was the perfect opportunity to implement the Workforce Housing Program, which, at the time, was offering about
$100,000 a door in rehab money. The development was located right next to a subway station, which is ideal for this type of housing because those tenants tend to rely on public transit. Ultimate- ly, we got $100,000 a door for 24 of the 32 units. Then, we went to the city and asked them to match that funding to redo the rest of the units. Under the Affordable Housing Trust [Fund], they came up with $1.2 million, and then we were able to come up with another $400,000 through a community preser- vation grant.
by Carole VanSickle Ellis
lot of investors never get in- volved in multifamily investing because they think it is just too big to handle. They fear they will never be able to raise the money to do the deals, and, if they did raise the money, that they would never be able to pay back their enormous debts. Most investors do not realize there are a lot of other funding options for multifamily deals that do not involve debt in the traditional sense. A
Here’s why that funding exists: When you develop multifamily proper- ties, you are providing a valuable service not just to the local community, but also, if you meet certain requirements, to your state and even the federal government. Specifically, if you create housing oppor- tunities for populations that desperately need them, then you are helping your city, your state, and your local economy. In many cases, your city and your state will reward you for that service if you alert them to your activities. In fact, they may even provide you with some capital!
The key to obtaining funding through government programs is to understand what housing needs the government is trying to meet in an area. For example, Massachusetts has a $100 million Work- force Housing Fund that was specifically designed, according to its website, “to support the creation of rental housing that is affordable for working families whose incomes are too high for subsidized hous- ing but are priced out of market rents.” As you might imagine, in many areas surrounding Boston, Massachusetts, where our case study is located, the population
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Carole VanSickle Ellis is the editor of Think Realty Magazine. She can be reached at firstname.lastname@example.org
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