How Waterford Co. Finds Funding As Federal Housing Programs Face Challenges

Getting financing for affordable housing projects has never been easy, but recent proposed changes to federal policy could make it even more difficult for developers to secure funds for the much-needed property type.

Much of the country is coping with a housing crisis, but the problem is perhaps most acute and longest-running in California. New data released this month indicates that qualifying salaries for low-income housing rose to six figures in parts of the Bay Area and neared $90K in three other northern California counties.

Developers in the state are increasingly looking to new funding sources as they try to get projects off the ground. 

“We have been heavily dependent upon the tax credit program,” Waterford Property Co. Head of Acquisitions and Development Sean Rawston said of the nationwide Low Income Housing Tax Credit program, which is by far the most-used mechanism for funding affordable housing. 

President Donald Trump’s newest budget proposal includes possible expansion for LIHTC, but threats to broader federal funding sources have exposed the risks inherent in leaning too much on any one tool.

To diversify, Waterford has looked to a state-level bond to create housing for so-called moderate income earners, or those making up to 150% of area median income, through acquisitions of existing properties.

Essential function bonds allow for-profit and nonprofit developers, such as housing authorities, to utilize tax-exempt bonds to finance affordable multifamily and senior housing projects.

The bonds work like this: A developer partners with a government entity such as a joint powers authority or a housing agency to buy an apartment building. The government entity acts as an issuer of the bonds and owner of the building.

The bonds are purchased by mutual or pension funds, which are traditionally buyers of municipal bonds. They are secured by the apartment building and are repaid by the income from rents at the property.

“[Municipal] investors traditionally don't invest in housing, which is why this program was so successful,” Rawson said. “We were able to bring an element of the market that typically does not invest in housing.” 

Rawson’s company makes use of California’s essential bond program, but they are also a growing segment in Texas, Florida and New York. A Fitch Ratings report published last March anticipated more of these types of projects would be in the pipeline across the country as cities look to partner with private companies to create much-needed housing for teachers, nurses and other professionals often held up as examples of those served by moderate-income housing. 

Critics of the program have expressed skepticism of how much of a discount to market rate rents the buildings provide and have said that the discounts could be steeper if not for the fees developers charged in relation to the projects. 

Waterford says that this type of project has faced challenges to its feasibility in the last year or so, both because of interest rates and because of a dispute involving a challenge to the projects’ property tax exemption that Rawson said is causing interested investors to pause until a resolution is reached.

“From a bond investor's perspective, if they see that there is this fight to destroy the tax-exempt nature of these projects, that completely disrupts wanting to invest,” Rawson said.

But while some for-profit projects are on hold, a similar transaction by the Housing Authority of the City of Los Angeles closed in December that turned a 333-unit, fully market-rate building into mixed-income housing. 

The $156M transaction was largely paid for by tapping into tax-exempt bonds, though the housing authority did put up $12.5M and received a $5M low-interest loan from a local nonprofit aimed at leveraging philanthropic money for affordable housing, the Los Angeles Times reported. 

Under HACLA, about a third of the units will be reserved for households making 80% or less of the AMI, and the remaining two-thirds will be rented to middle-income households making up to 150% of the median income, the Los Angeles Times reported.

Overall, the building’s average rent is expected to be 32% less than what it was under the previous owner, the housing authority told the LA Times.