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Robyn Bipes, Vice President of Loan Fund and Mortgage Lending, Twin Cities Habitat for Humanity
Some housing crises grab national headlines: sub-prime lending, the collapse of the housing market, or the urgent need to create more stable housing for our military veterans. Unfortunately for thousands of seniors and modest-income families, there is another housing crisis that has gone largely unnoticed: the looming loss of hundreds of thousands of the most affordable rental housing units in small towns and rural areas across the country.
Many parts of rural America face disinvestment. For years, affordable housing in rural areas has lacked private reinvestment, and the condition of rental housing has continued to decline due to aging properties and unaddressed rehabilitation needs. Rural areas do not see as much new construction; rents often are lower so developers are attracted elsewhere for greater profits; and state and federal resources allocated to building or revitalizing rural areas are vastly insufficient. Yet, these affordable rental properties are home to some of America's lowest-income seniors and families.
Without investment in rural housing, the situation may get much worse. Over the next eight years, rural America could collectively lose an estimated 11,500 affordable, federally assisted U.S. Department of Agriculture (USDA) Rural Development rental properties, currently home to more than 300,000 seniors and lowest-income Americans. This threat hinges on the loss of affordable mortgage financing for rural multifamily rental buildings. When the USDA mortgage secured by a rural multifamily rental building is paid off, the tenants in the property no longer receive USDA rental assistance. The rental assistance payments keep rents affordable for tenants and provide stable rent payments for the property owners.
The story could have a happy ending, however. In rural places across the nation, banks are partnering with nonprofit and community lending organizations to find new ways to stabilize and preserve this much-needed and irreplaceable affordable housing before it is permanently lost.
The U.S. Department of Housing and Urban Development (HUD) creates much of the country's affordable housing in urban centers and larger towns. The USDA, through its Rural Development division, has for decades provided financing for the creation and preservation of affordable housing in smaller towns, regional city centers, and rural areas with populations less than 20,000. The USDA's Rural Development Section 5151 housing program provided low-interest mortgages, with effective rates as low as 1 percent for 30 to 50 years, to small building owners, nonprofit groups, and mom-and-pop operators who developed and operated apartment buildings as small as eight units to house rural farm labor and other low- and moderate-wage households. The majority of this housing stock was built as modest walk-up apartments between 30 and 50 years ago.
These affordable properties have weathered decades of use, with insufficient funds for upkeep and rehabilitation. Many original owners who built this housing stock are aging too, often with no clear plan for who can take over the properties or care for their tenants.
The situation is reaching a crisis point as thousands of these affordable developments across the country are now nearing the end of their USDA-financed mortgages. While an end to a mortgage payment sounds good to most people, the striking reality is that when a USDA Section 515 mortgage is paid off, the owner is no longer under contract to provide affordable rents. When rent restrictions end, many owners elect to sell their properties or convert them into units that demand market-rate rents. According to USDA Rural Development, 11,500 properties will reach this maturity payoff point by 2024, creating a severe impact on hundreds of thousands of residents.
The USDA's Section 515 program also provides important rental assistance to many tenants of these properties. With this assistance, tenants can afford the rent by paying no more than 30 percent of their income on housing, helping ensure they have enough money for food, clothing, transportation, and health care. When a USDA mortgage matures or is prepaid, this rental assistance disappears. Consider this example: A renter with a household income of $1,000 a month has a rent payment of $500. Of this, the renter pays $300 and USDA rental assistance covers the rest. When a mortgage matures, the affordability restriction expires and the owner raises the rent to $600 a month at the same time that the tenant's rental assistance disappears. The renter must now pay $600, twice the previous amount. On average, households in a USDA-financed Section 515 property earn less than $15,000 a year, and many are on fixed incomes and unable to afford any significant rent increases.
Making the rural disadvantage worse is the fact that the USDA does not provide portable rental vouchers to tenants living in properties when USDA mortgages mature. Portable vouchers can protect tenants against rent increases when a property matures out of the program, by allowing them to use a voucher where they live or to find a similar property that will accept a voucher. Without vouchers, existing renters are often unable to pay the full rent to stay in their current housing. Finding other affordable housing can be difficult in rural communities where affordable housing has not been developed in years, or where the nearest affordable apartment is towns away.
How big is this problem? According to USDA Rural Development, rental assistance helps more than 215,000 of the 333,845 households that are renters in USDA-financed apartment buildings. The loss of USDA-financed housing will cause a doubling or, in some cases, tripling of rents, displaced seniors and low-wage earners, fewer suitable replacement apartments to house them, and further disinvestment in rural towns.
While national attention on this crisis lags, states like Minnesota, Oregon, and Ohio with large and aging portfolios of USDA-financed properties are proactively developing public-private partnerships among banks, public entities, and nonprofit organizations to effectively preserve these affordable units before too many are lost.
In Minnesota, a collaboration of Minnesota Housing (the state housing finance agency), the USDA Rural Development Minnesota office, and the Greater Minnesota Housing Fund (GMHF), a nonprofit lender, has resulted in a creative set of financing tools and incentives that have attracted private capital from banks and other investors. These resources are preserving Minnesota's most at-risk USDA-financed affordable rental properties before they convert to market-rate housing.
The Minnesota partners created a proactive statewide system to identify USDA-financed rural properties at highest risk of being lost. The funding partners then prioritize state resources and philanthropic dollars to provide incentives to owners to preserve or transfer their properties to preservation-minded for-profit groups and nonprofit organizations willing to buy and preserve these affordable units. These state incentives include an annual set-aside of $300,000 in low-income housing tax credits (LIHTC or housing tax credits) reserved for USDA Rural Development properties each year, and a prioritization of deferred loans from Minnesota Housing and other funders for properties that clearly demonstrate federal rental assistance is at-risk. Affordable housing developers in Minnesota have successfully used this set-aside to secure tax credit equity for their USDA developments, and raised private equity capital from banks and other investors in exchange for the tax benefits offered by the LIHTC program. The USDA has extended the term of its existing debt in some cases, allowed additional private mortgage debt as a new source of capital in others, and continued to provide rental assistance at properties that receive significant investments from the state and other funders.
The GMHF, with its 20-year history of creating and preserving rural housing, leads the private side of the partnership. The U.S. Department of the Treasury has designated the GMHF a community development financial institution (CDFI). As a CDFI, the GMHF blends its affordable housing mission with risk-managed lending. The GMHF acts as an intermediary for private capital, creating financing tools that fill niches in the housing market. The GMHF attracts capital from banks, private investors, and philanthropic organizations to fill financing gaps and invests in low-income communities. The GMHF made a multiyear commitment to raise $10 million in private capital to preserve the most at-risk USDA units. National banks and foundations based in Minnesota provide low-interest loans to the GMHF, which the GMHF uses to provide pre-development loans, property acquisition and construction loans, tax credit bridge loans, and longer-term amortizing mortgages to USDA properties across Minnesota.
The GMHF also leveraged private capital through its tax credit syndication subsidiary, which raises private capital for placement as equity in multifamily affordable developments. Through this subsidiary and public-private partnerships, the GMHF over the last seven years has financed the preservation of 25 USDA properties in rural communities underserved by other national tax credit syndicators or direct investors. By using this combination of state investments and private funds, existing owners of USDA properties and preservation buyers can keep the USDA affordability restrictions in place and preserve rental assistance before the mortgages are paid off or prepaid.
Minnesota banks have played an important role in preserving Minnesota's rural rental housing. Banks make direct lending investments in USDA-financed properties by providing acquisition and construction loans to current owners rehabilitating their properties, or to nonprofit or for-profit developers positioned to acquire these properties and preserve them before the mortgages mature or are paid off. In Minnesota, banks such as Wells Fargo and U.S. Bank as well as community banks such as Bremer Bank have made construction loans to USDA preservation transactions. Minnesota's preservation buyers generally have found that community banks are more likely to provide stand-alone construction lending on these relatively smaller properties (and corresponding smaller loans) than their larger counterparts that have a larger Community Reinvestment Act (CRA) footprint.
Banks also can preserve USDA properties by purchasing the LIHTCs on a project-by-project basis through tax credit syndicators or through direct equity investments,2 which result in a dollar-for-dollar offset of the bank's tax liability. In addition to tax advantages, banks may receive CRA consideration for investing in housing tax credits that preserve affordable rental housing. In Minnesota and elsewhere, banks have made very little LIHTC investment in rural preservation, in part because of the smaller size of each transaction. Affordable-housing developers have responded to this challenge by aggregating multiple USDA Rural Development properties together for portfolio acquisition, using 4 percent tax credits and bank loans. The larger size of these transactions makes them more attractive to larger banks and investors.
Although banks have helped preserve USDA properties, many affordable-housing developers and CDFIs indicate that the banks' participation has been insufficient and not aligned with need. This lack of bank involvement may be due to the complexity of the transactions; the remoteness and small size of the properties, which leads to smaller loan sizes; and the multiyear process of preserving units with federal assistance.
The Minnesota partners have encouraged banks to invest directly in these smaller, rural deals by making direct investments in CDFIs or the nonprofit entities that are purchasing the at-risk properties.
The GMHF as a CDFI raised capital for its preservation lending from public sources and from strategic investments made by national banks including Wells Fargo Bank and U.S. Bank. These banks invested in the GMHF's revolving loan fund by providing equity equivalent loan investments totaling more than $4.5 million, which the GMHF leveraged and deployed to preserve multifamily properties in every region of the state. The banks' investments in the GMHF are efficient and effective: Equity equivalent investments provide flexible, low-cost capital to nonprofits like the GMHF, and loan losses are reserved and funded using philanthropic and private dollars, ensuring that all lending capital can be returned to the bank when due. In Minnesota, private capital from national banks safely flowed through the GMHF to rural properties, at a scale and efficiency that exceeded what an individual bank might reach if it made loans directly to USDA properties. The banks' funds were leveraged at the property level with federal and state resources, resulting in significant public-private leverage.
Banks with a local connection also invest in nonprofit developers to expand their preservation efforts. One example is the Southwest Minnesota Housing Partnership (SWMHP), a nonprofit developer that creates and preserves affordable housing statewide. The SWMHP has received loans to cover working capital, numerous letters of credit, and a low-interest equity equivalent loan of $1 million from First Farmers & Merchants Bank, in Pipestone, Minn.
As the Minnesota example proves, banks have opportunities to invest in rural housing preservation. Each state has opportunities for direct investments by banks, or investments in the entities that are working to preserve these properties. The preservation model is particularly successful when there is a public-private partnership between agencies and CDFIs, and between lenders and rental housing owners, since preserving these properties can take years.
The economic and social return for a bank's investment, however, can achieve multiple successes: (1) Capital is directed to the bank's assessment areas, and the bank may receive CRA consideration for its investment; (2) at-risk multifamily properties in rural markets are preserved; (3) loans to nonprofit groups and CDFIs help to grow those entities as businesses and strengthen the rural job landscape; and (4) the bank helps preserve the affordable rental properties for decades to come. Without these bank loans and investments, states may not be able to keep pace with the loss of these irreplaceable rural housing units.
For more information, contact Robyn Bipes.
1 Authorized under Section 515 of the Housing Act of 1949 (42 USC 1485).
2 National banks may make investments that are primarily designed to promote the public welfare under the investment authority in 12 USC 24(Eleventh) and the implementing regulation, 12 CFR 24. This authority allows banks to make investments if those investments primarily benefit low- and moderate-income individuals or areas, or other areas targeted by a government entity for redevelopment, or if the investments would receive consideration under 12 CFR 25.23 (the CRA regulation) as a “qualified investment.” Examples of public welfare investments include those supporting affordable rental housing, such as by making direct and indirect equity investments in projects that use LIHTCs, and CDFIs certified by the Treasury Department's CDFI Fund.
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Collection: Community Developments Investments
Clockwise from top left: R Street Apartments, residents of the St. Dennis Apartments, St. Dennis Apartments, and Galen Terrace Apartments, all in Washington, D.C. (Photos courtesy of the National Housing Trust)
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