Borrowers, Lenders Navigate Rising Interest Rates, Costs

Interest rates are higher than they have been in years. Volatile construction costs continue to rise. These costs shocked developers struggling to finance plans to build and recapitalize affordable housing projects in 2022.

Despite the challenges, top lenders are committed to making deals work—helping developers fill budget gaps and find new ways to finance mixed-income and workforce housing projects.

“There will continue to be strong demand for affordable housing,” says Barry Krinsky, national production manager for Citi Community Capital. “There will continue to be plenty of debt capital providers available to finance experienced borrowers.”

In 2022, Affordable Housing Finance’s Top 25 affordable housing lenders provided more than $64.6 billion in permanent and construction loans to developments that serve households up to 80% of the area median income (AMI). That’s up from $63 billion in 2021.

Citi Lends More Despite Rising Costs

Citi closed even more affordable housing loans in 2022 than it did the previous year. It lent nearly $6 billion to affordable housing properties last year, up from $5.6 billion in 2021, making it the biggest affordable housing lender of 2022.

Citi expects to keep growing its affordable housing business.

“We expect a 5% to 10% increase in our lending in 2023 as compared to 2022,” says Krinsky. “We are seeing gaps getting filled by federal, state, and local government subordinate financing, and we expect to have a strong 2023.”

Higher interest rates have dug deep holes in many project budgets. “Higher rates increase borrowing costs, which reduce the amount of loan proceeds available,” he says.

To cool an overheated U.S. economy and fight inflation, federal officials raised their benchmark Fed Funds target rate to 4.75% in February. That’s up from almost zero at the start of 2022. Interest rates for floating-rate loans rose in time with these rate increases.

Interest rates for permanent loans rose more quickly, as bond markets anticipated future rate hikes. The yield on 10-year Treasury bonds moderated in recent months. Federal Reserve officials continue to hike rates, though not as quickly as in 2022.

“We expect to see additional interest rate increases, which will increase the cost of variable-rate financing,” says Krinsky. “As interest rates continue to climb, developer budgets will be stretched further.”

Rising costs also burden project budgets—from the volatile cost of construction to property insurance bills.

“The insurance markets are under stress, and we expect insurance pressure to continue, particularly for real estate located on the coasts,” he adds.

Merchants Capital Grows With Workforce Housing

Rising interest rates and development costs in 2022 delayed many projects that used traditional sources of financing for affordable housing like federal low-income housing tax credits (LIHTCs).

Some top lenders grew their affordable housing business by looking beyond LIHTCs to workforce housing.

“Merchants Capital launched a proprietary, structured, permanent loan product targeted at properties with rents up to 80% of the area median income (AMI),” says Dwayne George, executive vice president and national head of production for Merchants Capital. He says these permanent loans have flexibility on prepayment in three to five years and can close quickly. “This product proved extremely attractive to developers, allowing them to acquire, refinance, and rehab.”

Merchants Capital lent $5.8 billion to affordable housing properties in 2022, up from $3.2 billion the previous year. That increase was enough to make Merchants the second biggest affordable housing lender of 2022.

Its 2022 total included $3.7 billion in permanent loans to projects targeted at renters earning up to 80% of the AMI, more than double the $1.3 billion it lent in 2021.

In the past, developers repositioning an older apartment building might have taken out a floating-rate bridge loan from a bank or a private equity debt fund.

“The unprecedented pace of interest rate hikes stressed the performance of loans with floating rates,” says George. “Because of these factors, appetite for high-leverage bridge loans from debt funds and banks has subsided.”

Chase Finds New Money From State and Local Housing Programs

JPMorgan Chase was able to make more affordable housing loans in 2022 than ever before—despite the difficulties caused by rising interest rates.

“It’s encouraging that nearly everyone recognized the high demand for affordable housing, and the need to invest and create more of it,” says Vince Toye, head of community banking at JPMorgan Chase. “But even with the record year we had, there were a good number of projects that were pushed into 2023.”

JPMorgan Chase, coming in as the third biggest affordable housing lender of 2022, lent $5.8 billion to affordable housing properties last year, up from $4.8 billion in 2021.

Funding from state and local housing programs helped Chase’s borrowers keep their plans on track.

“We continue to work closely with developers to form creative partnerships—specifically public-private partnerships and collaborations between these groups helped move projects along,” says Toye. “We are also monitoring state and local initiatives to grow affordable housing, such as 2022’s California Housing Accelerator Program and the emergence of more Joint Power Authority efforts.”

JPMorgan Chase’s new Capital Solutions group also is finding new sources of financing for affordable and workforce housing—beyond LIHTCs.

“You have essential workers—teachers, firefighters, police officers, nurses—all being priced out,” explains Toye.

Many earn more than 60%, 80%, or even 100% of AMI. JPMorgan Chase is providing construction support and other resources to finance apartments that are affordable to them.

“We are working with non-housing institutions that have resources available,” says Toye. “That includes hospitals, tech companies, school districts, universities, and local municipalities.”

Consistency Helps Bank of America Grow

Strong relationships with affordable housing borrowers helped Bank of America once again grow its lending business even as interest rates rocketed higher.

“We are consistently there for our clients. We don’t move in and out of the market,” says Maria Barry, national executive of community development banking for Bank of America. “It’s our sixth consecutive record year.”

BofA lent nearly $5.1 billion to affordable housing properties last year, up from $4 billion in 2021. That’s enough to make BofA No. 5 on the top lenders list.

“Most of the focus has been helping our clients get their deals closed,” says Barry. “We have really early conversations with our clients, ensuring there’s adequate coverage for the interest to get through completion.”

BofA also supported new ideas to make housing resources like LIHTCs do more.

“We’ve seen more states considering ‘twinning’ credits and mixing LIHTC with middle-income housing for families making between 80% and 120% of AMI,” says Barry.

To support more than 3,000 affordable homes, including many at mixed-income projects, BofA has committed to provide some debt financing and up to $150 million in equity in partnership with Enterprise Community Partners.

Wells Fargo Wins With Partnerships, Mixed-Income

Some top lenders went even further to help affordable housing projects survive higher interest rates and rising development costs.

“The state or the city will say, ‘look we’re putting in another $3 million of subsidy, do you think you could raise your price for LIHTCs a penny or two?’” says Alan Wiener, managing director of Wells Fargo Multifamily Capital.

When it can, Wells Fargo, like many other lenders, provides construction loans, permanent loans, and tax credit equity to affordable housing projects. “It’s a policy to at least do two of the three,” says Wiener.

Wells Fargo, No. 6 on the list, lent $4.8 billion to affordable housing properties last year, up from $4.5 billion in 2021.

It also provided debt and equity to new, mixed-income developments like The Inwood Project in New York City. Half of its 698 apartments will rent at market rates, while the other half will be affordable to low-income households.

“It is one of the first new mixed-income projects to close in Inwood since the city completed a major rezoning to create more mixed-income neighborhoods,” says Wiener.

JLL Plans to Expand

JLL has big plans to expand its affordable housing lending business this year.

“We are growing a national team with expertise that can be partnered with our local presence in all of the 30-plus markets where we have offices,” says Angela Kelcher, senior managing director for JLL Capital Markets, who joined the firm in spring 2022. “My position is a new position dedicated to scaling the platform.”

No. 10 on the list, JLL lent $2.3 billion to affordable housing properties in 2022.

The firm was able to make loans even when affordable housing projects were delayed because they couldn’t close their financing.

“The next deals in line for 4% LIHTCs came up, and you had an opportunity,” says Kelcher.

JLL is also eager to make loans with a new loan program Fannie Mae is rolling out.

“There are a lot of things that make the affordable segment a bigger world to play in,” says Kelcher.

Fannie Mae’s existing Sponsor Initiated Affordability program offers lower interest rates in exchange for commitments from owners to keep apartments affordable to low- and moderate-income renters, often at properties that receive no other federal or state housing subsidies.

“Fannie Mae is also rolling out a sponsor-dedicated workforce product that requires rent restrictions only,” says Kelcher.

That means borrowers would simply keep rents affordable below a certain level, saving costs associated with verifying the incomes of their residents. Borrowers receive lower interest rates than conventional borrowers based on the depth and breadth of the affordability at the property.

Stifel Finds Some Relief From Rising Rates

Stifel is helping some borrowers who use tax-exempt bond financing find some relief from high interest rates.

“We have a flat or inverted yield curve, where short-term rates are higher than long-term rates,” says Brad Edgar, managing director for Stifel Public Finance.

Developers who raise debt through a public bond offering receive 100% of the bond proceeds at initial closing. During the construction period, developers can invest these bond proceeds in short-term U.S. Treasuries. With the inverted yield curve, the high yields earned from these short-term Treasury bonds is close to the public bond interest rate or in some circumstances higher.

As a bond issuer, Stifel lent nearly $2.1 billion to affordable housing properties in 2022, coming in at No. 12 on the AHF list.

Greystone Plans New Business for 2023

Many plans to build or recapitalize affordable housing were delayed in 2022.

“There were lots of deals where people said ‘I can’t do this right now,’” says Triloki Kaushal, managing director of affordable lending for Greystone.

Many of these deals may finally close their financing in 2023, even if interest rates remain high.

“People can deal with higher rates,” says Kaushal. “They can’t deal with rate uncertainty.”

Greystone expects to grow its affordable housing lending business as capital markets stabilize in 2023.

Landing at No. 14 on the list, Greystone lent $1.7 billion to affordable housing properties in 2022.

Greystone is also planning to provide gap capital to the growing universe of projects to preserve or recapitalize workforce housing properties—older buildings that will be affordable to residents earning up to 100% of the AMI, or 120% of the AMI in high-cost markets.

“We’re actively out there currently trying to raise pockets of money either with investors or ourselves to be able to provide some form of that gap capital,” says Kaushal.