Emanuel & the Preservation Compact propose new loan fund to increase the affordable housing stock in Chicago
Update: Adopted by City Council on July 25, 2018
Update: Freddie Mac now offers a similar program called the Workforce Housing and Targeted Affordable Mezzanine Loan.
Two weeks ago Mayor Rahm Emanuel announced the creation of an “Opportunity Investment Fund” which the City of Chicago would seed with $5 million. The $30 million fund is predicted to generate 300 affordable apartments with low-interest mezzanine loans. The OIF’s intention is to increase the amount of affordable housing, in existing buildings, by filling a gap in the mortgage market for small and mid-size property owners and developers.
Investors, owners, and developers would apply for funding from the Community Investment Corporation (CIC) to provide them with more equity. Typically, a bank will loan 80 percent of the value (loan to value ratio, LTV) of a property acquisition or construction loan and the developer must provide the remaining 20 percent LTV with their own equity. The OIF loan would cover up to 10 points of the remaining LTV, leaving the developer to cover the last 10 points.
Stacie Young, Preservation Compact director, said this is called subordinate or mezzanine debt. “Our fund will take you to 90 percent, and we’re charging you a very low interest rate,” she said.
“Typically,” Young said, “mezzanine debt in the market might cost you 14–15 percent, and ours is priced at 7.5 percent, in the best case, and it goes up from there. It’s a lot cheaper than the market mezzanine.”
The funds will only be used to acquire existing rental buildings in high opportunity areas — these are areas with a low concentration of poverty, lower crime, and higher employment rates. Preservation Compact is also calling these areas “strong markets”.
The map of eligible areas was made by combining the Chicago Housing Authority’s “mobility areas” with the Illinois Housing Development Agency’s “opportunity areas”.
But, Young said, “We’re not holding fast to these boundaries. A developer could make the case for us to lend to them outside the boundaries.” The final rules will be set after City Council approves the ordinance, and the CIC and Department of Planning & Development commissioner sign an agreement.
Cityscape Pro members can immediately determine if any of their existing or prospective properties are in an OIF area by searching for the address, and looking under “financial incentives” in the resulting Address Snapshot.
Additionally, this information can be seen without a membership by purchasing individual Address Snapshot reports for $9.99.
In exchange for the low interest rate, the owner must make 20 percent of the units in the buildings in the deal affordable for at least 15 years. Young said that “the fastest way to get affordable units in your building is to use Housing Choice Vouchers or project-based vouchers, and contract with the Chicago Housing Authority.”
Young said there are also a couple of other options: vouchers subsidized by the Veterans Administration, or reducing profit margins and subsidizing the units with the other rents. The units would be available to households earning less than 50 percent of the area median income (AMI), and rents would be set by the City’s existing mechanism.
One of the reasons that this new fund focuses on existing buildings is because renovation is faster and cheaper than new construction, but also that landlords in these “strong markets” have high occupancy at market rate rents.
Housing authorities are very eager to place HCVs and project-based vouchers (PBVs, which are subsidies that attach to a building) in strong markets. Yet many market rate owners in strong markets are seeing near 100% occupancy, and would not have a reason to enter into a PBV contract.
The Chicago Housing Authority is a slow-moving housing creator, and it also works with private developers to build its mixed-income projects. This fund could accelerate that in areas with greater opportunities than CHA and the city’s affordable housing fund typically work in, despite their own policies.
Young said that CIC prefers “larger” deals, “bigger than 24–32 units, that would be great, but we have to see what’s available on the market.” Young said 10–12 units is another target deal size. Any deal, however, must be six units or greater, according to Emanuel’s proposed ordinance.
For some clients and deals, it might be possible to refinance a building through this fund.
The $30 million loan fund is expected to preserve 1,500 units of mixed income housing, twenty percent of which would be 300 affordable units. It would be impossible to create 300 new affordable homes for $30 million, but Young and the Preservation Compact believe it can help acquire, renovate, and bring 300 affordable units to the market. It’s possible that some units in existing buildings are already affordable, for now, but use of this fund ensures they will remain affordable for 15 years more.
The City’s $5 million share of the fund would come from the Affordable Housing Opportunity Fund, which property developers pay into when they don’t build affordable residential units on-site. Other lenders so far include MB Financial and the U.S. Department of Treasury’s Capital Magnet Fund.
