January 30, 1992 - From the January, 1992 issue

“Safety Net” Financing Can Fill Housing Gaps

Larry Kosmont and Kevin Warner propose a mechanism to ensure affordable housing projects are funded. The proposed mechanism, "Safety Net" Financing, involves the CRA, developer, and a local agency. Kosmont is President and Warner is Vice President of Kosmont & Associates, Inc.

Larry Kosmont

...we sug­gest using Community Reinvestment Act monies to fund a statewide loan pool, or “Safety Net”, that would pro­vide short-term and mini-permanent financing (a short-term loan structured like a longer term loan, but for an interim period) for affordable hous­ing projects.

Today’s typical affordable hous­ing project transaction is complicated to the point of extremes. Those of us with years of development and finance experience wade through the incom­patible conditions of multiple fund­ing sources, often taking years to se­cure the subsidies and/or the financ­ing needed to make a project eco­nomically feasible. 

Typically, without public owner­ship of the land, only those develop­ers or land owners with a balance sheet that can support the costs of holding land and paying for predevelopment efforts can play the waiting game of putting together an affordable housing transaction. Con­sequently, many affordable housing developers see their projects die on the vine due to an inability to secure short- and long-term funding in an expeditious manner. 

Ironically, while there are a mul­titude of available funding sources and efficient construction technologies to finance and construct afford­able projects, these advantages are frequently neutralized because there is no reliable mechanism to bridge gaps in timing and conditions. 

In order to fill the need for such a reliable funding mechanism, we sug­gest using Community Reinvestment Act monies to fund a statewide loan pool, or “Safety Net”, that would pro­vide short-term and mini-permanent financing (a short-term loan structured like a longer term loan, but for an interim period) for affordable hous­ing projects. 

Obstacles to Affordable Housing 

Many of the problems encoun­tered by affordable housing project sponsors revolve around identifica­tion and timing of appropriate fund­ing sources. Anyone who has experi­enced the ins and outs of an affordable housing transaction has had to over­come the following:  

  1. Identifying the most appropriate funding for your particular project from a myriad of subsidized financ­ing sources. At last count, we have identified more than forty different sources of debt and equity funding for affordable housing projects. These include state, federal and local programs including tax credits, rental assistance, tax increment set-asides, veteran housing, and mortgage pools — each with its own unique set of application procedures and award criteria.

  2. Enlisting the assistance of lo­cal jurisdictions in securing the zon­ing and entitlements in a timely man­ner that satisfies the criteria of mul­tiple funding sources. 

  3. Satisfying the requirements of each funding source in a manner that satisfies the requirements of all other funding sources. In other words, how do you resolve the chicken and egg problems for financing local affordable housing development? 

Most affordable housing devel­opers must have site control as a pre­requisite to obtaining financing from the most commonly-used affordable housing finance sources. Non-profit and community-based developers, those entities most heavily involved with developing affordable projects today, typically find it difficult to obtain the predevelopment funding necessary for gaining site control and developing project plans and specifi­cations. This dilemma is a common “chicken and egg” financing hurdle that impedes development of afford­able housing.

Another typical problem is securing local government subsidies in a manner that also meets the funding application timing for matching sources at the state and federal levels. Developers frequently make emer­gency requests for funding from local agencies in order to meet the require­ments for reserving tax credits in the next available funding cycle. This fire drill further strains the limited resources of local agencies. 

Overcoming financing dilemmas such as the two illustrated above re­quires a reliable funding mechanism that can act as a financing vehicle that fulfills the cash-flow needs of a project moving forward while completing the often lengthy process of meeting the criteria for the multiple permanent funding sources.

Safety Net Financing 


We suggest that a solution to the “chicken and egg” financing prob­lems is to create a statewide SAFETY NET FINANCING source. Such safety net financing would be used as interim funding for affordable hous­ing projects that qualify for most of the commonly used primary financ­ing sources (e.g., Rental Housing Construction Program, low/moderate income housing redevelopment funds, low-income housing tax credits, etc.) 

The Safety Net Fund could also be used for providing mini-perm fi­nancing to projects which meet certain criteria for affordability but are unable to secure needed funding from typical sources on a timely basis. By providing interim and mini-perm fi­nancing, the Safety Net Fund would help to solve the problem of projects being held up between funding cycles.

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The Safety Net Fund would work as follows: The State of California would dedicate a percentage of each bank’s and thrift’s Community Rein­vestment Act (CRA) set-asides as security for tax-exempt bond financ­ing. The bank’s and thrift’s CRA set-­aside funds would be used as a credit enhancement for a statewide bond issue. By contributing a portion of their CRA funds to the safety net loan pool, banks and thrifts would not only fulfill a portion of their CRA obliga­tions to fund affordable housing projects, but could do so without putting their own dollars at risk on a project-by-project basis.

The State could then turn around and leverage those dedicated CRA funds in the tax-exempt financing market by selling a Marks-Roos affordable housing bond pool. The Marks-Roos offering would fund a statewide program, possible through a Joint Powers Authority, or through existing housing agencies. This pro­gram could be administered by ex­isting City, County and State housing agency staff as well as private sector representatives. As with other state­wide affordable housing funds, the Safety Net Fund would be overseen by a committee of housing profes­sionals who would rank project applications for funding determinations and make predevelopment project commitments, filling funding gaps that occur due to variations in funding cycles as well as funding availability, until permanent sources of funding can be secured. 

The affordable housing safety net fund could also segment a certain portion of its portfolio as mini-perm or long-tenn permanent financing, if for some reason a project did not ultimately reserve its projected sources of typical funding as repre­sented in the application to the safety net program. 

A New Life for the CRA 

The Community Reinvestment Act program in California is currently in a similar situation to that of the redevelopment agency affordable housing set-asides prior to the implementation of spending and re­porting requirements. It is only a matter of time before actual funding and spending requirements are im­posed on banks and thrifts that have heretofore been reluctant to actually finance affordable housing projects. 

The safety net loan pool we have suggested offers a mechanism for productively spending at least some of the affordable housing investments by financial institutions intended in the Community Reinvestment Act. The financial institutions would ben­efit from participating in the safety net loan pool. Presently, the obliga­tion to fund affordable housing projects under the existing CRA re­quirements often forces the banks and thrifts to consider funding risky projects, which is in conflict with the tighter lending controls now being imposed on them. 

By reducing the risk to the par­ticipating institutions, the safety net loan pool would allow financial insti­tutions to invest real dollars toward meeting their CRA obligations rather than simply going through the motions of compliance.

Because the safety net loan pool is flexible enough to work within the structure of permanent funding pro­grams, it represents a potential solu­tion to the problem of inconsistencies among existing programs without creating an additional layer of condi­tions. A reliable mechanism that could expeditiously and smoothly fund projects that today are falling through the cracks due to the timing of fund­ing cycles could double or triple the production of affordable units in California. 

Creation and implementation of a safety net loan pool program requires a significant commitment by the public and private participants. But because housing availability and affordability are vital elements of a prosperous statewide economy, both the public and private sectors share equally in the potential benefits gained from solving the affordable housing shortage in California. Therefore, state and local government as well as the private finance and lending com­munity should immediately set out to create and implement a Safety Net Fund to activate projects that otherwise would not be completed due to unavoidable funding and timing obstacles.


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