March 30, 1994 - From the March, 1994 issue

Affordable Housing: Leverage Financing Game Needs Revisiting

Leveraged financing is layering three or more financing sources to pay for development costs — which have proved critical in developing affordable housing in Los Angeles. The Los Angeles Director of Local Initiatives Support Corporation (LISC) Denise Fairchild argues that the current leveraged financing environment is dry. Dr. Fairchild takes inspiration from New York's City's affordable housing financing. 

It's no secret that Los Angeles has a housing crisis. Neither is it earth-shattering news (no pun intended) to hear that it has gotten worse since the Northridge earthquake. The real news is that despite the gravity of the problem and the national effort to stop the hemorrhage, never before has Los Angeles been less able to address its long-term affordable housing needs, much less its disaster-induced housing needs. The game of leveraged financing - layering three or more sources of financing to pay for development costs - has come to a virtual halt. Without voter willingness to pay for new sources of housing revenue, the quality of life in Los Angeles will continue to decline.

The Leveraging Game 

When the Federal Government, specifically the U.S. Department of Housing and Urban Development, got out of the affordable housing business in the late 70's and the 80's, leveraged financing became the chief way of meeting the housing needs of low-income households. A very sophisticated game of stitching together different government and private sector housing programs emerged. Whether constructing or rehabbing 12 or 200 units, a developer must understand and apply for up to 6 sources of financing. Each funder requires different application procedures, appraisals, income restrictions, regulatory agreements, design standards, and legal reviews. Eighteen months or more is a typical time frame for "packaging a deal". Construction and permanent loan closings - a process of finalizing and signing all the loan documents - is an experience not suited for the weak minded. 

Leveraging finances is an explicit finance goal identified in the Los Angeles Comprehensive Affordable Housing Strategy (CHAS). Subsidy requirements range from, $32,000 to $85,000 per unit for average (less than good) construction to make housing affordable for families earning between $15,000 and $33,000 a year (Rosen and Associates, 1990). Leveraging is a understandable way of stretching limited city housing funds. 

Essentially, to pay for development costs, every deal requires a minimum of: 1) a bank mortgage, 2) equity investments from the syndication of Federal and State tax credits which are awarded on a competitive basis from the State Tax Credit Allocation Committee, 3) local government subsidy, and 4) state or federal subsidy. This does not consider the early money needed to undertake the predevelopment work, or the bridge or interim financing to plug the usual time lag in the flow of funds. 

This convoluted and complex housing finance scheme ran most developers out of the affordable housing market and resulted in rising homelessness. Nonetheless, the non­profit housing community, committed to meeting the needs of the underserved no matter what the obstacles, have become experienced users of the system. Without the true grit and perseverance of the non-profit developers, L.A.'s housing crisis would be worse than it is now. 

But if this financing charade is not bad enough, the problem has just gotten worse. There is no money left to leverage. 

Current Funding Environment 

Over the last 5 years, Los Angeles' affordable housing developers were endowed with several sources of subsidy to support new housing starts: tax increment financing from the Los Angeles Community Redevelopment Agency, voter-approved State general obligation bonds (Prop 77 and 84), Federal Community Development Block Grant (CDBG) and most recently, HOME funds through the Los Angeles Housing Department. Century Freeway Housing Program funds, and tax credit investments. Leveraging, though complicated, was possible. Spring 1994 finds the affordable housing community in dire straits. The State’s Rental Housing Construction Program ran out of money. The $126 million Century Freeway Housing Program is also "temporarily" out of business. An additional $12 to $20 million dollars in program funds might be available in the fall, or it might not. The Los Angeles Community Redevelopment Agency weighs in at a greatly diminished $25 million level, down 75% from its recent past. The Los Angeles Housing Department (LAHD) is essentially the sole major player left for housing subsidies, with a combined $80 million 1994 appropriation, and a possible $30 million extra earthquake appropriation. Both self-imposed and government restrictions, however, limit the ability of the LAHD to spend its money. 


LAHD limits its per unit subsidy to less than $50,000, and is squeezing developers into less than $25,000 per unit with increasing fervor. A new Emergency Rehab Loan Program capitalized with $30 million of new funds from the $8.2 billion Congressional Supplemental Appropriation for earthquake relief, is limited, by city policy, to $15,000 per unity gap financing. Also, HOME funds, which account for $27 million of LAHD housing funds in 1994, require a non­federal match, limiting its use. These policies mandate finding another source of public subsidy before city funds can be spent, but no one has any at the moment. The CRA is expected to come out with a $25 million Notice of Funding Availability (NOFA) in the Spring. CRA funds have, in the past, been used to leverage LAHD funds. But once again, city policy now prohibits this. 

Taking Stock 

The current state of affordable housing finance looks bleak. The city boxed itself in with its leveraging restrictions. By its own admission, the LAHD 1993 CHAS document indicates that its long-term housing goals will be cut in half because "there are no matching funds at this time". But one wonders how Los Angeles can effectively spend its money under the current leveraging scenario. 

The fact that the Northridge earthquake resulted in 20,000 multi-family structures damaged with 18,000 units vacated and $700 million in estimated costs puts the city further behind. Yet, the same, and in fact more restrictive, leveraging rules apply. 

If current trends continue, the quality of life in this city will be greatly impacted - overcrowding, homelessness, deteriorating housing stock and declining neighborhood conditions will rapidly escalate. As it is now, Los Angeles annually meets less than half of the 26,000 units needed to keep up with the demand projected by SCAG’s Regional Housing Needs Assessment. This figure has been dropping over the last several years, and of the units produced, an increasing number are market rate, not affordable, units. 

A new and expanded commitment to financing affordable housing is desperately needed. If leveraging is to work, then new and expanded revenue sources must be found. Some of the suggestions put forth in the CHAS document include tax exempt revenue bonds, utility franchise taxes, linkage ordinance-housing mitigation fees on commercial, retail, and industrial development, one-time fee paid by owners of luxury apartments to exempt their units from rent control and raising the CRA central business district tax increment cap. All these recommendations require voter approval. Theresponsibility rests with each of us. Two state general obligation bonds will appear on the ballot this year. We cannot afford to vote them down as has been the case over the last few years. The availability of tax increment financing must be re-examined for its merit as well as its problems, and a balanced solution found.

Yet, on another level, even with new sources of housing finance, we need to assess whether the leveraging game, as it is structured in Los Angeles makes sense for getting the job done efficiently. New York City's commitment to affordable housing, for example, is evidenced by its "single source" subsidy commitment, allowing developers to build faster and toachieve significant scale and impact. The Northridge earthquake created both a new urgency in meeting our affordable housing needs, and hopefully, a new sensibility among Angelenos about what it means to have decent, safe and affordable housing. Let's take the opportunity to meet the challenge sensibly and forthrightly.


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