Freddie Mac Multifamily has unveiled a new social-impact pilot initiative to help preserve affordable housing and protect working families from rising rents across the nation.
In return for low-cost loans under the program, borrowers must voluntarily reduce or maintain the majority of a property’s rents at levels affordable to households earning 80% or less of the area median income (AMI) for the life of the loans, usually seven to 10 years.
Using its existing Multi-Asset Commitment structure, Freddie Mac Multifamily has partnered with Salt Lake City–based Bridge Multifamily Fund Manager, an affiliate of Bridge Investment Group, on this first-of-its-kind transaction in conjunction with Wells Fargo Multifamily Capital and KeyBank Real Estate Capital.
A Private-Capital Solution
Freddie Mac will aggregate up to $500 million worth of Capital Markets Execution program loans over a one-year period and then put all the social-impact loans into one securitization, for which Bridge will be required to purchase the subordinate bonds. Wells Fargo will originate $400 million of the commitment, with KeyBank originating the remainder.
This execution will help Bridge acquire, rehabilitate, and preserve affordable and workforce housing communities nationwide and will incentivize the owner to voluntarily keep rents affordable without relying solely on local, state, or federal funding programs.
“We’re providing advantageous terms in return for that annual check of rents,” says Lauren Garren, vice president, multifamily production and sales, at Freddie Mac Multifamily, adding that properties will be reviewed annually to ensure the rent restrictions are met during the life of the loans. “This is a private-capital solution for this issue, and we can help regulate that rents are staying at levels affordable to those making under 80% of the AMI.”
Bridge and Wells Fargo recently closed the financing on the first asset to be acquired under this agreement. The owner will preserve and rehab a 352-unit multifamily community in the Tampa Bay, Fla., area, which has seen rents increase significantly year over year, by 4.4%, according to Apartment List’s May 2018 Tampa Rent Report.
The property, in Plant City, Fla., currently has 82% of its rents affordable for households earning less than 80% of the AMI. In addition to keeping the majority of the units affordable, Bridge plans to improve the development’s units and common areas, add a soccer field, and build an on-site community center that will be run by its nonprofit partner Project Access to promote social engagement.
“[This] innovative financing commitment will allow Bridge to preserve and rehabilitate dozens of workforce and affordable housing properties in fast-growing markets across the United States,” says Robert Morse, executive chairman of Bridge Investment Group. “The integration of our value-add, in-house operating model with our focus on sustainability and social and community programming will allow us to create energetic, thriving communities and provide our residents far more than just ‘four walls and a roof.’ ”
According to Bridge, which owns approximately 30,000 multifamily units across the nation, this structure will allow the firm to obtain competitive pricing, superior execution, and flexibility on behalf of its dedicated workforce and affordable housing strategy. The borrower savings to Bridge can then be passed on to residents via property improvements and sustainable rents while enhancing investor returns and providing a double bottom line.
The partnership with Freddie Mac represents another step in furthering Bridge’s affordable and workforce housing reach. Prior to launching its dedicated workforce and affordable housing strategy, Bridge had acquired 43 assets with almost 16,000 units that could qualify as workforce and affordable housing—where 51% of the residents earned less than 80% of the AMI. The firm plans to grow its portfolio even further over the next three years and expects to acquire approximately 50 to 60 properties and close to 20,000 units during that period, or around 10 to 20 properties with over 6,000 units per year. Bridge currently has about 4,000 workforce and affordable units closed or under contract.
Garren says Bridge is working on its next acquisition in the partnership and will be looking at markets where workforce housing concerns are the highest—those with limited supply and high housing costs. Close proximity to schools, jobs, and transportation also will be prioritized.
According to Garren, with up to $500 million in commitments, the partnership could equate to providing up to 5,000 units for working families, factoring, on average, a $100,000-per-unit acquisition/rehab cost.
This execution is the latest example from Freddie Mac in its efforts to find innovative ways to provide affordable housing for the nation’s low- and moderate-income households.
“We support the top end and also have great offerings that use government programs to cover the lower end [of multifamily housing],” says Garren. “The real gap in the market is housing for the workforce at 60% to 80% of the AMI.”
Freddie Mac Multifamily highlighted the nation’s affordability issues in a report released this past fall by looking at loans covering over 97,000 units it had financed multiple times between 2010 and 2016. The analysis looked at the nine states where Freddie Mac Multifamily financed the most rental units twice during the six-year period—Arizona, California, Colorado, Florida, Georgia, Nevada, North Carolina, Texas, and Washington.
Researchers found that at the first financing, 11.2% of the rental units were categorized as affordable for very low-income households with incomes 50% or below the AMI. At the second financing, rents had increased so that only 4.3% of the units were categorized as affordable for these households. This resulted in a more than 60% reduction in the number of affordable units available for very low-income households.
“We think the problem is significant, and we need as many tools in our toolbox [as possible] to cover every corner of the market,” says Garren.
Freddie Mac Multifamily is considering the pilot partnership with Bridge as a test transaction to work through the details of the new program. “We’re looking for sponsors that we know well and who work with this asset class,” says Garren. “We definitely want to encourage this private-capital solution as broadly as we can.”
Help for Naturally Occurring Affordable Housing
In another move in 2017, Freddie Mac unveiled a new financing execution to aid in the preservation of unsubsidized affordable housing, also known as naturally occurring affordable housing (NOAH). Freddie Mac’s Impact Gap Financing program, which pairs mission-focused borrowers with impact investors, can be combined with the GSE's flexible Targeted Affordable Housing NOAH Preservation Loan. This mechanism provides nonprofit borrowers access to comprehensive capital to help them compete with market-rate developers to acquire and preserve projects’ long-term affordability.