Creating Affordable Cooperatives is Akin to Layering a Cake

layer rainbow cake

With construction costs so high in most areas of the country, it is nearly impossible to create a new housing cooperative that is affordable or attainable using the traditional model of blanket debt and share financing covering the entire development cost.

In order to create affordability in a new cooperative, the trick is to use a layered approach to financing to bring “soft” money to the project to cover the gap between the total development cost of the project and proceeds generated by blanket debt and share sales. Soft money is no or low-cost capital given to a project in exchange for creating housing that is affordable to certain lower-income groups.

The first step in the process of closing the gap between the total cost development less the amount you will get through the blanket debt and share sales is to identify what is available from local government resources and other social “investors” that may be available to your project. These resources come in a variety of options that may differ from location to location. A good place to start, includes the following:

  • Local housing authority;
  • Local economic development offices;
  • State housing finance agencies;
  • Local and state U.S. Housing and Urban Development offices;
  • Local and state U.S. Department of Agriculture offices;
  • Social “investors” or lenders;
  • Regional federal home loan banks; and
  • Local land banks.

The resources provided by these groups can come in many forms including the following:

TAX ABATEMENTS – Most jurisdictions provide tax abatements in exchange for affordability. This abatement allows the property to pay a lower than normal or no real estate taxes for a given period of time in exchange for a certain number of units that will be affordable to a certain income level. The abatement provides for a lower operating cost for the property and increases the amount you can borrow on your blanket debt.

DIRECT GRANTS – Some jurisdictions provide direct funding to your project in the form of a grant that does not require repayment in exchange for a certain level of affordability.

LOW-COST, LONG-TERM LOANS – Many jurisdictions also offer low-cost loans to a project in exchange for affordability. The loans will be made in a subordinate position to the main blanket debt, often at interest rates of 1 percent or 2 percent annually and don’t require payment until maturity.

LAND GRANTS OR LONG-TERM LAND LEASE – Many local governments are granting government-owned land to local developers in exchange for affordability. In addition, land banks and governments may provide long-term land leases at very low cost to developers for the same purpose. This lowers the overall development cost for the project, making it more affordable to cooperative members in the long run.

FUNDING FOR ENERGY EFFICIENCY OR GREEN RETROFIT – Many jurisdictions have funding available for environmentally friendly projects.

HOME BUYER’S ASSISTANCE – Many local governments have homebuyer’s assistance or down payment assistance for certain income groups. Some allow this assistance to be used to lower the share prices for cooperative members.

OPPORTUNITY ZONES – If your project is in a qualified opportunity zone, there may other special lending programs or investment programs available.

It is not unusual for one or all of these types of soft type of funding in a project to help close the gap. You may also see several layers of soft loans to a project from a variety of sources. While most projects don’t have more than three or four layers of soft financing, it is not unusual to have six or seven layers depending on the resources available.

I am working with a number of developers who are building affordable cooperatives that are taking a very creative approach to raising capital in addition to what is listed above. A couple is looking at crowdfunding platforms to raise capital from like-minded individuals. Others are creating investment funds to attract socially conscious investors to fund cooperative development. Still, others are looking at approaching local businesses to invest in the housing cooperative to create affordable housing so members can live close to where they work.

In conclusion, while it is difficult to gather all of the financing mechanisms together today to create affordable and attainable housing cooperatives, it is possible, and it is being done.

Hugh Jeffers is originator at Centennial Mortgage

This article was featured in CHQ winter 2020 issue. Click here to read the PDF newsletter.

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