Renters are experiencing a housing shortage, with affordability as a central concern. With the nation short an estimated 7.3 million affordable rental homes, workforce housing preservation plays an important role in maintaining housing that is affordable to working families across the country.
Although there is no official definition, workforce housing generally supports middle-income renters with rents that are affordable to those earning between 80% and 120% of the area median income (AMI). These residents are often those who form the backbone of our communities, like teachers, police officers and firefighters. These families may not qualify for subsidized housing, but for many of them, market-rate units in certain multifamily properties also remain out of reach.
Workforce Housing Faces Unique Challenges
Much like deeply affordable housing, structuring workforce housing deals means overcoming economic challenges. Between interest rates, operational costs, insurance costs and construction costs, it can be difficult to make the numbers work. According to Meg McElgunn, VP and co-head of multifamily conventional production and sales at Freddie Mac, "The overall economics are a huge challenge, which is why we look to find alternative ways and financial products to support workforce housing."
As part of Freddie Mac's mission to preserve affordable housing, last year it financed 447,000 units at or below 120% AMI. As part of this success, the agency surpassed a 3,000-unit goal under its Workforce Housing Preservation offering. This year, through some creative financing solutions, Freddie Mac is well on its way to helping preserve more than 5,000 units through that same offering.
Financial Features That Support Preservation
While Freddie Mac does not purchase construction loans, the agency has several workforce-specific products that can help ensure a deal will pencil. In addition, new for 2024 is that deals financed using their Workforce Housing Preservation offering are excluded from the annual multifamily loan purchase caps established by the Federal Housing Finance Agency for Freddie Mac and Fannie Mae.
Under the Workforce Housing Preservation product, Freddie Mac offers favorable pricing and credit terms to borrowers that agree to keep a portion of the units affordable to working families. When owners stick to predetermined AMI requirements throughout the loan term, it creates a market-driven solution for creating and preserving workforce housing. To see these benefits, Freddie Mac's Workforce Housing Preservation options can be added to loans where borrowers set aside a minimum of 20% of units for affordable housing.
"That is huge," says McElgunn. "I call it a triple win because the owner of the asset often ends up getting better credit and pricing terms, the tenants can live in an affordable unit for a longer period of time, and Freddie Mac is doing business that helps preserve affordable rents."
An example of the Workforce Housing Preservation feature is Westgate Apartments in Spartanburg, South Carolina, which received $8.34 million in financing in August 2022. Of the 122 units, 41% are rent restricted, providing local and affordable rental housing to the workforce population in this Blue Ridge Mountains community. In addition, preservation is spread across the entirety of the 25 properties pooled in this portfolio.
On the Targeted Affordable Housing side of Freddie Mac's business, there are opportunities for both LIHTC and non-LIHTC forward deals. LIHTC forwards for heavily subsidized housing have been around for decades, but non-LIHTC forwards are newer and can open the door to workforce housing projects in a higher AMI range.
"Our workforce housing products create certainty of execution at lower costs for the sponsors, and they can take that interest rate risk off the table before the construction is actually completed on those projects," adds McElgunn. "That is both helping us preserve and support the creation of affordable housing."
For more insights and thought leadership from Freddie Mac, click here.
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Kelsi Maree Borland
