On Feb 24, the Metropolitan Transportation Commission (MTC) unanimously approved proposed changes to the Bay Area Preservation Pilot (BAPP) financing program to address deployment barriers and improve the feasibility of the program.
The three main changes that were made to the program include:
- Allocating up to $6 million of MTC’s $10 million commitment for deployment as long-term forgivable debt that can stay in a project as a permanent subsidy
- Decreasing the leverage ratio requirement on MTC funds from 5:1 to 3:1
- Extending the term of the BAPP program from 10 years to 20 years
BAPP was launched in February 2018 with a $10 million commitment from MTC and supplemented with an additional $39 million in capital from the two program managers, Enterprise Community Loan Fund (ECLF) and the Low Income Investment Fund (LIIF). ECLF and LIIF envisioned the program as a financing tool to help mission-driven developers acquire and rehabilitate unsubsidized properties in the Bay Area in order to minimize displacement and preserve long-term affordability.
The program was launched and proposed loans were underwritten based on certain assumptions, including:
- Local public subsidy, along with Community Development Financial Institution (CDFI) capital, would be readily available to leverage the MTC dollars, therefore a 5:1 leverage ratio would be achievable
- Loans are sized based on a project’s rental revenue and rents were based on households earning an average of 80 percent of the area median income (AMI)
- Only minor rehabilitation to the properties would be needed
- MTC/CDFI loans would be repaid from tax credit equity
After marketing the program and reviewing several prospective projects, ECLF and LIIF realized that, in practice, soft debt has been much more limited, particularly outside of San Francisco and Oakland, which are the only two cities in the region where dedicated funds for preservation of affordable housing exist. Also, the incomes of residents living in the prospective projects were closer to 50 percent AMI than 80 percent AMI, which meant rents were lower than anticipated and not able to produce enough revenue to cover higher loan amounts. Many of these properties had higher rehabilitation needs, which increased the total development costs of the project. Lastly, developers of smaller projects indicated that they did not plan to pursue tax credits and, as a result, would need to use a traditional refinance to repay the BAPP/CDFI loan, which limits the size of the loan. These realities resulted in financing gaps and project infeasibility.
Changing the leverage ratio requirement and allocating a portion of the $10 million MTC funding as forgivable debt allows a project to take on more low- or no-cost debt to fill the financing gap and be able to “pencil.” By increasing the amount of MTC funds in the project, and particularly using some of the MTC funds as soft debt, the program is able to reach a wider geography and fund projects with deeper levels of affordability. Increasing the term of the program allows for time to fully deploy the funds and still be able to provide the maximum 10-year loan term, as well as to revolve funds as loans are repaid.
For more information about BAPP loans, reach out to Eve Goldstein-Siegel.