In the present environment of higher construction loan rates, reduced permanent loan advance rates and generally declining hard loan proceeds, tax credit transactions are facing challenges.

At the time of this writing, national average construction loan rates are running between 9.0% and 9.5%.  Lenders are requiring higher underwritten construction period interest to be carried in development budgets, and investors are stress testing for construction cost overruns and delays as well as for operating expense escalation.

  While HUD 221(d)(4) loans can be an attractive solution, processing times are currently as long as one year; and, while life insurers offer some of the lowest available commercial construction loan rates, their programs are quite difficult to qualify for.  To fill the gaps, state, local, and other financing sources have become increasingly important – but are also being rapidly depleted.

In order to accommodate the lower permanent debt levels that new projects can support, Westwood is encouraging developers to consider our proprietary Affordable Housing Future Flow Contributive Asset-Backed Securities (AHFCABs), as an alternative source of truly low-cost construction finance (see rate range below), in addition to its other uses.


Our Solution: Become your own Construction Lender

The AHFCABs structure enables developers to tap into the value of their existing portfolio residual GP/SLP interests in annual operating distributions, development fees, and disposition and refinancing proceeds – over the full life of portfolio properties – to create a borrowing base, the proceeds of which can be used for any purpose, including construction finance.

The structure effectively enables developers to establish their own internal ‘bank’ to fund ongoing construction finance needs (for any number of properties), interest reserves and other working capital positions during uncertain times (or anything, for that matter).  Proceeds can be warehoused and drawn as needed over a period of up to 12 months after the initial funding.  Proceeds devoted to construction finance can be “right-sized” to an organization-wide average outstanding construction loan balance and taken down in bulk at a much lower cost of funds than prevailing construction loan interest rates. There is no pressure to convert – the average term of AHFCABs financings is 8-10 years and rates are fixed throughout.

As a reminder, this investment-grade securitized debt is non-recourse, off-balance sheet, tax free and does not conflict with mortgage or HUD covenants nor require limited partner consents.

We remain optimistic that pricing of these facilities will not only stabilize but start decreasing by Q4 of 2023. Indeed, we believe that a transaction commenced today will price at approximately 250bps over the 10-year Treasury Note; likely more than 300bps lower than prevailing construction loan interest rates.