By Mark Fogarty NH&RA November 2023
If Timed Right, Financial “Braiding” Techniques May Cover Whole Cost of Retrofits
There’s a brave new world of opportunities for “green” multifamily affordable housing renovation and development coming with the ever-quickening ascendancy of green buildings. This is according to one of the early adopters of clean energy solutions in multifamily, Ravi Malhotra—founder and president of ICAST. New pots of money enabled by the Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law (BIL) can bring in enough funding through “braiding” techniques to reduce or even eliminate the need for hard debt, says Malhotra. Developers may even be able to forego the ubiquitous deferred developer fees they use to make so many projects pencil.
This green way of financing affordable housing, while different from the old models of developing affordable multifamily, isn’t totally different from the old ways. For example, utility rebates and Low-Income Housing Tax Credits will still be in the mix, but Solar Tax Credits (ITCs) will have a bigger role to play. Bridge and construction financing will still be featured in the new mode just as it is in the old modes, Malhotra says, since many of the new funds won’t be distributed until completion.
The good news is that the federal government wants to get this money out there ASAP, says Malhotra. So, while the future of federal programs is never certain, this green funding is coming online right now.
“How do you braid the different funding sources available for green technologies to produce or preserve affordable housing?” is how Malhotra describes the question posed by the new opportunity.
The braiding will reduce the amount of money needed to be borrowed, he says. “And in some instances, we’ve been making the case that if you have a nine percent LIHTC deal, and then you put in solar, the LIHTC deal would be roughly 70 percent paid for by tax credits, and then you get at least 30 percent ITC tax credits from the IRA. Your cost is covered,” he says. “Then you have an additional opportunity for bonus tax credits, you have depreciation, and potentially you could get a grant from the Environmental Protection Agency or whatnot. You could actually be putting money in your pocket, not just reducing costs. They would be paying you to put in solar.”
This is a big opportunity, Malhotra says, since nowadays most developers’ deals are not penciling out. “More often than not, the developer’s fee is being deferred. Maybe now you’ve got some money. That would change the equation.”
“It’s a lot of money coming in if you do the braiding right,” he says. “This is an opportunity to do it on Uncle Sam’s dime, but it must be on Uncle Sam’s time. You’re welcome to do it on your own time, but you’re going to do it on your own dime.”
Malhotra detailed the new IRA and BIL funds available to developers during a presentation at a meeting of the National Housing & Rehabilitation Association and a subsequent interview. (See list below.) Most of these green funds are available through four government agencies: the Department of Energy, the Treasury Department, the Environmental Protection Agency (EPA), and the Department of Housing and Urban Development.
He noted that while the programs offered through these agencies are not exclusively for multifamily affordable housing (except for HUD’s Green and Resilient Retrofit Program (GRRP)), which has $837.5 million available.
“Billions” of dollars are gettable, he said. The way to bring the programs together is by “braiding” funding sources, much the same way traditional New Markets Tax Credit deals’ capital stacks may have six or seven sources of money.
Both preservation of existing properties and new construction can benefit from the braiding techniques, he said.
Each funding opportunity has its own specifications, which must be considered, Malhotra said, much as current LIHTC deals must consider all the requirements in all the sources in their capital stack. “Each funding opportunity has its own set of rules. It’s a matter of mixing and matching.”
Malhotra gave four examples of braided finance projects:
The first is a project-based rental assistance (PBRA) development in Carthage, NC. The 150-unit property, which has 33 buildings, was built in 1973. Some of the green work scheduled for this property includes cold climate air source heat pumps (ccASHPs), heat pump hot water (HPHW), electrical infrastructure upgrades, energy-efficient refrigerators, and a 168-kW solar install. The project budget of approximately $6.1 million is totally covered by braided funding of $450,000 in utility rebates, $2.1 million in DOE electrification rebates, and $3.6 million in GRRP money from HUD.
Similarly, costs for a project in Kalamazoo, MI are completely covered by braided funding. The 104-unit property, built in 1971, is primarily getting a fuel switch upgrade through ccASHPs, HPHWs, attic insulation, and induction stoves. The approximately $1.54 million cost is being covered by utility rebates (approximately $320,000), DOE Weatherization Assistance Program (WAP) funding (approximately $808,000), and $400,000 in DOE home electrification rebates. “That pretty much pays for itself,” he said.
In a third case, a 20-year-old, 275-unit property in Chattanooga, TN, will benefit from more than $1 million for energy upgrades. This includes almost $300,000 in WAP funding, $576,000 in DOE rebates, leaving approximately $134,000 in total customer cost.
Finally, for a 120-unit PBRA in Washington, DC, “it’s a $2.8 million project, the DOE Home Electrification rebates will provide $1.2 million, the ITC is worth approximately $400,000, and if the GRRP comes in, which we’ve applied for, will pay for the rest.”
Malhotra told the meeting there were many new opportunities for preserving multifamily affordable housing in an alphabet soup of new funding sources. These include:
Possibilities Per Apartment
1. $25,000 low-cost loan from EPA Greenhouse Gas Reduction Fund or DOE Revolving Loans Fund (RLF);
2. $14,000 grant from DOE High-Efficiency Electric Home Rebate Program (HEEHR);
3. $60,000 grant from HUD’s GRRP;
4. $20,000 grant from USDA;
5. $5,000 tax credit from 45L or $3,750 tax deduction from 179D;
6. $10,000 grant from WAP;
7. $5,000 cash from local Utility Rebates;
8. $3,500 Solar ITC & Depreciation; and
9. $2,000 from Electric Vehicle Tax Credits and Utility Rebates.
The sky could be the limit here, according to Malhotra. He said he has seen estimates of as much as $500 billion in funding available from the Treasury for ITC. Ironically, the smallest bucket of grant funding, at approximately $837 million, is from HUD – traditionally the agency most concerned with housing. But there could be as much as $20 billion at DOE, $35 billion at EPA, and $20 billion at USDA, for example.
The government is interested in getting these monies disbursed, said Malhotra. Many funding opportunities are happening right now. Early rounds seem to have far fewer applicants and thus a much better chance of winning, said Malhotra. If there are not enough applications in the first rounds, everyone applying will be funded, he said.
But he warned that with government opportunities, politics or changes in Administration might change or end the government’s largesse. So, the time to apply, he said, is now.