The Deal
Commercial Lending Solutions structured a $15 million construction facility for a 42-unit family affordable housing development in the San Fernando Valley, capitalizing on California's ED1 (Executive Directive 1) streamlined approval process. The project featured exclusively 2 and 3-bedroom units targeting families earning 30-60% of Area Median Income, with affordability restrictions extending 55 years.
The capital stack layered our construction loan with 4% Low-Income Housing Tax Credit equity, HOME Investment Partnerships Program funds, and city soft financing. The developer, a regional nonprofit, secured ED1 designation through the state's streamlined approval pathway, which expedites environmental review and permitting for affordable housing projects on underutilized sites.
ED1, established in 2019, allows qualifying affordable housing developments to bypass lengthy local approval processes when projects meet specific affordability thresholds and site criteria. This particular project achieved 100% affordability at deeper income targeting than ED1's minimum requirements, strengthening its regulatory position.
The Challenge
Family-oriented affordable housing presents unique financing challenges compared to smaller unit configurations. The 2 and 3-bedroom layouts averaged 1,050 and 1,280 square feet respectively, driving per-unit construction costs to $357,000, significantly above typical studio and one-bedroom affordable projects in the market.
The sponsor's limited track record posed additional underwriting complexity. While the nonprofit had successfully completed smaller affordable housing projects, this marked their first ED1 development and largest construction undertaking. Traditional affordable housing lenders typically require extensive sponsor experience for projects exceeding $10 million.
The capital stack timing created further complications. LIHTC equity wouldn't close until construction reached stabilization, while HOME funds required specific draw procedures that didn't align with typical construction loan advancement schedules. The city's soft financing carried subordination requirements that needed careful coordination with our senior construction facility.
The Solution
We identified a community bank actively pursuing Community Reinvestment Act credit in low-income census tracts. Their CRA strategy aligned perfectly with the project's deep affordability targeting and San Fernando Valley location within a qualified CRA geography.
The bank's willingness to work with emerging sponsors proved crucial. They paired the nonprofit with their internal project management team, essentially co-managing construction oversight. This arrangement satisfied the bank's risk management requirements while providing the sponsor with institutional-level project controls.
We structured the construction loan with a 20-month term at prime plus 200 basis points, with interest reserves covering the full construction period. The facility included a six-month extension option to accommodate potential LIHTC equity closing delays, a common issue in affordable housing construction.
The draw structure incorporated HOME fund advancement requirements, with our construction loan funding initial phases and HOME dollars reimbursing specific cost categories as construction progressed. City soft money remained subordinate throughout construction, converting to permanent subordinate debt at stabilization.
The Outcome
Construction commenced four months after loan closing, with ED1 streamlining delivering the promised permitting acceleration. The project avoided an estimated eight to twelve months of additional entitlement processing that traditional local approval would have required.
The bank's project management partnership proved valuable beyond initial expectations. Their team's construction oversight helped the nonprofit sponsor navigate complex affordable housing compliance requirements while maintaining budget discipline throughout the build process.
LIHTC equity closed two weeks ahead of schedule, facilitated by the project's strong lease-up performance. The family-oriented units achieved 95% occupancy within 90 days of certificate of occupancy, validating the market demand for larger affordable units in the San Fernando Valley.
The construction loan converted to permanent financing through the same community bank, with the permanent loan carrying a 35-year amortization at a fixed rate 150 basis points below market alternatives. The bank's CRA goals supported their competitive permanent financing terms.
Total project cost came in 2% under budget at $14.7 million, with the unused construction loan capacity returning to the bank. The successful completion established the nonprofit sponsor as a bankable affordable housing developer, leading to two additional project financings within 18 months.
This transaction demonstrates how ED1's streamlined approval process, combined with strategic lender selection based on CRA motivations, can overcome sponsor experience limitations in affordable housing construction financing. The deal's success opened additional market opportunities for both the sponsor and the community bank's growing affordable housing portfolio.