$22,000,000 ED1 Ground-Up 100% Affordable Multifamily, East Los Angeles / South Los Angeles, CA

Scaling Los Angeles Executive Directive 1 affordable housing beyond its Koreatown origins requires more than just replicating the playbook. This $22 million construction financing for a ground-up 100% affordable multifamily project in East Los Angeles demonstrates how critical timing coordination and creative capital stacking have become for sponsors working outside the traditional affordable housing corridors.

The Deal

The borrower needed construction financing for a ground-up affordable multifamily development under LA's Executive Directive 1 program, which fast-tracks 100% affordable projects through city approvals. The project required a full capital stack including 4% Low-Income Housing Tax Credits, tax-exempt bonds, and multiple layers of state soft debt through the Homeless Housing Assistance and Prevention (HHAP) program and California Department of Housing and Community Development (HCD) funding.

Unlike market-rate construction deals where timing flexibility exists, this transaction demanded precise coordination across multiple allocation calendars. The California Debt Limit Allocation Committee (CDLAC) bond allocation, Tax Credit Allocation Committee (TCAC) commitment, and various state soft debt programs each operate on different timelines with non-negotiable deadlines.

The Challenge

The primary obstacle was underwriting complexity around state soft debt programs. Most construction lenders price deals based on hard equity and senior debt ratios, but this project's feasibility hinged on $8.5 million in combined HHAP and HCD soft debt that wouldn't fund until specific construction milestones. Traditional lenders struggled to credit these programs appropriately in their loan-to-cost calculations.

The second challenge was geographic. While ED1 has proven successful in Koreatown, lenders remained skeptical about East Los Angeles and South Los Angeles markets for affordable housing construction. Site control, community engagement requirements, and longer entitlement timelines in these areas created additional layers of execution risk that most institutional construction lenders weren't comfortable underwriting.

Timeline coordination presented the third hurdle. The borrower needed to close construction financing before securing final TCAC commitment letters, but most lenders required full capital stack certainty before funding. This created a circular dependency that threatened the entire transaction.

The Solution

We structured the deal with a mission-focused Community Development Financial Institution (CDFI) that understood both the ED1 program mechanics and state soft debt timing. The CDFI provided an 18-month construction facility at 7.25% with interest-only payments and a 75% loan-to-cost ratio based on total project costs including soft debt.

The critical innovation was forward-committing the permanent financing before construction close. We secured a commitment from a national life insurance company for a $15.8 million permanent loan at 5.85% fixed for 35 years with 40-year amortization. This permanent loan commitment gave the construction lender comfort that the exit strategy was secure regardless of market conditions during the 18-month build period.

We coordinated the capital stack timing by structuring the construction loan to accommodate phased soft debt funding. The CDFI agreed to reduce their loan balance as state funds arrived, rather than requiring full soft debt funding at closing. This allowed the project to maintain adequate liquidity throughout construction while honoring the various allocation program requirements.

For the underwriting challenge, we provided detailed cash flow models showing how HHAP and HCD funds would flow based on construction progress. The CDFI credited these programs at 85% of committed amounts in their loan-to-cost calculation, recognizing that while timing might shift, the state's commitment was essentially guaranteed once allocations were confirmed.

The Outcome

The borrower closed construction financing three weeks ahead of their CDLAC allocation deadline and maintained their position in the TCAC application queue. The phased soft debt structure provided $3.2 million in additional liquidity during the critical first six months of construction when materials procurement and site preparation required significant upfront capital.

The forward-committed permanent financing locked in favorable long-term rates during a rising rate environment, ultimately saving the project approximately $400,000 in debt service over the first five years of operations. More importantly, the permanent loan commitment allowed the sponsor to begin marketing tax credit equity partnerships with certainty around final capital costs.

This transaction established a replicable framework for ED1 projects expanding into East Los Angeles and South Los Angeles markets. The key insight was recognizing that these deals require lenders who understand affordable housing program mechanics rather than just competitive pricing. The successful coordination of multiple allocation calendars and state funding programs created a template that other sponsors have since adopted for similar projects across Los Angeles County.