$28,000,000 ED1 Affordable Multifamily (72 Units) in South Los Angeles, CA

The Deal

Commercial Lending Solutions recently closed a $28 million construction loan for a 72-unit affordable multifamily development in South Los Angeles, representing one of the first major projects to utilize California's Executive Directive 1 (ED1) streamlined approval process.

ED1, signed by Governor Newsom in 2021, allows 100% affordable housing projects to bypass traditional CEQA environmental review and significantly reduces municipal approval timelines from the typical 24+ months down to 6-9 months. The directive targets projects where all units are reserved for households earning 80% or less of Area Median Income, creating a fast-track pathway for critically needed affordable housing.

This particular project leveraged the full ED1 framework, combining 4% Low-Income Housing Tax Credits (LIHTC), tax-exempt bond financing, Los Angeles Housing Department soft funding, and conventional construction debt in a complex capital stack totaling approximately $35 million in total development costs.

The Challenge

ED1 projects present unique financing complexities that traditional construction lenders often struggle to navigate. The capital structure requires the construction lender to subordinate to multiple layers of public financing, creating an intricate web of intercreditor relationships that can make conventional banks uncomfortable.

The specific challenge here was the subordination hierarchy. The tax-exempt bonds held senior position, followed by the construction loan, with the city's soft money and LIHTC equity filling the remaining gap. Most conventional construction lenders either don't understand this structure or require the construction debt to maintain senior position throughout the construction period.

Additionally, ED1 projects operate under accelerated timelines that don't always align with traditional construction lending practices. The 6-9 month approval window means developers need construction financing commitments before all entitlements are fully secured, requiring lenders to underwrite based on the ED1 framework rather than completed municipal approvals.

The borrower had initially approached three conventional banks, all of which declined due to either unfamiliarity with ED1 mechanics or unwillingness to accept the subordinated position within the capital stack.

The Solution

We identified a Community Development Financial Institution (CDFI) that specializes in affordable housing construction and has developed specific expertise in ED1 transactions. CDFIs are mission-driven lenders that prioritize community impact alongside financial returns, making them natural partners for complex affordable housing deals.

The CDFI structured a 24-month construction loan at a rate of prime plus 200 basis points, with interest reserves built into the loan amount to minimize cash flow pressure during construction. They agreed to the subordinated position behind the tax-exempt bonds while maintaining appropriate protective covenants.

Key loan terms included a single 12-month extension option, standard construction-to-permanent conversion mechanics tied to occupancy thresholds, and modified draw procedures that accommodate the reimbursement timing from public funding sources. The lender also provided flexibility around the LIHTC equity timing, understanding that tax credit equity typically comes in multiple tranches tied to construction milestones.

We structured the intercreditor agreement to clearly delineate the responsibilities and rights of each capital stack participant, with the CDFI maintaining construction oversight and the bond trustee holding ultimate collateral position. The Los Angeles Housing Department's regulatory agreement was subordinated to both the bonds and construction loan for enforcement purposes.

The Outcome

The construction loan closed within 45 days of application, allowing the developer to break ground while their ED1 approvals were still moving through the streamlined process. The project is currently six months into construction and tracking on schedule for completion in Q3 2024.

The financing structure has performed as designed, with the tax-exempt bond proceeds and LIHTC equity funding drawing according to the established waterfall. The city's soft funding has provided the necessary gap financing to make the project feasible at the targeted affordability levels.

This transaction demonstrates the viability of ED1 as a financing framework and establishes a replicable model for similar projects throughout California. The CDFI lender has since committed to expanding their ED1 lending capacity, and we've identified two additional projects in Los Angeles County that will utilize similar structures.

The project will deliver 72 units of affordable housing in a high-opportunity area of South Los Angeles, with units targeted to households earning 30% to 80% of AMI. Upon completion, the construction loan will convert to permanent financing through the same CDFI, maintaining the subordinated capital stack structure through the 15-year compliance period.