$35,000,000 ED1 Mixed-Income Development (95 Units) in Hollywood, Los Angeles, CA

The Deal

Commercial Lending Solutions recently closed a $35 million construction financing package for a 95-unit mixed-income development in Hollywood, Los Angeles. The project qualified under California's Executive Directive 1 (ED1), a streamlined approval process for 100% affordable housing developments that bypasses traditional local zoning restrictions when projects meet specific affordability thresholds.

The five-story wood frame over concrete podium structure delivers units across multiple Area Median Income (AMI) levels: 30%, 50%, 60%, and 80%, addressing the city's critical need for workforce and deeply affordable housing. ED1 approval allowed the developer to move directly through state-level permitting, eliminating the typical maze of local approvals that can extend timelines by years.

The capital stack combined a CDFI first mortgage with tax-exempt bond financing, structured to maximize leverage while meeting affordability covenant requirements. Construction timeline spans 24 months with an additional six-month lease-up period before permanent conversion.

The Challenge

Hollywood's construction market presents unique cost pressures that separate it from other LA submarkets. Union labor requirements, limited staging areas, and complex site logistics drove the final construction budget 15% above initial estimates, creating a $4.2 million funding gap that threatened project viability.

The borrower's initial capital stack assumed a 75% loan-to-cost ratio based on preliminary budgets. When hard costs escalated from $315 per square foot to $362 per square foot, the construction lender balked at increasing their basis without additional credit support. Traditional gap financing proved elusive given the project's 100% affordable structure and limited cash flow during the initial rent-up period.

Adding complexity, the tax-exempt bond allocation required a firm construction start date. Any delays risked losing the bond capacity, which would have forced a complete capital restructure and potentially killed the deal economics entirely.

The Solution

We restructured the capital stack through a three-pronged approach that preserved the project timeline while addressing the funding shortfall. First, we negotiated with the city's housing department to increase their soft loan commitment by $1.8 million, leveraging the project's deeper affordability levels at 30% and 50% AMI to justify additional subsidy.

Second, we identified a construction lender experienced in affordable housing who understood the risk-mitigated nature of projects with locked-in permanent financing and regulatory agreements. They agreed to an 82% loan-to-cost ratio, bridging $2.4 million of the remaining gap through higher leverage rather than requiring additional equity that the developer couldn't provide.

The final piece involved restructuring the developer fee payment schedule. Rather than taking fees at construction completion, we deferred $1.2 million in developer compensation to permanent conversion, reducing immediate funding needs while maintaining project returns through the tax credit equity structure.

Critical to success was timing the construction loan closing to preserve the bond allocation deadlines. We compressed due diligence into a six-week process, running environmental, title, and third-party reports in parallel while coordinating between the CDFI lender, bond counsel, and city housing staff.

The Outcome

The project broke ground four months after initial cost overruns threatened cancellation, preserving both the tax-exempt bond allocation and the developer's site control. ED1 approval proved essential: the streamlined process saved an estimated 18 months compared to traditional local entitlement, plus over $2 million in carrying costs and consultant fees.

The restructured capital stack delivered a workable financing solution at 82% leverage while maintaining the project's affordability commitments across all AMI levels. Construction commenced in Q3 2024 with completion scheduled for Q3 2026.

This transaction demonstrates how legislative tools like ED1 can unlock affordable housing development, but only when paired with flexible capital providers who understand the sector's unique risk/return profile. The deal required lenders willing to underwrite based on regulatory cash flows rather than market fundamentals, plus public sector partners able to increase subsidy commitments when market conditions demand it.

For the broader market, this financing structure provides a replicable model for similar ED1 developments facing construction cost pressures. The combination of increased soft money, higher leverage construction debt, and deferred developer fees offers multiple tools to bridge funding gaps while preserving affordability requirements that make these projects pencil long-term.