The Deal
Commercial Lending Solutions recently closed a $45 million construction financing package for a unique 125-unit mixed-income residential development in Exposition Park, Los Angeles. This groundbreaking project utilized two distinct entitlement pathways: 75 affordable units approved under Executive Directive 1 (ED1) and 50 market-rate units approved under Assembly Bill 2011 (AB 2011).
ED1, signed by Mayor Bass in December 2022, streamlines affordable housing approvals on City-owned land through expedited processing and reduced fees. AB 2011, effective January 2022, allows qualifying affordable and mixed-income housing projects to bypass local zoning and CEQA review when meeting specific criteria including prevailing wage requirements and affordability thresholds.
The capital structure required two parallel financing streams. The affordable component secured funding through a community development financial institution, tax-exempt bonds, and 4% Low-Income Housing Tax Credits. The market-rate building obtained conventional construction debt from a regional bank at 60% loan-to-cost. Total construction timeline spans 28 months across both buildings.
The Challenge
This transaction presented several complex structural hurdles that required innovative solutions. First, the two buildings, while physically connected and sharing infrastructure, represented legally distinct projects with separate entitlement pathways, ownership entities, and regulatory requirements. Each building had different unit count restrictions, affordability covenants, and compliance monitoring obligations.
The capital stack complexity created the primary financing challenge. The affordable building required coordination between multiple funding sources: CDFI construction debt, tax-exempt bond proceeds, 4% LIHTC equity, and various soft money sources including City and County programs. Meanwhile, the market-rate building needed straightforward construction-to-permanent financing without the regulatory encumbrances affecting the affordable component.
Shared infrastructure presented additional complications. The parking structure and common areas served both buildings, requiring careful allocation of costs and responsibilities between two separate borrowing entities with different lenders, different draw schedules, and different completion requirements. Standard cross-collateralization and guaranty structures were incompatible with the affordable housing financing restrictions.
Finally, this represented one of the first ED1/AB 2011 hybrid deals in Los Angeles, meaning limited precedent for lenders to evaluate risk and structure appropriate terms.
The Solution
We structured two parallel construction loans with the same regional bank to ensure coordination and alignment of interests. This single-lender approach eliminated potential conflicts between different institutions while maintaining the legal separation required by each building's financing sources.
The shared infrastructure challenge was resolved through a detailed cost-sharing agreement that allocated parking and common area expenses based on unit count and square footage. We established separate draw schedules for shared components, with the market-rate entity initially funding shared costs and receiving reimbursement from the affordable entity according to predetermined percentages.
For the affordable building, we coordinated construction loan sizing with the permanent financing sources. The CDFI provided the construction facility, sized to accommodate the gap between development costs and permanent sources including bond proceeds and LIHTC equity. We structured the timing to ensure LIHTC investor equity contributions aligned with construction draw requirements.
The market-rate building received a conventional construction loan at 60% LTC from the same regional bank, with standard recourse and completion guarantees from the developer principals. This loan featured typical construction-to-mini-perm terms with a three-year takeout requirement.
We negotiated coordinated development agreements between the two entities covering shared site management, construction scheduling, and infrastructure maintenance responsibilities. These agreements included default and cure provisions that protected both lenders' interests without creating inappropriate cross-default exposure.
The Outcome
The transaction closed successfully, providing Los Angeles with 125 much-needed housing units through an innovative regulatory approach. The affordable component delivers 75 units restricted to households earning 50% to 80% of Area Median Income, while the market-rate building adds 50 units without income restrictions.
This deal established a replicable framework for future ED1/AB 2011 hybrid developments, demonstrating how different entitlement pathways can be combined effectively within a single project. The financing structure provides a template for similar mixed-income developments seeking to optimize both regulatory benefits and capital efficiency.
Construction commenced on schedule with both buildings breaking ground simultaneously. The coordinated financing approach enabled the developer to achieve economies of scale in construction while maintaining the distinct regulatory and financial requirements of each component.
The successful execution of this complex transaction reinforces the viability of California's new affordable housing legislation and provides lenders with confidence to finance similar hybrid developments. As ED1 and AB 2011 projects continue to emerge, this deal structure offers a proven approach for navigating the intersection of affordable housing policy and commercial real estate finance.
Trevor Damyan is a principal at Commercial Lending Solutions in Los Angeles, specializing in complex commercial real estate transactions.