Capital is, perhaps, the biggest challenge to the development and maintenance of affordable housing. Community development financial institutions, known as CDFIs, are local, mission-driven entities dedicated to the creation and preservation of affordable housing in low-income communities—and they play an essential role in providing the capital necessary to give affordable housing deals wings.
KeyBank is a leading lender and investor in the creation and preservation of affordable housing. According to Brian Maddox, team lead of CDFI lending and investment at KeyBank, KeyBank has also been investing in CDFIs for over 30-years to help expand the number of affordable units being produced annually in this nation. “CDFIs play a very important role that bridges the traditional lender and the equity that comes from the developer. They are at the nexus between those two roles,” Maddox says.
While KeyBank can address the construction lending, equity and large permanent mortgage needs of developers creating affordable housing, CDFIs are involved in both the early-stage development needs, including funding land acquisitions and predevelopment phases, and late-stage deals needing small loans to maintain long-term affordability.
“There are many times that banks just cannot fund these loans because of regulation, risk and size. CDFIs are able to be more flexible with those loans and can often offer higher leverage positions than a bank would be able to,” explains Maddox. While banks can provide up to 80% loan-to-value, CDFIs can regularly go as high as 90% loan-to-value, according to Maddox.
Lower rents often mean permanent mortgage loans are required to be sized smaller than market-rate multifamily housing, and CDFIs can provide permanent loans that would otherwise be too small for a traditional bank. Maddox points out that KeyBank has invested in various CDFIs who specialize in permanent mortgage lending for affordable housing, including NewWest Community Capital, Rocky Mountain CRC and Ohio Capital Corporation for Housing.
“They play an important role at the end of the process on the long-term mortgage or permanent lending,” says Maddox. “Many of these perm loans are small in nature, and large traditional financial institutions are not able to play in that arena. CDFIs can provide those smaller perm loans for affordable housing.”
CDFIs also do a great job of creating and proving out new housing concepts. Maddox notes a recent example of co-living housing, which blends shared living spaces and kitchens with private bedrooms and bathrooms. The concept provides quality housing for reduced pricing, and is particularly popular among young people in dense cities. CDFIs were integral in ushering in the concept, where others in the industry were skeptical. “This type of living is seen as a great way to maintain affordability. This is not something that traditional banks have been able to wrap their heads around in terms of understanding the risk,” says Maddox.
CDFIs can do this because they are integrated parts of communities, making them market experts and flexible enough to adapt to new needs. Understanding this, Maddox highlights that the Biden Administration has invested $8 billion to help CDFIs fund housing projects. “CDFIs are closest to the ground, where the affordable housing development actually happens,” says Maddox. “They are the connection between the individuals that need the housing and the capital resources seeking the opportunity to invest. They are able to provide that flexible and nimble response to the housing industry, and they will always be more adaptive in that area than most traditional financial institutions.”
Maddox adds that while CDFIs’ focus is on affordable housing development, consumer loan products, as well as small business lending, KeyBank recognizes that their presence has a far greater impact, helping to address racial injustice, facilitate job creation and end poverty. KeyBank seeks to expand its relationship with CDFIs and has hired a dedicated team to respond to the growing needs of CDFIs around the nation. Through its investments, support and technical assistance, Maddox believes that KeyBank will help drive greater impacts in underserved communities with its partnership with the CDFI industry, particularly, small and minority led CDFIs.