Small-Scale Strategies Open Doors to Affordable Renting in Connecticut
by Camille Galdes and Maya Brennan
The continued viability and affordability of small multifamily properties may be one of the keys to income integration in the suburbs, rural communities, and even some urban neighborhoods. Yet small-scale apartment buildings are often overlooked or underserved by housing policy and traditional housing and commercial real estate finance mechanisms.
Based on the prevalence of this housing type in New England and its importance in the housing stock of the state, the Connecticut Housing Finance Authority (CHFA) has created a three-pronged program to address rental needs at a scale that works for the state’s smaller communities.
The definition of small multifamily buildings varies by program. The buildings may have fewer than 20 apartments—or perhaps fewer than 50, at the largest. These buildings may be older properties, apartments above main street retail or commercial space, or other small buildings that are easily woven into the fabric of a community. Typically, these properties are naturally affordable without a subsidy, and a majority are operated by an individual owner, family, or investor rather than a large real estate company. In Connecticut communities, these small buildings account for about 10 percent of all housing units.
This building type appeared on CHFA’s radar after some exploratory roundtables in 2010with community development financial institutions (CDFIs) identified a burgeoning gap in long-term financing for small multifamily properties.
“We wanted to understand where the constraints were in the marketplace. We were there to solve market failures,” says Dara Kovel, who was CHFA’s chief housing officer and vice president of multifamily housing at the time of the roundtables. The potential loss or deterioration of the state’s smaller properties emerged as a clear constraint that needed to be addressed.
Before the Great Recession, some traditional lenders, including smaller operators and those in the subprime market, provided higher-risk mid-term financing for small multifamily developments, but that substantially dried up after the crash in 2008. CDFIs historically provided only construction loans, but were now offering permanent financing for up to seven years. The seven-year timeline was “very cumbersome for property owners who want to keep them for longer periods of time,” says Diane Smith, CDHA’s director of planning, research, and evaluation.
Serving these owners presented a challenge for CHFA. The typical owner of a smaller property was not familiar with the complex rules and regulations that characterize the programs and requirements of housing finance agencies. Private owners in the small multifamily market may never have worked with regulatory agreements, income certifications, heightened design standards, or deed restrictions. Put simply, “They don’t speak our language,” says Kovel.
CHFA decided to set aside a $5 million pool of low-cost capital to support small multifamily buildings. CHFA established loan funds with three CDFI partners—Greater New Haven Community Loan Fund, Hartford Community Loan Fund, and Housing Development Fund—to support private investors that rehabilitate, acquire, permanently finance, or construct affordable housing, especially any currently vacant or blighted multifamily properties.
Key to the loan fund program was a simple, private market–style approach. Kovel explains, “We thought, ‘How do we offer our products without acting like an HFA?’ Let’s create a mechanism to push through dollars and to act more like a private lender.”
CHFA decided to rely on the CDFI’s standards and delegated the underwriting process to the finance institutions after preapproving their overall process. In this arrangement, the CDFIs originate the loans for blighted or vacant properties of three to 20 units and provide them with permanent financing for up to 20 years.
While the loan fund has a broad statewide appeal, the Connecticut Housing Finance Authority also sought to incorporate low-cost rental housing in a downtown revitalization strategy and as part of developments near new transit and main street investments in the state.
Traditional small-scale, main street properties with ground-floor retail and second-floor office or residential space dot the state’s urban landscape. While surveys find high levels of interest in walkable places among people of all ages and incomes, many of Connecticut’s main street buildings were underused.
In response, CHFA and the Connecticut Main Street Center worked together to create the Come Home to Downtown program, which provides building owners in five downtown communities with technical assistance to upgrade their properties and attract new residents to small-scale, mixed-use living. CHFA provided guidance on the redevelopment process and options that would work for common building types.
The program, which is just getting off the ground, provided six properties with technical assistance that may result in about 100 new rental units in the urban centers of Meriden, Middletown, New Britain, Waterbury, and Torrington—adding crucial supply in a high-cost state while also playing a role in reviving local economies.
For the final component of the state’s small-scale rental strategy, CHFA focused on the opportunity presented by new public transit investment. Investments in new public transit have been shown to increase property values in the surrounding area, making housing affordability a challenge for many families.
CHFA did not want to miss the opportunity to infuse some housing affordability around new station stops along rail and bus rapid transit lines, so it partnered with Connecticut’s Department of Economic and Community Development and the Local Initiatives Support Corporation (LISC) to create a loan fund to support transit-oriented development (TOD). The TOD loan fund provides up to $3 million for predevelopment and acquisition financing per project to support development within a half mile of a transit stop, provided that the development includes some affordable housing.
Connecticut’s multifaceted strategy for small-scale rental housing, which started by identifying barriers to and opportunities for forming partnerships, is not only adding units to this valuable component of the affordable housing stock, but also is revamping tired downtowns and ensuring equitable transit access. The strategy won a 2015 Robert C. Larson Housing Policy Leadership Award from the ULI Terwilliger Center for Housing and a 2014 Award for Program Excellence from the National Council of State Housing Agencies.