The main obstacle to creating affordable cooperative housing, some folks say, is the lack of financing. The problem is stated as if everyone understands and agrees that if only financing were available, we could create more housing.
This so-called "unavailability of financing" is not the problem. Financing is available all around us. The trick is figuring out how to use the financing that is available for our particular housing development and keeping all the moving parts going in the right direction until the transaction is completed. Financing can come from a variety of sources and a cooperative developer must research which financing will work best for each project. Listed on the next page are financing sources and programs that can be used to create cooperative housing, including not only financing itself, but also enhancements that may make financing easier.
It is important to note that I define "cooperative housing" as housing that generally follows the spirit of the cooperative principles. I distinguish this from the Internal Revenue Service's definition of a housing cooperative, which merely describes how U.S. federal tax law is applied to a housing cooperative and its tenant-stockholders, as defined by the IRS. Using the cooperative principles as the touchstone broadens the possibilities for organizing cooperative housing ownership entities so as to take advantage of the widest range of financing methods. Developers and members or prospective members may or may not find it advantageous to organize within the confines of the IRS definition of a housing cooperative, when weighed against the broader concerns of the group.
In some cases the sources listed may provide only one layer of the multiple layers of financing needed to complete any housing development, especially housing that is affordable to low- and moderate-income families. The list should give you an idea of the multitude of sources available to finance your transaction.
Keep in mind also, that there may be uses of the funds that can be sliced off, to make it easier for a specific funder to help you and your development take a small step in the right direction. Examples of these include the following:
Gap financing provides financing for the difference between the permanent mortgage and the total funds required. This is usually necessary, because most conventional lenders will lend only up to 75 or 80 percent of the appraised value or the total development cost of the project. Gap financing can be provided through the use of a second or third mortgage on the real estate. A second or third mortgage (sometimes called a soft loan) is subordinate to the first mortgage and is riskier to the lender; therefore, many conventional lenders do not provide this type of lending. Many of the intermediary lenders and local and state sources of financing are willing to lend their funds as soft loans, thus providing gap financing.
Share loans are borrowed by the member, putting up as collateral the membership certificate or share of stock and occupancy agreement evidencing the rights the member has to live in the cooperative's unit. Share loans can be used to shoulder some of the financing burden, and could be obtained, for example, by a seller taking back share loans from members, from a credit union, or from a local government making available down-payment assistance funds to the members. These down-payment assistance loans could be secured with the members' shares or membership certificates.
This layer-cake approach to financing doesn't make it easy to finance your transaction, but it may make it possible. The secret is to figure out how to get ownership or control of the property as one of the initial steps, so you don't lose the property in the process of putting the whole thing together.
Who can you call for help? In addition to the phone numbers listed above, in your community you can find a public library, and perhaps a county or city community development department, or housing and economic development office, where folks can begin to answer some of your questions. In your state, you can find a HUD/FHA office, a USDA office that deals with rural development, and your state housing finance agency. In your region, you can find one of the twelve Federal Home Loan Banks, and one of the Foundation Center Libraries. Most of the larger intermediary nonprofit organizations listed above have several regional offices around the country. The Internet is a tremendous resource, if you or someone you know has access to the World Wide Web.
When you start asking these questions, keep in mind that many people have never heard of cooperative housing. Usually you have to show those on the other end of the conversation how your project is eligible, explain why it is a good idea, and describe how it accomplishes the goals, objectives, and priorities they have set out for their organization.
I hope I have offered a sense of the possibilities to those of you who thought that there was no way you could finance a new cooperative housing community.
Good luck in your search.
Federal Programs
FHA and USDA Mortgage Insurance and/or Guarantees
FHA Section 213
FHA Section 221(d)(3)
FHA Section 223(f)
USDA Section 238 (Rural Housing)
USDA Rural Business Loan Guarantees
Federal Direct Loans and/or Grants
HUD Section 202 grants (for Senior Citizens)
HUD Section 811 grants (for persons with disabilities)
USDA Section 515 (Rural Housing)
USDA Rural Housing Site Loans
USDA Farm Labor Housing Loans and Grants
USDA Housing Preservation Grants
USDA Community Facilities Loans (for community centers, day care facilities, etc.)
Tax Exempt Bonds
for Blanket Mortgages (501(c)(3) bonds are an option if your cooperative housing
organization can be structured as a nonprofit charitable tax-exempt
corporation.)
for Individual Share Loans
Equity Through the Sale of Federal Tax Credits
Low Income Housing Tax Credits (available to a limited partnership that can
lease real estate to a cooperative)
Historic Tax Credits (same as above for historic buildings-both can be used
simultaneously)
Federal Funds that Flow Through States, Localities, Housing Authorities, and
Community Action Agencies
HOME funds
Community Development Block Grant funds
HOPWA (Housing Opportunities for Persons with AIDS)
Appalachian Regional Commission funds (to help pay for land development in
portions of Appalachian states)
Section 108 Loan Guarantee (CDBG recipient cities can pledge future CDBG
funds against a construction loan to help get your housing built.)
HOPE VI Public Housing Redevelopment and Replacement funds
Section 8 set-aside of certificates for a particular project by local public housing
authority (This is not financing, but it can help to enhance a loan by
providing comfort to the lender that a loan can be repaid, because the
residents will be able to afford the monthly charges.)
Federal Emergency Management Agency funds for disaster relief areas (after a
flood, tornado, hurricane, etc.)
Energy conservation/weatherization grant funds through Community Action
Agencies or other nonprofit organizations
State and Local Programs (examples of which I am aware)
State or Local Housing Trust Funds (At least 25 states have one; they are usually
affiliated with the state housing finance agency.)
Tax Increment Financing
Highway Replacement Housing Funds
Other miscellaneous local and state financing programs
Local or State Down-Payment Assistance Programs
First-Time Homebuyer Assistance Programs
Governor's (or mayor's or administrator's) discretionary funds
Airport replacement or remediation funds
Local & State Homestead Exemption for Real Estate Taxes (Though not a financing
program per se, lower real estate tax allows the lender to increase the amount of
permanent financing for the development.)
Private Sources of Financing (these are just a few of many)
National Cooperative Bank/NCB Development Corporation and affiliates,
Washington, D.C (800) 955-9622
Federal Home Loan Bank System (12 District Federal Home Loan Banks, each
owned by banks and savings associations in the district)
Affordable Housing Program Direct Advances
Affordable Housing Program Subsidized Loans
Community Improvement Program
Local, state, regional, and national nonprofit community development loan funds
Institute for Community Economics, Springfield, Massachusetts; (413) 746-8660,
fax (413) 746-8862
Local banks (spurred by the Community Reinvestment Act)
Consortia of local banks
Foundation grants and program-related investments-The National Guide to
Funding for Community Development (The Foundation Center, (212) 620-4230,
May 1996, ISBN 0-87954-659-X, 808 pp., $135) lists 2,500 foundations and
corporate direct-giving programs active in community development. Here are a
few:
The Fannie Mae Foundation, Washington, D.C.; (202) 274-8078
The McAuley Institute (emphasis on women), Silver Spring, Maryland; (301) 588-
8110
The Parodneck Foundation (emphasis on New York), New York City; (212) 431-
9700
Community Development Financial Institutions funded or certified by the CDFI
fund of U.S. Treasury (certified CDFIs can borrow funds at 0% cost to them and
re-lend at favorable rates)
Seller financing, sometimes by the seller taking back a subordinate loan for a small
portion of the equity during at least the development period of the rehabilitation
and sales program, if not longer.
Intermediary Organizations
Housing Assistance Council (rural predevelopment funds), Washington, D.C.;
(202) 842-8600
Local Initiatives Support Corporation, New York City; (212) 455-9800
Neighborhood Reinvestment Corporation (has a special interest in mutual
housing associations), Washington, D.C.; (202) 376-2400
Rural Community Assistance Corporation, Sacramento, California; (916) 447-
2854
Rural Community Assistance Program, Leesburg, Virginia; (703) 771-8636
The Enterprise Foundation, Columbia, Maryland; (410) 964-1230
Pension Funds
The AFL-CIO Housing Trust is one of the better known pension funds financing
housing development; (202) 331-8055
