Phase 3: Securing Funding

Now we get to the section that most developers want to know about: how do I get money for my project? Before you read ahead, know that previous steps in this process, like conducting a market study and developing a project budget, are critical because they are required by certain funders.

Developing multifamily housing can take years, and it's no different on Native lands. You might have to apply to the same funding source for multiple rounds before being awarded or start a conversation with an investor before realizing your project isn’t a good fit. Do not give up! Your patience and persistence will pay off.

This phase includes potential funding sources to get started with, and advice along the way. Including:

• Understanding Public Sector Funding Sources

• NAHASDA

• LIHTC

• Accessing Private Sector Funding

• Working with Lenders

• Working with Investors

• Layering Financing

Understanding Public sector Funding Sources

Securing financing is a critical piece of the development process and once you have a more complete picture of your financial feasibility, you can begin to explore sources of financing available. There are a number of public sector financing sources to develop land and construct housing available to tribes, TDHEs, and other developers. Financing depends on a range of factors including capital needs, size, and location, to name a few. Often for federal grants you may have to apply in one year, wait until the next year to receive the funding, or if you are not awarded, wait until the following year’s cycle to apply again. A list of the most common sources of funding for housing development on tribal lands can be found below.

Additional resources that outline more extensive lists of potential funding sources include:

1. The Indian Housing Development Handbook
2. GAO Review of Block Grant Program

Decades of underfunding and poorly executed housing programs for Native communities led Congress to enact the Native American Housing Assistance and Self-Determination Act (NAHASDA) of 1996. NAHASDA combined multiple federal housing programs and created a single block grant for Indian tribes or Tribally Designated Housing Entities (TDHEs)--including Alaskan Villages–known as the Indian Housing Block Grant (IHBG). Today the legislation extends to Native Hawaiian homelands.

Although funding levels have remained too low to meet the needs outlined above, activities eligible to be funded with IHBG assistance include new construction, rehabilitation, acquisition, infrastructure, and various support services. Assisted housing under these funds can be either rental or homeowner units. Not only does NAHASDA give Native communities the ability to design housing programs better suited to members, but it also facilitates the leveraging of federal dollars with private funding, which is key to building more and better homes.

Competitive Formula

IHBG funding is administered by HUD on the basis of factors like housing stock, population, and housing characteristics. Therefore, the formula impacts different tribes differently, since tribes with large reservations and large populations have different needs than tribes with smaller populations and reservations. There have been several tribes who successfully challenged the HUD census data as it relates to this formula, according to a GAO report in 2015: https://www.gao.gov/products/gao-15-353r

The Native American Housing Assistance and Self Determination Act (NAHASDA) is the law that guides the U.S. government’s approach in administering housing assistance to Native nations. NAHASDA is designed to support Tribal self-determination and give Tribes increased flexibility to allocate funding to their community’s development needs. NAHASDA consolidated previous HUD programs for Tribal development with a single program: the Indian Housing Block Grant (IHBG), which provides funding to Tribes annually. The amount of funds distributed to each Tribe through IHBG is determined based on a set formula that considers the size of the low-income population, current housing quality, and the number of households that are paying too much of their income on housing costs (i.e., households that are “cost-burdened”).[26] Tribes may also access additional IHBG funding on a competitive basis.[27]

The Low-Income Housing Tax Credit, commonly referred to as LIHTC, currently finances 90 percent of all affordable housing development,[28] with a growing trend for funding projects specifically on tribal lands. There have also been a number of IRS rulings that have led to the increased usage of IHBGs in conjunction with LIHTC credits. [29] The overall process for receiving LIHTC credits includes:

There are two versions of the LIHTC program, the competitive 9 percent program and the non-competitive 4 percent program. In some states, there is also a “state credit” (sometimes referred to as the “affordable housing tax credit”) which can be coupled with the 4% credit. The two programs allow investors to claim a credit equal to 9 percent or 4 percent, respectively, of their investment each year for ten years. Depending on market conditions, 9 percent credits could provide up to 70 percent or more of the equity needed for new construction or rehabilitation.[1] The majority of LIHTC projects in Indian Country have involved the competitive 9 percent program because of the larger share of equity it provides.

One of the main barriers to the development of LIHTC properties on tribal lands is that they are typically unable to support hard debt or debt that requires monthly or annual payments. Instead, they must rely on equity, soft subordinate debt such as loans with below-market interest rates or flexible repayment terms, or housing grants. The primary reason for this challenge is that household income in tribal areas is generally too low to charge rents that would support hard debt. For this reason, LIHTC can and should be paired with other financing sources such as:

• NAHASDA

• IHBG

• Title VI guaranteed loan

• Housing Trust Fund

• RD Section 515 loans

• RUS water/sewer grant/loans

• FHLB AHP

• HOME funds

• Renewable energy investment tax credit

• HUD Continuum of Care funds

LIHTC Success in California

Through sustained efforts by tribal housing agencies, Native American housing coalitions, rural affordable housing advocates, and state and federal housing agencies, California developed the Tribal Housing Pilot Program. The program was the first LIHTC set-aside in California and led to the first award to an Indian tribe in California since the program was established in the state over 35 years ago.

This success highlights how partnership and collaboration can breakdown longstanding barriers of isolation and inaccessibility that plague Native communities across the country.

The case study, Native Americans and the Low-Income Housing Tax Credit Program: Lessons from the California tells the story of this success and can act as a guide for how tribes can begin to work towards building support for increased LIHTC set asides in their states.

https://www.frbsf.org/community-development/files/ci_vol26no2-Native-Americans-and-the-LIHTC-Program.pdf

Accessing private sector funding

In addition to public financing sources, affordable housing projects also can leverage private sector funds.

Commercial financing comes from the private sector, usually banks. Commercial financing usually takes the form of hard debt. There are mission-driven commercial financing options, such as Impact Development Fund, Enterprise Community Loan Fund, Mercy Community Capital, Capital Magnet Fund, and CDFIs, which offer more flexible development financing than conventional loans in order to support more housing development in low-income and underserved areas.

Philanthropic funding is funding from foundations, usually consisting of grants or in-kind support.

Lenders decide whether to invest in a project by assessing how likely it is that they will not get paid back on a loan. They consider this risk in two ways: the risk that the project will not generate enough revenue to pay them back (“project risk”) and the risk that you, the developer, will not pay them back if the project is not completed (“borrower risk”). The riskier they perceive the project and borrower to be, the less likely they are to lend the money and the more likely they are to offer you unfavorable loan terms.

So, when you are seeking for private financing, focus on reducing uncertainty and increasing confidence in you and your project. Here are some tips and tactics you can pursue:

• Proactively build your relationship with lenders. Reach out before submitting an application for funds to ask questions, hear from them about their loan process and requirements, introduce yourself and establish a relationship. Participate in events to help build rapport – for instance, Indian Business Alliance meetings convene a wide range of stakeholders, including community development and lending institutions.[32] This gives you the opportunity to build a network of others that can support your development, access information and assistance that can improve your project, and establish your credibility as a partner.

• Get support from other community leaders. Tribal leaders’ support for your project can help address lender concerns and make lenders more comfortable with the process on Tribal lands. Having a letter of support or bringing a community leader when you meet with lenders can help demonstrate their support for your project. This shows lenders that there is community support and that others are willing to help make your project succeed.

• Educate lenders on how the development process looks in your community. For instance, leaseholds are not well understood by many lenders and investors, which can make these transactions seem riskier.[33] To combat this, you may need to clarify the process and demonstrate your comfort navigating it to make lenders more comfortable.

• Provide a reasonable assessment of financial feasibility. Show how you will be able to make the project balance out financially (or “pencil out”) if you get access to this funding. Provide documentation for any assumptions you make and acknowledge where there are risks, so you can show that you are prepared to address them. Finally, summarize the analysis in a format familiar to the lender – generally, this means assembling or adapting your pro forma package using their templates or guidance. Lenders will review this package with two metrics in mind: the Loan to Value ratio (LTV) and the Debt Service Coverage Ratio (DCSR or DCR). Check if the lender has published maximum LTV or minimum DSCR thresholds and use your feasibility analysis to determine if you need to adjust your model to align more closely with these standards.

• Secure a loan guarantee. If you have a loan guarantee, that means the lender is guaranteed to be paid back, in full or in part, even if the project does not generate enough income. These guarantees are often offered by the public sector (e.g., the federal government offers loan guarantees through Title VI and Section 184 to Tribal developments).

• Identify alternative income streams to secure loans. Although land is the most typical loan collateral in real estate finance, tribes may have alternative income streams at their disposal that could be used as collateral when land is not an option (e.g., when developing on trust land). For instance, some tribes have used third-party healthcare reimbursements, gaming revenues, and NAHASDA monies, among other revenues.[34]Alternative income streams as collateral works for Native CDFIs, such as Indian Land Capital Corporation.

Unlike lenders, who expect to be paid back regardless of project performance, investors take on the risk that they may not get their money back when investing equity in a project. In exchange, they become partial owners of the property.

Native CDFIs

Some banks and community development financial institutions (CDFIs) primarily serve Tribal areas. The Center for Indian Country Development at the Minneapolis Federal Reserve Bank maintains a map of these institutions. In addition to offering conventional lending products, some Native CDFIs have prioritized lending on Tribal lands when other financial institutions are not able to do so. These institutions may be able to offer a higher level of flexibility to meet the needs of your specific community and project.

While a lender is looking for their debts to be covered (DSCR or LTV), investors are estimating their rate of return. And they will usually only invest when they believe they will see some positive return on their investment. They get this return from revenues generated by the project (i.e., rental income or capital gains from selling the property). In some cases, investors may also receive tax benefits from the property. If a project doesn’t generate revenue, they don’t get paid back.

Many of the same tips for building relationships with lenders also apply to building relationships with investors, including proactive outreach and networking, cultivating support from community champions, and clear financial analysis.

Layering financing

There is not enough public funding to fully address housing shortages, so it is important to leverage federal dollars with other sources. This is sometimes called “layering financing” or “leveraging financing.” For some tribes, annual allocations of federal funding will not be enough to finance a single development and it may require multiple years of grant allocations to assemble sufficient financing if other sources aren’t used. Leveraging or layering makes it possible for these dollars to go farther. For instance, the Cook Inlet Tribe was able to nearly triple the amount of housing built annually by taking advantage of NAHASDA and leveraging it with other funds.[35] However, leveraging is a relatively new concept to many tribes since public programs did not heavily encourage this approach before NAHASDA.[36]

Refer to the table of public sector funds for some of the programs commonly paired with NAHASDA. This is not an exhaustive list. Regional HUD offices can also help identify leveraging opportunities, but they do not provide assistance with completing applications for funding.[37] For further assistance with layering financing, you may wish to hire a consultant with experience in housing development on tribal lands or you can apply for technical assistance. All tribes that receive IHBG funding are eligible for no-cost technical assistance, which you can request through your local HUD Office of Native American Programs.[38]

Finally, always refer back to your pro-forma and development budget as funding is secured. Keeping these resources up to date will help you approach subsequent funders and demonstrate expertise.

While many sources of public housing finance are available to Native communities, they were not all designed with Native communities in mind. As a result, you may need to be prepared that public program staff may resist or need assistance working with program regulations if the tribal context is new or unfamiliar.

Public funding applications imply a certain order of events in the development process. For instance, you need a detailed concept ready before you apply for most development funds. This can make it hard to spend significant time and resources on the design phase, limiting opportunities for creative or culturally appropriate design.[39] Having flexible pre-development resources can help account for this.

You may have to navigate duplicative requirements. For instance, you may be asked to complete multiple environmental reviews to satisfy the standards of different programs when layering sources. If you identify these overlapping tasks early enough, you may be able to create processes that satisfy multiple requirements at the same time and avoid duplicating effort. You may also need to clarify regulatory frameworks that do not align with tribal context (e.g., some funding sources set their own wage rules, but most tribes are permitted to pay either Davis-Bacon or their own wage rates).[40]

Statewide underwriting standards and financial assumptions may not align with tribal context. For instance, Tribes may adopt a maximum rent policy that sets rents lower than what is allowable by state and federal funding sources (and often these maximum rents are not determined based on a percentage of family incomes, unlike state and federal rent limits).[41] This means you may need to negotiate an exception or account for higher rents in your development project and find ways to offset them with rental assistance or other financial support for families with lower incomes.

Indigenous Design Trade-offs

In Phase I we talked about working with architects to create beautiful and community-informed structures. While there are numerous funding sources that can be used to cover the cost of designers and architects, including IHBG or any source for pre-development costs, there is always a tradeoff. The cost per square foot community space may end up being higher than a site plan with no community space, and lenders or funders will not see a guaranteed revenue for such spaces. Often, working with good design also means working with funders to understand higher costs of design if it’s done in a culturally informed way.

Overall, these difficulties reflect the limited engagement of Tribes in many state-level housing policy and planning discussions. That lack of engagement also limits how much funding flows from statewide housing programs to Native nations.[42] Additional engagement and advocacy between Tribal and state leaders can help create a friendlier environment for Tribal development by redesigning or streamlining processes with Tribes in mind and creating preferences or set asides for Tribal development projects.

Using Tribal Revenue for Housing

Low-Income Housing Tax Credits (LIHTCs) can provide larger amounts of financing than typical allocations from other public finance programs, dramatically increasing the amount of housing construction possible in Tribal areas.[43] In this guide we focus on 9% tax credits.[44] Using LIHTC to expand and accelerate housing construction can also free up Tribes to use other, more flexible resources for different activities like infrastructure development, housing maintenance, or economic development. But making LIHTC work in Native communities requires persistence and creativity.