1-4 Unit Programs | The Preservation Compact

Innovation and Impact

In 2014, a Preservation Compact Working Group helped develop an innovative 1-4 Unit Loan Program, one of the first programs in the country to finance the redevelopment of groups of smaller buildings for affordable rental housing. A complementary building acquisition pool launched soon after.

Background

In 2011 just after the market crash, The Preservation Compact convened a working group to explore strategies to redevelop Cook County’s struggling 1-4 unit rental housing stock. With little to no demand from owner-occupants to purchase the properties, blocks suffered from widespread abandonment and deterioration.

According to Compact partner, the Institute for Housing Studies at DePaul University:

Small 1-4 unit buildings comprise nearly half of Chicago’s rental stock, and
31 percent of all rental units in 2 to 4-unit properties in Cook County’s LMI markets were directly affected by a foreclosure filing from 2007 to 2010.

The working group found that no lender or program provided financing to redevelop groups of 1-4 unit buildings, which prevented responsible investors from achieving scale. Low values and appraisals further complicated access to financing. The working group concluded that better access to capital would expedite revitalization, and directed the Compact and CIC to develop a financing program to redevelop groups of vacant 1-4 unit buildings.

Two Programs Launched

The Compact and CIC responded by implementing two complementary 1-4s initiatives. In total, CIC has utilized $42.1 million to support redevelopment of nearly 1,350 rental units in 1-4 unit buildings.

1-4 Unit Loan Program

In 2014, CIC launched a new $26 million loan program (now $48 million) providing long-term take-out financing for responsible investors redeveloping groups of 1-4 unit buildings.

Innovative Structure

To structure the 1-4 Unit Loan Program, CIC intentionally designed an approach to address the critical issue of low appraisals. CIC recognized underwriting based on cash flow from expected rental income would be a more accurate predictor of a property’s success.

Within that context, CIC created a program structured with two mortgage tiers and an Investor Loan Loss Reserve.

The First Mortgage Tier extends to 60% Loan to Value (LTV) with a 1.5 Debt Coverage Ratio (DCR).
To address concerns of low appraisals, the Second Mortgage Tier extends to 120% LTV or 80% Loan to Cost (LTC), whichever is less, with a 1.25 DCR.
Recognizing the higher risk of the second Mortgage Tier, the MacArthur Foundation social impact capital enabled CIC to take a first loss position in the Second Mortgage Tier. This helped protect the other lender investor in the second tier.
CIC was awarded a $2.2 million grant from the Illinois AG to support the Investor Loan Loss Reserve.
Loans are sold to investors under a CIC 1-4 Unit Note Purchase Agreement.

To date, the program has had no delinquencies or losses. Given its success and projected annual lending volume, CIC increased in the first mortgage tier, nearly doubling the overall funding for the program — from $26 million to $48 million.

Gradually recovering appraised values drove less use of the second mortgage tier than originally anticipated. Specifically, LTVs of up to 120% were anticipated at program inception, but actual loans averaged 85% LTV.

The lending program was originally capitalized by 11 bank investors, a Program-Related Investment by the MacArthur Foundation and a grant from the Illinois Attorney General (AG)’s Foreclosure Settlement Funds.

1-4 Unit Acquisition Pool

In 2014, as a complement to the 1-4 unit loan program, CIC received a $5 million PRO Neighborhoods grant from the JPMorgan Chase Foundation to create a 1-4s collaborative effort with Neighborhood Housing Services of Chicago (NHS) and Chicago Community Loan Fund (CCLF).

Significant Impact

CIC used its $1.5 million portion of the $5 million grant from JPMorgan Chase Foundation to establish a new revolving acquisition pool, which has deployed $5 million to finance the acquisition of over 740 units. The Acquisition Fund allowed CII to buy properties otherwise stuck in limbo and help assemble and sell to responsible investors.

The Acquisition Pool has been a self-supporting and revenue-generating activity that continues to expedite the development process for responsible developers.

By vetting good investors, this program achieves impressive scale and leverage, while also crowding out irresponsible investors who may have otherwise further contributed to blight.

CIC has utilized $42.1 million to support redevelopment of nearly 1,350 rental units in 1-4 unit buildings.

Financing:

605

units

605

units

605

units

$37.1

million

$37.1

million

$37.1

million

Acquisitions:

743

units

743

units

743

units

$17.2

million*

$17.2

million*

$17.2

million*

*$1.5 million of initial capital leveraged
$17.2 million on acquisitions.