On August 3, OHFA received clarification from the State that the term "gap financing" as used in HB 1031x for the Oklahoma Increased Housing Program does not allow for program funds to be granted.
Therefore, the structure of this program has substantially changed from grant funding to loan funding. Grants for down payment/closing cost assistance are still an allowed use and the structure of that proposed program remains unchanged. Please see revised White Paper and Application posted to OHFA's website on August 4 for additional details.
Financing is not the biggest impediment to building in small town Oklahoma, sales price is the biggest risk. As a small developer in rural towns we would only be able to develop projects of 5 units spread across multiple locations. 0% financing is helpful, but benefits are greatly reduced by the costs of applying for and participating in the program. The proposed requirements seem more like mortgage financing not short-term construction financing. Due to my limited capacity to build no more than 5 units the program does not make financial sense for me to participate. I estimate that time spent on the application, as built appraisals (multiple locations), marketing plans, market study (multiple locations), site environmental (multiple locations), OHFA inspector visits, and "other required items" would increase my cost $7500 per home. To build speculation housing in an affordable price range that means:
(5) 1,000 square foot homes x $140 per foot = $700,000 project cost
$700,000 x 90% = $630,000 construction loan
$630,000 x 10% construction loan estimate (1-year) = $63,000 estimated value of 0% construction loan
(5) homes x $7,500 increase in cost due to application/program requirements = $37,500
Estimated net benefit of 0% financing = $25,500
The estimated benefit from the program does not offset the sales price risk. If I was able to sell homes for the max $160 per square foot (very doubtful).
Based on (5) homes Home sales x $160 = $800,000 Cost of construction = $700,000 Closing cost estimate = $58,000 Gross profit $42,000 (6% ROI)
The forgiveness aspect to the program helped mitigate the risk of sales price for small developer/builders in the rural areas of the state without it, I do not see a reason to participate in the program. Projects of (5) homes should still be eligible for loan forgiveness if you want the program to work in rural areas.
This gap funding will be critical toward making tax credit proposals in OKC and Tulsa pencil, as well as the rest of the state. I hope OHFA will better balance urban deals along with rural deals because it is critical to provide affordable workforce housing adjacent to job centers. This is how affordable housing most directly contributes to growing the state's economy, and will help the state target new employers to come to our state by keeping cost of living low.
I would humbly request that OHFA consider 17-20 year terms (so that it plays with Freddie/Fannie's requirement to match senior term + 6 months) with these funds. Feel free to apply an interest rate like 1% or 2%, but the term duration is really critical toward being able to plug long-term financing gaps. That is the most effective way to mitigate the interest rate and cost environment right now and make deals from a couple years ago viable once again.
Thank you for your work and consideration on this opportunity! Much needed for all of OK.
Agree with the comments above about making the loan a 17-20 year term. If this gap financing only has a 2 or 3 year term, it will be very difficult for projects to be able to pay off this debt at such a short time frame. I also agree that you could put a 1% or 2% interest rate on the loan and these payments should be contingent upon available cash flow. If it is a 2 or 3 year term, it should be a construction loan that can be converted to a permanent loan that would meet the 17 year term we are requesting.