iStock illustration
What’s keeping affordable housing developers up at night? The financial sword of Damocles currently dangling over the regional banking sector.
California-based Silicon Valley Bank was a major lender for technology and life science startup companies, but the bank also played a vital role in community banking well beyond the Bay Area. SVB acquired in 2021 Boston Private Bank and Trust, known for a client base that included affordable housing developers and nonprofits.
The loss of a heavy hitter in the affordable housing development sphere throws further headwind on a sector that already struggles to cross the starting line, as high construction costs and rising interest rates make already difficult-to-finance projects further complicated in an expensive market like Greater Boston.
“There’s just a little anxiety over a key player stepping out of the market at a really, really important moment,” said Leslie Reid, the CEO of Madison Park Development Corp., a nonprofit that did business with SVB on projects including an affordable housing project proposed at 2085 Washington St. in Roxbury.
But it’s not entirely chaos, at least for projects that are close to getting off the ground.
“The federal government is not just honoring deposit accounts with SVB, but also existing contractual obligations, which we take to include finance and equity commitments towards long-term projects,” Reid added. “Existing projects that are already closed or closed that have fully inked contractual agreements. We understand that’s going to be honored for us because we were really concerned about the pipeline.”
Bank Played Major Role in Projects
Community banks play an outsized role in commercial real estate development and especially affordable housing, as the relationship-building that comes with these smaller institutions often lead to more favorable lending terms compared to the institutional giants like Bank of America or JPMorgan Chase & Co.
SVB’s collapse has created uncertainty about the path to groundbreaking for projects still in the early stages of piecing together financing.
Affordable housing developers rely on a combination of private tax credit equity and government subsidies to obtain financing.
“There’s a fear that because of the scale of involvement of SVB and the particular role that it was playing in facilitating relationships that its demise could have a negative effect on the overall lending environment for these projects,” said Kevin Murray, interim executive director of the Massachusetts Association of Community Development Corporations.
Nonprofit developers say they are counting on the region’s banks to fill the void and keep the housing production pipeline flowing following Silicon Valley Bank’s collapse.
There’s speculation that deals in the works at SVB are getting approved on a case-by-case scenario since the crisis, Murray said.
Peter Munkenbeck, a consultant who works with community development corporations on project financing, said many lenders could be eager to step in and fill SVB’s role.
“There’s such great support from the highest levels of government, these deals will pull themselves together,” he said.
Pressure on Project Timing
Like Bank of America and Citizens Bank, Silicon Valley Bank often invested in tax credit equity for affordable housing project along with providing construction loans on the same projects, Munkeneck said.
“Typically, they say we are happy to invest in your project if we can also be your construction lender, which is very good from a developer’s point of view,” he said. “It’s the same party, so that provides a tremendous efficiency.”
But if deals backed by SVB need to be renegotiated, it could cause construction delays for projects that already have broken ground, he said.
“Contractors are cutting checks every week, so there’s real pressure on not to break stride,” Munkenbeck said.
Madison Park’s Reid echoed the concerns about timing and potential project delays if deals have to be renegotiated with new lenders.
“Smaller local banks can see this as an opportunity,” Reid said. “As long as we’re confident that they’re financially sound from an insurance standpoint, they can continue to be viable.”
Banker & Tradesman Associate Editor Steve Adams contributed to this report.
