Reducing the shortage of affordable housing requires the development and preservation of millions of housing units. A 2024 report identified a shortage of 7.3 million affordable rental homes across the U.S. An important component of the construction and preservation of affordable housing is financing, which typically requires Low-Income Housing Tax Credits (LIHTCs) in the mix.
“A decade ago, Freddie Mac created a new streamlined Tax-Exempt Loan (TEL) program designed to work with 4% LIHTCs, which is essentially a cash version of a tax-exempt bond credit enhancement,” says Michael Patterson, a managing director with Greystone who has been involved with the program since its creation. “Bond credit enhancement (BCE) transactions are quite esoteric, and they require additional teams to close the BCE, including Bond Attorneys. The TEL program allows us to streamline the three or four transactions that were in the BCE method and turn the loan into one that can be sold and swapped for cash like any other mortgage.”
Greystone, the first lender to close a Freddie Mac Forward Rate Lock TEL in October 2015 (where Greystone provided the construction loan and Freddie Mac provided the permanent loan), has closed over $1.1 billion in TEL loans over the past decade.
To date, Freddie Mac has provided nearly $12 billion in funding through TEL loans to create or preserve more than 100,000 units of affordable housing in 40 states and D.C. since the inception of the program.
The Appeal of TEL
Simplicity is one of the prime attributes of Freddie Mac’s TEL program, which created a standardized marketplace for investors, Patterson says.
Financing with a TEL program is faster and more efficient, plus transaction costs are lower because of fewer transaction parties, he says.
“The magic there is Freddie Mac leveraging their balance sheet in the near term to swap it for cash at closing and then securitize it later,” says Jeff Englund, executive vice president for Greystone’s multifamily affordable housing finance platform. “Freddie Mac accumulates loans on its balance sheet and later securitizes them via its PC or ML securitization platforms. But our client - the borrower - never sees this because it’s all after their transaction closes.”
TEL loans can be used to support new affordable housing or heavy renovation to preserve affordable units.
Freddie Mac’s capital markets expertise creates the opportunity for borrowers to lock their permanent loan rates early and offer competitive market rates, says Sarah Meads, a managing director with Greystone’s multifamily affordable housing finance platform.
“We couldn’t do that before because of the lack of investors,” she says.
While rates were different a decade ago when the TEL program started, the process is similar, Meads says. For example, a borrower can lock in at the current rate at the beginning of the deal as a forward commitment, then convert that rate into the permanent loan once the building is completed and stabilized.
“This gives the construction lender confidence for a takeout, too,” Meads says. “TEL terms originally were amortized for 30 or 35 years, but in recent years, 40-year terms are becoming more common. Interest-only payments are allowed to create cash flow.”
The 40-year amortization option is critical to allow for more debt to fill the gap in the capital stack that tax credits may not always fill, and is offered on a deal-by-deal basis, Englund says.
Greystone Housing Impact Investors LP (GHI) provides construction lending for affordable housing, most of the time including 4% LIHTCs, with a TEL takeout loan.
“With this financing, you’re creating new affordable housing, not just preserving affordable housing,” Englund says. “And you’re not dependent on a bank for the construction loan since we can provide that financing.”
Alternatives to TEL
There are generally four options for financing affordable housing with 4% LIHTCs, including:
- Private placement loans with large financial institutions that leverage their own balance sheets and are investing in tax exempt bonds. They compete directly with the Agencies and provide their own construction-to-perm product. This market is very rate sensitive, Englund says, with times when private placement offers competitive rates, particularly in Community Reinvestment Act (CRA) markets.
- HUD-insured loans are also an option, but they can be time-consuming and take more than a year to close, Englund says. They also require compliance with Davis Bacon wages rules, but may appeal to developers who already use union labor and are not in a hurry, he says.
- Fannie Mae MTEBs, selling an MBS as collateral for the Tax Exempt Loan. “This product is very competitive right now in terms of rates,” Englund says. However, there are significant transaction costs associated with MTEBs, in part because the structure requires additional parties to close.
To choose the appropriate financing option for Tax Exempt Bond transactions, Greystone completes a side-by-side analysis of all the financing options available to meet the client's needs. Primary factors include timing, leverage, cost, prepayment flexibility and interest rates, Englund says.
TEL Success Stories
TEL loans have helped create housing for the widest band of people – those with household incomes at 60% of area median income, Patterson says. These affordable multifamily developments are dependable cash flow investments that tend to be fully leased more often and longer than other multifamily investments, he says.
Developers who locked in TEL loans a few years ago benefit in today’s higher rate environment.
“There was a large push for TEL Forward loans when rates were really low in 2021 or so, many of which are now converting,” Meads says. “Without those TEL rates locked in, they would be paying 5% to 6% now instead of around 3%.”
Greystone and Freddie Mac’s first TEL loan was a $6.23 million transaction that rehabilitated a 70-unit affordable townhouse development in San Diego. A more recent success story is a $39 million TEL construction-to-permanent loan that closed in 2024 to build 265 units of affordable housing in Tysons Corner, Virginia called Dominion North. The community, located in the Washington, D.C. metro area, is a 100% affordable housing development for residents with household incomes from 30% to 70% of area median income.
“Greystone has been committed to the Affordable Housing market for the past two decades with our affordable platforms, including the Fannie Mae Multifamily Affordable Housing (“MAH”) and Freddie Mac Targeted Affordable Housing (“TAH”) platforms, FHA platform, Greystone Housing Impact (“GHI”) platform and most recently, our Greystone Real Estate Capital (“GREC”) LIHTC syndication platform”, Englund says.
The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.