Great Planning DC – Affordable Dwelling Units may be Affordable but they are not Lendable

What is wrong with this picture?

I should preface the rest of this post by the fact that if you know me personally you know how much I appreciate the opportunity to live and work in our nations capitol.  Unfortunately, appreciating living here comes with its caveats.

I think you can tell where this is going…Lets use the example of DC’s required Affordable Dwelling Units.

To oversimplify an explanation…if you, as a developer, are planning a building targeted to middle to upper income buyers, the city mandates that 30% of the units you are planning to build be targeted and priced as Affordable Dwelling Units for low to moderate income buyers.   (The definition of ADU is unimportant here but if you want to know more go HERE)  As an example, PN Hoffman’s Union Row has ADU’s in the $170,000′s to $185,000′s when their market rate counterparts are in the mid $300,000′s.

Sound too good to be true?

We’ll its not – they are available and ready to be sold to qualified buyers.

So whats the issue?

The issue is that nobody planned ahead.  When DC mandated the ADU’s  nobody thought to create deeds that banks would underwrite for the next buyer.  When ADU’s were first introduced I think we could all agree that, loosely speaking, most working professionals could qualify for a loan.  Most banks had loose underwriting guidelines and many of the challenges we are currently facing today were easily overlooked when the expectation was that the value of the market would keep appreciating.

Thats not the case anymore.

Banks are now combing through buyers files with a fine tooth comb, reading each and every sentence several times.  And who can blame them?

Now, imagine that you represent the underwriting department in a bank and you came across the following paragraph on the deed (which is on the deed of most ADU’s in the city):

“Grantee(s) covenants that it will only transfer the Affordable Unit to a person or family of moderate income as defined by the United States Department of Housing and Urban Development, as amended from time to time, or as otherwise designated by the Agency in writing.”

Did you pick up on it?

A BANK DOES NOT QUALIFY AS AN ADU QUALIFIED OWNER! Therefore a bank can not foreclose and has no basis for recourse on the unit.  The bank would not legally be able to take posession of the property, making their secured loan just the opposite.  Get it?

In the past week I have called at least 14 banks to see if anyone was willing to underwrite a loan for a buyer with this deed restriction in place.  Every single one said no.

Even Washington DC’s own loan program, called DC Bond, will not lend to an ADU unit.

From what I have learned, the only way this can be changed is with an exception from the DC Government, which then has to be approved by the Attorney General – but who knows how long that will take (I’ll update as soon as I know).

We need to take a serious look at how this situation is being handled.  We need a solution.

Does anyone have any recommendations?