If you don’t have time to read the full story:
- Frontier Housing has primarily focused on building new homes since it was established in 1974. But now, with new construction costs being so high, they have been shifting their strategy to focus more on purchasing homes in need of repair, in order to complete the repairs and resell at an affordable price.
- With a $1.3 million loan from Mountain Association, they were able to recapitalize the organization and continue with this shift.
- Frontier Housing and Mountain Association have also collaborated on a unique financing solution to make up some of the difference between the cost of construction and the appraisal value for their clients.
For many families across the country, skyrocketing housing prices are top of mind. There are many factors at play in this housing market squeeze. Many areas have not been building homes fast enough to accommodate for population growth. Construction costs for new homes are higher than ever and supply chains more unpredictable. At the same time, more investors have been snapping up property to capitalize on home and rental prices.
Nonprofit housing groups building affordable housing in Eastern Kentucky are feeling the pains of construction price swings and, in the more populated areas of the region, some markets are also seeing increased competition due to investors.
“We are now seeing historic gaps between the cost to construct and what the home appraises for,” Tom Manning-Beavin, President and CEO of Frontier Housing, said. “For us, our costs may be $210,000 to build a new home, but it may only appraise for around $170,000.”
Frontier Housing has been working since 1974 on affordable housing solutions in Eastern Kentucky, and they currently serve 16 counties. For many of those years, they focused on building new homes. Now, with new construction costs being so high, they have been shifting their strategy to focus more on purchasing homes in need of repair, in order to complete the repairs and resell at an affordable price. However, in looking at purchasing lots or homes in need of repair, particularly in the Boyd and Greenup county areas, they have begun to face increased competition from investors.
With this challenge, they needed more asset liquidity in order to compete as cash buyers amongst these investors. Last year, Tom and his team approached Mountain Association to look at some options for restructuring their past debt in order to clean up their balance sheets and become more attractive to large-scale lenders like PNC Bank.
With a $1.3 million loan from Mountain Association, they were able to recapitalize the organization and pay off several outstanding loans. This allowed them to have better cash flow and do better than just break-even.
Manning-Beavin said this made all the difference to investors like PNC.
After closing on the loan with Mountain Association in June 2021, by the fall of 2021, they were able to get capital from PNC as well as another lender to focus on housing development in Ashland market.
“If we hadn’t been able to work out a solution to lower our current asset-to-liability ratio, that level of investment wouldn’t have worked out,” Manning-Beavin said. “Now we can respond to opportunities in the growing Ashland market faster because we are a cash buyer, rather than having to work out project specific financing each time a lot or home comes available for purchase.”
Frontier Housing and Mountain Association have also collaborated to find further financing solutions in order to make up some of the difference between the cost of construction and the appraisal value. Through the Mountain Association’s How$martKY program, Fleming-Mason Electric Cooperative has offered $5,000 loans to new home owners that are repaid through the utility bill each month.
“This has made these gaps much more workable for our organization and the homeowners,” Manning-Beavin said. “We have some resources and subsidies to offer homeowners, but they are finite. Some homeowners are also not eligible for certain grant programs because their income exceeds the thresholds. This option isn’t income dependent. It can also help address the gap between appraised value and total development cost in an economically just way: the loan doesn’t fall on the borrower if they chose to move out of the house, it stays with the home.”
This is a unique way How$martKY has allowed people to improve their housing situation. The Mountain Association created the program several years ago to address the primary barrier to investment in home improvements: upfront payment. Through the typical use of program, customers pay for energy upgrades each month out of the average savings generated by the upgrade. The program has allowed utilities to put energy efficiency within reach of those who need it the most.
We look forward to our continued partnership with Frontier Housing in support of healthy and affordable housing in Eastern Kentucky.