New Capital Sources Filling Gaps in Affordable Housing Finance
AHIC Spring Meeting | Scottsdale, AZ | April 21-23, 2026
Financing gaps in affordable housing are widening, and the market is turning to new structures to fill them. A panel at the AHIC Spring Meeting in Scottsdale examined three tools gaining traction in the capital stack: ground lease capital, bond securitization B-pieces, and subordinated tax-exempt bonds.
The session was moderated by Bob Simpson, President of Multifamily Impact Strategies, with speakers Steve Wylder, Executive Vice President and Head of Investments at Safehold; Mike Hemmens, Managing Director at Citi Community Capital; and John Varones, Founder and CEO of Systima Capital Management.
Ground Lease Capital as a Gap Funding Source
Safehold has deployed over $7 billion in ground lease capital across its broader business, the majority in market-rate deals, and has closed 21 ground leases specifically on ground-up 4% LIHTC transactions over the past two and a half years. (Safehold Presentation)
The structure works as follows: Safehold acquires the fee interest in the land and enters into a 99-year lease with the developer, paying proceeds at a premium to underlying land costs. The lease rate today is in the low 5% range, well below the debt constant on conventional permanent debt, which is closer to 7%.
Because Safehold's capital comes in at that lower cost and developers receive proceeds above land value, transactions using the ground lease typically see a 10% to 20% pickup in combined proceeds compared to a conventional capital structure.
The lease is a hard-pay obligation that sits above the line as an operating expense, reducing NOI available to service permanent debt, but the pricing differential more than compensates in most cases. Safehold has transacted with US Bank, Bank of America, Wells Fargo, PNC, Raymond James, Aegon, and Redstone. JP Morgan and Freddie Mac are in the process of closing their first transactions with the company.
Safehold has made several structural updates in response to investor and lender feedback. The first potential CPI reset has been pushed from year 11 to year 19, making the rent obligation fully predictable throughout the compliance period with only fixed 2% annual increases.
New provisions address restrictions on fee interest transfers, a non-monetary standstill during compliance, and a monetary standstill that causes unpaid rent to accrue rather than triggering lease termination in a deep downside scenario. A fifth provision, not yet closed in any transaction, would allow Safehold to subordinate up to 15% of its rent behind senior debt service under certain sizing conditions.
Safehold sets rent at roughly one-third of underwritten NOI. At end of compliance, the ground rent becomes embedded in operating expenses, supporting a sale, refinancing, or recapitalization. The fee interest is encumbered by the regulatory agreement, so affordability restrictions remain in place.
Volume has been concentrated in California, but the company has recently closed its first Texas transaction and is active in Florida and Utah.
Securitization and the B-Piece Market
Systema Capital Management pools first-lien loans on 4% LIHTC, tax-exempt bond-financed properties and accesses the securitization market to fund those pools, retaining the B-piece, or first-loss position. (Systima Presentation)
A typical pool is sized at $250 to $300 million, with average individual loan sizes around $25 to $30 million. Freddie Mac's ML series created the initial boom in affordable housing securitizations, allowing the top 85% to 90% of a pool to be guaranteed and rated AAA and sold into the tax-exempt bond market, while the sponsor retains the unguaranteed, unrated B-piece.
A significant recent development is that rating agencies, particularly S&P, now allow private-label securitizations to achieve investment-grade ratings on 90% to 97.5% of a pool without a Freddie Mac guarantee. This has improved economics for B-piece buyers and is driving increased private-label issuance. Private-label volume this year is on track to roughly double compared to the prior year.
As the directing certificate holder, the B-piece buyer retains significant control rights after securitization, including the ability to remove a borrower or change a property manager in default. As more investors compete for this paper in the secondary market, permanent debt pricing improves for borrowers and pricing volatility decreases over time.
Subordinated Tax-Exempt Bonds as a Gap Filler
Subordinated tax-exempt bonds have existed for years but historically were placed with individual investors at current-pay sizing. A shift is underway toward institutional buyers and accrual structures.
In 2025, Citibank partnered with Jefferies to publicly underwrite and sell subordinate tax-exempt bonds on four new construction transactions, all in California. These bonds were raised and funded at closing, with interest through construction and lease-up fully funded at that time. Post-conversion, the bonds are structured as cashflow notes, subordinated to the senior lender under a standard subordination agreement and foreclosable.
The key difference from older structures is that these bonds are sized as accrual instruments. Only approximately one-quarter of interest is paid current, with the remainder accruing. Modeling assumptions typically show interest becoming fully current roughly nine to ten years after stabilization. The bonds are sized at roughly one-third of the permanent loan; where the permanent loan is approximately $40 million, the subordinate bond has been approximately $15 million.
Investors focus heavily on exit value at year 15, underwriting back-end residual value and rent growth. Approximately 15 to 20 additional projects using this structure are currently in process and expected to close in the near term. While California dominates, the structure is active in Colorado and other states as well.