CASE STUDY: Madison Heights Beats the Clock
By Bendix Anderson
5 min read
Gorman races RAD deadline
In April 2015, Brian Swanton got a message from the U.S. Department of Housing and Urban Development (HUD). Federal officials questioned whether his plan to redevelop public housing in Maricopa County, Ariz., would violate the Fair Housing law by concentrating poverty in a low-income neighborhood.
It was terrible news. The plan for Madison Heights had won two reservations of competitive Low-Income Housing Tax Credits and a place in HUD’s Rental Assistance Demonstration (RAD) program. It would lose its funding if it could not start construction in time to finish by December 2016.
“We had a gun to our heads,” says Swanton, the Arizona and Southwestern U.S. Market President for Gorman & Company, an affordable housing developer partnered with the Maricopa Housing Authority.
A superior location in a poor neighborhood
The plan for Madison Heights replaces three crumbling public housing projects with 143 new apartments near transit, services, shopping and jobs in Avondale, Ariz.
“This is a far superior location,” says Swanton.
The three older public housing communities total 143 units: 77 apartments on the Madison Heights site before renovation, 46 apartments at Norton Circle, also in Avondale, and another 20 apartments at the HM Watson property, in Buckeye. The existing public housing residents have a “right to return” and live at the new community, where the apartments are reserved for very-low income residents whose rents will be subsidized.
“Through RAD we now had the flexibility to lift the subsidy off the three public housing properties and achieve economies of scale at the new Madison Heights,” says Swanton. “We doubled the density of the site.”
Before the renovation, the public housing at Madison Heights spread over the 9.7-acre site in lines of boxy, one-story, cinderblock buildings, looking a little like military housing. The buildings were inefficient. Instead of air conditioners, they relied on “swamp coolers” to fight the heat in the summertime, using a tremendous amount of water in an unsuccessful effort to cool the apartments by evaporation. The heat was so intolerable, ten percent of the residents would typically move out in summer months.
The new apartments are designed to look like townhouses, ornamented with high-end materials like brick and metal shade awnings. The whole community is built to meet the tough Leadership in Energy and Environmental Design standards set by the U.S. Green Building Council, though Gorman does not plan to pay to get the property fully certified. Housing officials in Arizona offer 20 points in the competition for LIHTCs to projects that meet these high standards. That effectively makes green building a requirement.
Madison Heights wins the race for funding
Winning tax credits is very difficult in Arizona, where affordable housing developers regularly apply for three times as many LIHTCs as the Arizona Department of Housing has to reserve.
To make things more difficult, an affordable housing project can only ask for so many LIHTCs per application in Arizona. Gorman had to split the redevelopment of Madison Heights into two phases, with separate applications for two separate reservations. The developer applied for both phases at the same time, and both phases will be managed as one property.
However, because of the RAD program deadline, Gorman needed its financing for Madison Heights to come together, including both reservations of LIHTCs, in the same year. Otherwise, Madison Heights would probably have to give up its commitment of RAD funding and let HUD give the funding to another project.
One of the phases at Madison Heights includes 30 units of supportive housing, which provides services to people at risk of homelessness. This phase applied for tax credits under a special LIHTC set-aside for supportive housing communities – however, another supportive housing project scored higher in the competition. That left both phases to compete in the general competition – winning LIHTC reservations in early 2015.
“We got really lucky,” says Swanton.
Affordable Housing Partners, a subsidiary of Berkshire Hathaway, bought the LIHTCs for Madison Heights, paying in the high 90-cent-range per dollar of tax credit.
Prices for LIHTCs have risen significantly higher from that level. “The same investor bid on more recent projects and they just couldn’t meet the market pricing,” says Swanton. “We are slowly chasing away the economic investors.”
Making the case to HUD
But the developers still had to convince HUD that their plan did not violate Fair Housing Law. The planned redevelopment would increase the density of the public housing community, adding new apartments for low-income residents to a Census tract where the poverty rate is already high.
“HUD’s goal right now is to de-concentrate poverty,” says Swanton.
The developers argued the Madison Heights site is a natural location for a new, more densely developed community. Residents will have access to services, amenities and transportation options.
“It really is a market-rate quality site,” says Swanton. The largest of the three public housing sites, it is conveniently located on a major road with good bus service and easy access to Interstate 10. The site is also next door to the Agua Fresca High School and walking distance to a large grocery store. The other two sites were much more isolated.
After four stressful months, HUD officials agreed to let the plan go forward.
Madison Heights closed its financing for both of its phases September 2015, for a total of $40.4 million.
That includes $25.8 million in LIHTC equity, $1.9 million
in permanent financing, $1 million in gap financing from
the Arizona Department of Housing and $520,000 in HOME funds.
Construction started in October. Madison Heights also includes a 5,000 square foot community center with a computer room and a fitness center. At the old Madison Heights, the operating subsidies supplied by HUD were not enough to pay to bring services to the property.
“It will be nice to be known as one the nicest multifamily communities in the community,” Swanton predicted.
Sources of Funding
Phase I
LIHTC Equity…………………………………………….. $14.2 million
First Mortgage…………………………………………… $1.4 million
ADOH Gap Financing……………………………….. $715,527
HOME Funds…………………………………………….. $320,000
Total………………………………………………………….. $16.7 million
Project Costs
LIHTC Equity…………………………………………….. $11.6 million
First Mortgage…………………………………………… $1.5 million
ADOH Gap Financing……………………………….. $391,022
HOME Funds…………………………………………….. $200,000
Total………………………………………………………….. $13.7 million
