Enter Mr. Fix-It: Dominium Moves Quickly to Turn Around Troubled Properties
By Glenn Petherick
6 min read
When it comes to turning around a troubled low-income housing tax credit property, Minneapolis-based Dominium is a Mr. Fix-It: it gets to work early and taps multiple funding sources to begin tackling the remedial work even before being formally admitted to the restructured limited partnership as the replacement general partner.
Dominium begins work immediately after taking over management of a property in order to retain the remaining residents and to restore the development to peak condition more quickly so that site managers can resume renting vacant units.
These deals account for roughly 60% of the more than 200 multifamily properties owned and operated by Dominium, a major developer, owner, and manager of affordable and market-rate apartment properties operating in 24 states.
“Through 2012 we’ve done these workouts on 167 projects with 17,892 units,” says Dominium executive Mark Sween. All have had housing tax credits; some have also has project-based Section 8 rent subsidies. The takeovers have all occurred during the 15-year tax credit compliance period.
“We’ve come into a lot of properties in mid-stream, things we didn’t develop,” says Sween. “It’s not working, and something needs to happen and change.”
Dominium is usually invited in by the project’s tax credit investor or lender. “We come up with a plan as to how the real estate might be fixed,” says Sween. As part of an agreement, Dominium typically provides tax credit and operating deficit guarantees to the investor for the remainder of the compliance period. In exchange, Dominium takes over property management and is designated as the new general partner in the restructured limited partnership to replace the original developer. However, it usually takes many months – sometimes even longer than a year – before Dominium is officially admitted as the replacement GP, says Sween. Much of the reason for the delay is due to the various consents and approvals that have to be obtained from different parties.
The problems that Dominium finds at a property – financial, physical, and sometimes security – are usually the result of poor property management by the prior operator. Common signs are numerous vacant units often in substandard condition, deferred property maintenance, unpaid bills, unfilled work orders, and unhappy residents.
“In most cases the residents have been in a situation for a long time where they have not been treated well,” says Sween. “Because there wasn’t the money, things didn’t get repaired. There’s a work order problem. We see situations where credit standards go down because the operator is desperate for money. Now all of a sudden you’re letting in people who you really shouldn’t be letting in. We come into properties that have security problems. At one property, the first day that we took over we found out that the pizza delivery guys would not deliver pizza because of the danger.”
Remedial Steps
“When we come into a property,” Sween says, “the first thing to be done is to improve the housing situation for the residents. It has to be a place where people want to live.”
The first task of Dominium’s site staff, according to Sween, is “to get connected to the residents and the issues they have.” In the first few days site staff typically holds an open house for residents and slip a card under their apartment door to introduce Dominium as the new property manager and offer them $10 off next month’s rent if they visit the management office. This visit enables Dominium to update its rent rolls and correct any inaccuracies, and to identify problems and complaints that need to be addressed. “We ask residents to come in with every open work order and everything that is wrong with their apartment,” says Sween. “And we tell them that within a specific number of days we’ll get this done. We want to put ourselves in a position where we hold ourselves accountable; that when we say we will do something, we do it. We want to show the residents who we hope will stay that this is going to be a good place; don’t leave yet.”
The scope of work required varies by property. Common tasks include fixing up vacant units so that they are marketable again, addressing curb appeal issues, landscaping, and paying any delinquent bills.
Dominium has two specialist employees it relocates temporarily to troubled properties to contract out and oversee the required repairs and improvements. This frees on-site staff from this extra burden.
Dominium doesn’t resume renting vacant units until after the property has been fully restored and stabilized – typically four months after the company has taken over management. During the interim, site staff renews the expiring leases of current residents and evict undesirable tenants if they commit lease violations.
“Our job is to make a good, thriving community with people who are respectful of their neighbors and the property and who pay their rent,” says Sween. “If people don’t do those things they can’t live there. We’re not going to fix up the property and have them destroy it for other people.”
Repair Costs, Funding Sources
The cost of remedial work varies by property. “Every deal is different, but oftentimes we need to do a fair amount of capital improvements,” says Sween. He noted the company has spent as much as $10,000 a unit.
To be able to begin fixing up a property immediately after taking over management, prior to being admitted as the replacement GP, Dominium draws on several sources to fund repairs and improvements, catch up on unpaid bills, and cover other expenses. “We basically have a continuum of money,” says Sween.
The first source tapped is project-specific recourse loans – generally two to four years in term – that Dominium obtains from various banks. In addition, Dominium usually spends some of its own money. A third source used, as needed, is a $15 million unsecured line of credit with one bank that Dominium can draw on.
According to Sween, Dominium taps a fourth funding source after the property has been fully restored and stabilized to repay the funds that the company has already expended to fix up the development. This may be a nonrecourse Fannie Mae or Freddie Mac loan.
“To be able to implement our strategy,” says Sween, “you need to have two things. The first is to be able to operate this real estate, know what you’re doing, and not be surprised. The second is that you’ve got to have money available to come in and fix the property when it is in a state that is not underwritable by a normal lender.”
