Niche Housing Sponsors Forge a New Path
By Caitlin Jones
10 min read
Tax Credit Advisor, March 2010: From New York to California and points in between, sponsors are engaging in niche construction and rehabilitation of affordable housing, either by producing specialized units or using non-traditional funding sources. Much of this output is the result of the American Recovery and Reinvestment Act of 2009 (ARRA).
In Chicago and San Diego, for example, the local housing authority is making use of Build America Bonds (BABs) for housing purposes.
Authorized by ARRA, direct payment BABs are taxable obligations that can be issued by states, localities, and public bodies to finance eligible projects (e.g., schools, hospitals, municipal buildings) that are owned by a governmental or public body. Issuers can achieve a very low borrowing rate because they receive a federal subsidy equal to 35% of the interest cost on the bonds. The deadline for issuing BABs is 12/31/10; the Obama Administration has proposed that the program be made permanent.
BABs were first issued in April 2009 and now account for a large share of total municipal bond volume. Few of these issues have been for housing, though some public housing authorities have issued or are planning to issue BABs.
By late February, the Chicago Housing Authority (CHA) expects to close the sale of $25 million in BABs to fund a contract under which two private companies will complete the last 10% of energy and water efficiency improvements at about 22 senior and family CHA rental properties containing 4,800 units. CHA has funded work completed thus far with public housing capital dollars and other resources.
The improvements include installing new, more efficient boilers, water heaters, furnaces, faucets, showerheads, and other measures.
“We’re going to close these bonds with a rate of about 3.76%” said CHA Chief Financial Officer Eli Rosario.
San Diego Plan
The San Diego Housing Commission (SDHC) will use the proceeds from a forthcoming $60 million BAB issue to help finance the construction or acquisition and renovation of affordable rental units that the Commission will own and lease to low-income tenants. SDHC will also use the future federal interest subsidies received for the bonds to produce additional housing.
The new units will defy traditional labels. SDHC President & CEO Rick Gentry says they will not be public housing units, low-income housing tax credit units, or Section 8 units – just “affordable housing units.” Federal tax credits can’t be used for BAB-funded facilities because they must be publicly-owned.
These new units will represent part of a broader plan by the Commission to produce at least 350 additional rental housing units.
Washington, D.C. attorney R. Wade Norris, a partner in the law firm of Eichner & Norris PLLC, says BABs allow housing authorities “to get what is effectively very low-rate debt financing to finance their acquisition, construction, or rehabilitation of affordable housing facilities.”
Norris, whose firm has helped structure San Diego’s BAB issue and has closed several BAB issues for hospitals, estimated that after factoring in the federal subsidy an issuer can achieve a fixed, all-in borrowing cost from a BAB issue of around 4.92%. This rate estimate assumes that the bonds are sold on a “drawdown” basis and the bonds are credit enhanced by FHA mortgage insurance and a Ginnie Mae guarantee. In a drawdown sale, the bond proceeds are disbursed in stages during construction rather than released all upfront. This enables an issuer/borrower to both achieve a low borrowing rate and avoid costly negative arbitrage.
Norris said there’s a possible role for private developers and contractors in BAB-funded projects. For instance, they could collect fees for developing or constructing the facility, for acting as construction manager, or for managing the completed facility.
HUD Retrofit Grant
The Jonathan Rose Companies, a major New York-based developer, is using a $3.6 million federal grant to help finance improvements at its West 135th Street Apartments, a 10-building, 98-unit Section 8 property in Harlem, N.Y.
The grant was the first awarded by HUD under its new Green Retrofit Program for Multifamily Housing.
Improvements will include the installation of 10 high-efficiency boilers to replace 32 old boilers; more efficient lighting systems, water fixtures, windows, and doors; EnergyStar appliances; use of non-toxic paint and environment-friendly materials; and rooftop solar photovoltaic panels to generate power for common areas. The improvements are expected to cut utility costs by 25%.
Nathan Taft, Director of Acquisitions, said Jonathan Rose Companies decided to apply for Green Retrofit Program funding as part of its overall strategy to green existing buildings. “We think it’s a good environmental proposition. But we also think it’s a prudent economic proposition.” He added, “In the affordable housing arena, greening and making these projects more energy efficient saves the government money, saves tenants money, and improves tenant quality of life.”
Analyst Clayton McPhail said the HUD funds will cover about half the renovation costs. The rest will come from other sources, including city subsidies, a state solar grant, and a federal grant received in lieu of claiming the federal solar tax credit.
Neighborhood Stabilization Funds
The Community Builders (TCB), a major Boston-based nonprofit developer, will use $78 million in federal Neighborhood Stabilization Program (NSP) funds to develop affordable multifamily rental housing units in the District of Columbia and eight states: Illinois, Indiana, Massachusetts, New York, North Carolina, Ohio, Pennsylvania, and Virginia.
“We’ve committed to HUD in the neighborhood of 13,000 units, [but] we’d like to produce more,” says Patrick Clancy, TCB’s president and CEO.
The NSP program was established in 2008 with $3.9 billion in initial funding (NSP1); ARRA authorized another $2 billion (NSP2) for competitive awards. Under NSP, federal grants are provided to states, localities, and other eligible recipients to help revitalize distressed neighborhoods plagued by high rates of home foreclosures or abandoned, vacant, or blighted structures. Funds must benefit households at or below 120% of the area median income (AMI); one-fourth of each grant must benefit households at or below 50% of AMI. NSP2 grant awards were announced recently.
Eligible uses of NSP funds include the acquisition and renovation of foreclosed, vacant, or abandoned homes for resale or rental; new construction; and down payment assistance for home buyers. Also eligible are acquisition, renovation, or construction of rental housing.
Most NSP recipients plan to use their funds for single-family housing activities. But a number are targeting multifamily rental housing.
TCB views the use of NSP funds for multifamily rental housing as another way to help stabilize neighborhoods hit by high home foreclosures and reductions in home values, which have eroded confidence among would-be home buyers. “In many of those settings,” Clancy says, “significant revitalization activity that may be multifamily rental can help to spur that renewal of confidence.”
TCB will use the $78 billion in NSP2 dollars to develop multifamily rental projects in the eight target states and D.C. It expects to finish identifying actual projects for two planned rounds by early April. “Our objective is to have these dollars committed to deals that start construction before the end of 2010,” says Clancy.
“There will be diverse multifamily efforts in different places. In some places they will all be new construction in a neighborhood that has been impacted by foreclosures. In others if could be mod rehab; more preservation-type activities; or substantial rehab of distressed multifamily [such as] the conversion of a failed condo project.”
Quick Start Approach
A key element of TCB’s HUD-approved NSP plan is an approach called Quick Start. Under this, TCB will use a chunk of NSP funds to start construction of a project, and secure all of the other funding sources during construction. If successful in doing so, TCB will then recapture many of the NSP dollars from one project and roll them into another. This will enable TCB to produce more units and meet the NSP program’s tight deadlines.
For-profit developer Kyle Bach, president and CEO of Mecca Companies, Inc., Mishawaka, Ind., is also reaping business from the NSP program. The for-profit firm, once an LIHTC development consultant, changed its business model last August to assist communities in applying for NSP funds and executing their plans. This includes identifying sites, developing the housing, and managing construction – all for fees that Bach says average 14-16 percent of the NSP grant amount.
Mecca Companies is now working with the following communities that received NSP1 funds:
- Kokomo, Ind. ($2.2 million in NSP funds). Mecca Companies has acquired and is rehabbing 15 to 20 scattered foreclosed homes that will ultimately be sold to income-eligible home buyers. Some NSP dollars will be used for down payment assistance to attract buyers.
- Quincy, Ill. ($2.1 million). Bach’s firm is substantially rehabilitating 12 to 14 historic buildings, mostly historic homes, including through several partnerships. One is with the nonprofit Center for Independent Living to renovate a duplex for the group’s clients, disabled individuals. A second is with a YWCA to renovate a duplex to house domestic abuse victims. The remaining homes will be sold to income-eligible buyers. Mecca is also building, in conjunction with a local hospital, a new fourplex for low-income renters.
- Chicago Heights, Ill. ($1.6 million). Some 9 to 12 new homes will be constructed on one or two city-owned blocks. Rather than being sold, as originally planned, these homes may be rented to qualified households on a lease-purchase basis.
Other Activities
Bethesda, Md. CPA Mark Einstein, of Reznick Group, has some unusual projects among his pending deals.
A mixed-use project in Missouri will involve the rehabilitation of an historic building into a hotel with market-rate apartments above. A HUD Section 221(d)(4) loan will help finance the apartment component. Equity from federal historic and new markets tax credits will help fund the hotel. “Because I’m able to get a high-enough HUD loan,” says Einstein, “I can take the tax credit equity that would have applied to the residential and apply it to the hotel. So the hotel has no debt.”
The developer is providing some capital that will be used for a soft leveraged loan for the hotel. In addition, the municipality is providing millions in funding.
In a second case, a group of private individuals is providing a $50 million bridge loan for a new mixed-used project (apartments, office space, convention space) in a small Ohio town. The loan will be repaid once the tax credit equity is received – from federal and state historic tax credits, NMTCs, and possibly also LIHTCs.
Einstein said this is his first project where a group of individuals is providing a bridge loan. The developer took this route because “there weren’t any options,” he noted. “The developer spent the last year looking for a way to bridge the tax credits, and found someone who understood enough and is willing to take what is effectively a completion risk.”
From private bridge loans to BABs to NSP dollars, developers and housing agencies are employing non-traditional funding sources and creative strategies to produce affordable and market-rate housing that addresses local needs. All of which is critically important in a challenging environment.
