Opportunities Abound as Housing Authorities Revitalize, Develop Projects
By Caitlin Jones
13 min read
Tax Credit Advisor, July 2009: Public housing agencies (PHAs) are exerting an expanding force in housing and community development and in improving the lives of low-income persons, in routine and creative new things both alone and in partnership with private developers.
PHAs large to small are undertaking or planning much of this work using billions of extra dollars provided by the American Recovery and Reinvestment Act (ARRA). At the same time, several new federal programs proposed for the U.S. Department of Housing and Urban Development (HUD) hold the promise of new development opportunities. In addition, PHAs may be a way to help save some stalled low-income housing tax credit (LIHTC) projects.
Numbering 3,300 nationwide, PHAs are the cornerstone of affordable housing in the U.S. They own and operate public housing – low-rent apartments serving the poor and extremely low-income – and administer the HUD Section 8 voucher program in their communities. PHAs, though, have expanded beyond these traditional activities, as the result of new HUD programs, powers, and resources.
Under the HOPE VI program, PHAs have redeveloped distressed existing public housing projects into mixed-income residential communities using federal HOPE VI grants and other resources, such as LIHTC equity. They’ve done similar projects under HUD’s “mixed-finance” program, combining federal public housing dollars other than HOPE VI (e.g., capital grants) with other public and private funds. Projects developed under these two programs have typically had a portion of units designated for public housing-eligible residents; LIHTC rental units; and often market-rate apartments. Some have also had for-sale housing units.
In these ventures, some PHAs – usually big-city ones – have acted as their own developer, usually through a for-profit subsidiary. Other PHAs have brought in – partnered with – a for-profit developer. Examples of both development models are plentiful today.
Development Examples
In Alexandria, LA, a city of about 50,000 in Central Louisiana, the Alexandria Housing Authority (AHA) is embarking on a two-phase affordable housing project in its first partnership with a private developer, for-profit Gorman & Company, of Oregon, WI. The city has a “very high” need for additional affordable rental housing, according to Wanda Davis, AHA executive director, and Joseph Lewis, an outside communications consultant.
AHA’s portfolio includes 526 public housing units in multiple small properties, and 73 Section 8 voucher households. AHA once had another 247 public housing units, in a distressed multi-building 1971 development. Using a HOPE VI demolition grant, AHA razed the buildings in 2006, displacing nearly 400 residents, as part of a plan to revitalize the 38-acre site. A new $35 million mixed-income development called Legacy Heights is to be built on the site, with construction starting this quarter. Phase I will provide 40 new public housing units; Phase II, 47 new public housing units, another 116 affordable rental units, and 37 single-family homes. “Legacy Heights represents the largest affordable housing project ever built in Central Louisiana,” says Lewis.
Davis said Legacy Heights is the first project by AHA in partnership with a private developer. “This is all new to me,” she said. “That’s mainly why we needed to bring someone in with expertise.” A subsidiary of AHA will be co-developer on the project with Gorman.
AHA has also relied on a private firm, Baker Tilly Virchow Krause LLP, specifically senior consultant Carlos Guice and principal Terri Preston, to design the financing packages for the two phases. Creativity was forced by disappointing setbacks. The disruption in the LIHTC and municipal bond markets torpedoed the original financing plan. AHA had intended to use tax-exempt financing and 4% housing credits to provide much of the funding, but had to abandon this notion after two commitments from equity providers fell through. “I think it was about 25 or 30 investors that we went to,” said Davis.
Preston said the deal got “very messy” after the original plans fell apart. “So we re-tooled, and then re-tooled again, and got to this strategy,” she explained.
Under the revised packages, anticipated funding sources include regular and special ARRA public housing capital grant funds, a bank construction loan, a loan from Fannie Mae (secured by a pledge of future capital grant funds to be received by AHA), and other monies. Guice said consideration is also being given to using Build America Bonds – a new tool authorized by the Housing and Economic Recovery Act of 2008. “We are looking at those for leveraging,” he noted. Build America Bonds are taxable bonds that can be issued to finance government-owned facilities; issuers get a 35% federal subsidy they can use to buy down the borrowing rate. If used, Guice said AHA would issue the bonds and use the proceeds to help fund the public housing units in Legacy Heights.
In Franklin, TN, the Franklin Housing Authority (FHA) is partnering with Michaels Development Co., a prolific for-profit developer of HOPE VI and LIHTC projects based in Marlton, NJ. FHA has retained Michaels to help prepare a master plan – and potentially to be the developer – for the redevelopment of FHA’s entire current portfolio of 297 public housing units in eight aging properties scattered across 60 acres.
While FHA Executive Director Derwin Jackson said this is the first time FHA has partnered with a private developer, he previously headed the PHA in Meridian, MS, where Michaels partnered with the authority on a HOPE VI project.
“What we’re proposing to do, and want Michaels to assist us with,” says Jackson, “is to put together a master plan on how we can redevelop all of our properties on the 60 acres, and come back with 308 units of public housing, and redevelop the rest as homeownership or workforce or affordable housing.”
Jackson said project funding sources will be identified after completion of the master plan. “We’re hoping to tap into a little bit of everything,” he stated.
ackson said the city of Franklin (pop. 60,000) has enormous need for affordable rental housing. The city is a suburb of Nashville in the second richest county in Tennessee (median family income $65,000-plus), dotted by homes of famous country western singers and producers.
Pennsylvania, Wisconsin Agencies
Examples at the other end are the Philadelphia Housing Authority, the fourth largest PHA in the U.S., and the Housing Authority of the City of Milwaukee (HACM).
Both typically act as their own developer on housing projects. They’ve constructed or renovated public housing, HOPE VI, mixed-finance, LIHTC, and other developments. Philadelphia’s authority has developed more than 27 LIHTC projects; HACM, six tax credit projects, including five HOPE VI jobs.
Bobbi Marsells, Assistant Secretary of HACM, said the authority’s original motivation for acting as developer was to be able to plow back the developer’s fee into projects to allow amenities and features mirroring those in the private sector.
Carl Greene, executive director of the Philadelphia Housing Authority, described several of the authority’s current projects.
One is Warnock Street, a two-phase, 95-unit development in eastern North Philadelphia. It will contain 50 rental units in traditional row houses, and a three-story building with green roof, 45 apartments for seniors, and 33,000 square feet of ground-floor commercial space. The commercial space will be used for a day care center for seniors, health care services, community space, and a new office for the authority’s Section 8 operation. All of the housing units will be both public housing and LIHTC units. Greene said funding sources for the commercial component include public housing capital grant dollars and program income funds.
“Pretty much our practice is that we function as our own developer,” says Greene. “We bring in construction management companies, to manage and mitigate our risk in the construction phase, and we use tax credit compliance professionals to help us with the marketing and lease-up” of LIHTC units and to ensure ongoing compliance.
Philadelphia’s authority has also begun a comprehensive new program to make energy-efficiency improvements to its existing public housing units to cut energy bills. About 2,000 units of a total 14,000 units have been completed so far under the Maintenance WAVE initiative (Weatherization and Value Enhancement). Greene said the authority has teams working seven days a week making improvements such as caulking around windows and doors, wrapping hot water tanks, installing compact fluorescent light bulbs, and replacing light fixtures. “Weatherization is a hot topic,” he notes, “and we want to be at the forefront of the emerging topics. That’s why we’re engaging in this in a major way.”
In Milwaukee, HACM is developing the next phase of a project that will produce single-family homes on 23 scattered sites, intended for sale to households at or below 60% of area median income. Project funding sources include public housing capital grants (providing construction financing), a HOPE VI grant, and LIHTCs.
Marsells said HACM is also using tax credits to construct Olga Village – 37 public housing units for seniors – in partnership with a nonprofit organization. “We’re building it on the campus of the nonprofit,” she said. “They own the land and they’ve allowed us to develop on it. They also have a very enriched services program, so they’ll be providing all of the services for the residents.” Marsells said the project will be on the same campus as an existing HUD Section 202 elderly housing development. “We’re looking at the possibility of putting a community space between the two buildings and connecting them,” she noted.
Steve Falek, Associate Director of HACM, said the authority is also partnering with a private developer to tear down one of its existing obsolete high-rise buildings and replace it with a new residential care assistance community (i.e. assisted living for low-income households). Falek said HACM chose to partner with this developer because of its experience in developing these kinds of facilities.
Various Opportunities
Opportunities for PHAs and private developers to develop and partner are substantial, varied, and growing.
Pittsburgh-based Macy Kisilinsky, Director/Public Housing of LIHTC syndicator National Equity Fund, Inc., estimates only 7% of all PHAs have ever partnered with a private housing developer.
Sunia Zaterman, executive director of the Council of Large Public Housing Authorities, whose 60 or so members are the largest PHAs in the U.S., says PHAs nationwide have aggregate public housing capital needs of roughly $32 billion – much more that the federal government can ever fund. “We have an under-funded operating side, and a severely under-funded capital side,” she notes.
She said an area of consensus among PHAs is that it’s “critical” for them “to bring new partners in” to help them address needs in their public housing communities. Two key needs are to help PHAs: address the needs of their older public housing residents so that they can “age in place,” such as building alterations and services (35% of all public housing tenants are seniors); and, “green” their public housing properties to make them more energy-efficient.
ARRA provided an extra $3 billion in formula public housing capital grants to all PHAs to make capital improvements, and another $1 billion in competitive public housing grants in a funding round now underway. The latter dollars can be used by PHAs for a wide variety of purposes, including to rehabilitate or make energy retrofits to public housing projects.
San Francisco consultant Eric Olson, of CSG Advisors, Inc., said there may be opportunities for private developers to work with PHAs on projects funded by the $4 billion in ARRA public housing capital grant dollars because of tight expenditure and obligation deadlines for the monies. He indicated some PHAs might, for example, turn to third-party developers to help “ramp up” their construction and rehab activities.
Sources said possible ways that private developers can partner with PHAs on housing projects include to serve as the sole or co-developer, as project manager, as contractor, or to provide property management.
Traits that make for-profit developers attractive to PHAs as partners include familiarity with and experience in securing private and public sources of funding (e.g., LIHTCs, bond financing, bank loans, soft debt); and development and property management expertise. On the flip side, PHAs can offer funds (e.g., public housing capital grants, operating subsidies), existing properties, vacant or under-utilized land, and relationships with public officials.
Several sources noted PHAs may provide a possible solution today to developers with proposed LIHTC deals that are stalled because of no or insufficient tax credit equity. For instance, a housing authority could infuse some of its capital dollars into a project to plug a funding cap in the project, in exchange for having a set number of project units designated as public housing units. Sources said the addition of these funds might also make stalled projects more competitive in seeking federal Tax Credit Assistance Program (TCAP) funds from state credit allocating agencies.
Proposed New Programs
Developer Bob Greer, of Michaels Development Co., also sees potential future opportunities for private developers under some of the new federal programs proposed by the Obama Administration in its FY 2010 budget request for HUD. These programs will require enactment of legislation to establish.
One program is the proposed Sustainable Communities Initiative, which would offer $150 million in planning grants that cities or housing authorities could use to better plan their growth and to more effectively coordinate transportation and housing development. “That planning is going to lead to specific proposals that the private development industry can participate in with housing authorities,” said Greer. Of the $150 million in grants, $100 million would be earmarked for planning for transportation and housing; $40 million to encourage mixed-use development districts.
A second proposed program is Choice Neighborhoods, with initial funding of $200 million. This would build on HOPE VI, but permit funding for a wider range of activities that contribute to healthy and sustainable neighborhoods, including affordable housing, economic development, etc. In addition, eligible applicants would be broader than just PHAs, including for-profit developers, cities, and others.
New details of the proposed new HUD programs have been released. (Go to http:// www.hud. gov/offices/cfo/reports/2010/cjs/pih2010.pdf, p. 0-1 for Choice Neighborhoods; http://www.hud.gov/offices/cfo/ reports/2010/cjs/ pih2010.pdf, p. Q-12 for Sustainable Communities.)
Developer Tom Capp, of Gorman & Company, a LIHTC and historic tax credit developer, says his firm in the past two years has diversified beyond just working “in tandem” with housing authorities and local governments, to also begin partnering directly with PHAs, such as being chosen to be their development partner.
One example is the Alexandria, LA project. Another is in Rockford, IL, where Gorman has been picked by the housing authority to design and redevelop a public housing project into a mixed-finance residential community. Gorman will also stay on to help the authority plan its target HOPE VI areas, and to help the city coordinate the use of new federal Neighborhood Stabilization Program dollars.
Capp indicated that his firm’s move to partner directly with PHAs ties into his belief that more and more of the financial resources provided for affordable housing over the next 5 to 10 years “will find its way through public housing authorities.”
Capp believes “a range of relationships” will evolve between housing authorities and private developers. He also contends housing developers, to be successful, will need to have “broader tools and broader skill sets” to offer housing authorities, such as planning expertise. “Firms that have experience in working in larger contexts – bigger than their own project, doing multiple projects in a revitalization area – are going to be better positioned to work with housing authorities as their development partner,” says Capp.
