Preserving Affordable Housing: Use the Full Range of Tools and Opportunities
By A. J. Johnson & Caitlin Jones
7 min read
Tax Credit Advisor, March 2009: Florida developer Debra Koehler is using her past experience in building affordable apartments and renovating office towers to undertake a housing preservation niche – the rehabilitation and preservation of urban high-rise apartment buildings as affordable housing.
The Columbian, her current project in downtown St. Petersburg, illustrates the varied opportunities available to developers for preservation deals using low-income housing tax credits: from specialized niches, federal legislation, and other factors.
Built in 1971 under the Section 236 program of the U.S. Department of Housing and Urban Development (HUD), The Colombian is an 11-story apartment building with 188 affordable apartments for senior and disabled residents.
“We’re basically going to do a substantial rehab – over $34,000 a unit,” says Koehler. She noted the projected total development cost of about $107,000 per unit compares to over $200,000 to build a new downtown high-rise apartment tower in Pinellas County.
Koehler, a founder of Sage Partners LLC, said her firm entered the picture after the owner indicated he planned to let the current HUD Section 8 contract expire in September 2009, while the city wanted to find a way to preserve the affordable housing.
HUD has approved a 20-year renewal of the Section 8 contract for 70% of the units, the same share as before. All but one of the funding pieces for the $20 million development – the tax credit equity – are in place. Koehler has a letter of intent from a syndicator and is scheduled to close March 9th.
Other funding sources include a decoupled interest reduction payments stream from the Section 236 mortgage, soft second mortgage under Florida’s SAIL program, local and state housing trust fund dollars, and supplemental state funds. Tax-exempt bonds issued by the county housing authority and placed with Bank of America will fund the construction and permanent loans.
Challenging Environment
Admittedly, it’s a tough today to pull off any new tax credit project, including preservation deals. Equity is in short supply, construction loans are harder to find, underwriting is tighter, and the economy has soured in many markets. But there continue to be some diamonds in the dirt.
“There are fewer opportunities out there,” for multifamily preservation deals, says Michael Bodaken, president of the National Housing Trust, a Washington, DC-based nonprofit and developer of preservation deals, particularly of HUD-assisted properties. “They’re not plentiful, and they’re somewhat specific to markets.”
He adds, “The opportunities we’re seeing are properties with certain cash flow that you can assume and hold onto, where the seller is willing to take a takeback note, and over time take the seller out with credits, when the credits come back.”
Robert Sheppard, an executive with the Tax Credit Group of Marcus & Millichap, a broker of LIHTC projects, typically between their 10th and 15th year, indicated there are some opportunities in certain markets to acquire and rehab older tax credit properties with new tax credits. “A well-located tax credit deal, in a good market, and most likely [where] that market has some sort of soft funds available to do the deal so that you can cover the gap in the stack, as long as you’ve got a market like that, you can probably get a deal done,” he said.
Bodaken also pointed out that state housing credit agencies (HCAs) in awarding 9% housing credits continue “to have very strong preferences in their QAP and in their soft money for preservation.”
For example, the Massachusetts Department of Housing and Community Development (DHCD) in its draft 2009 qualified allocation plan proposes to reserve at least 40% of the credits available in its 2009 application round for preservation projects. In New York State, the Division of Housing and Community Renewal has earmarked up to $3.3 million of its $25 million in available 2009 federal housing credits for preservation deals.
Economic Legislation
Near-term opportunities for preservation deals are likely from the new economic stimulus law (see Stimulus Bill Provides Some New Bucks for Affordable Rental Housing).
The act provides an extra $2.25 billion in federal HOME program funds for allocation to state HCAs to provide gap financing to stalled LIHTC projects. While the mechanics and timetable for this initiative have yet to be determined, the infusion of these funds could help many challenged acquisition/ rehab projects move forward to closing and development.
The law also allows state HCAs to exchange a portion of their unused housing credit authority for cash grants, and use these monies to provide financial assistance to LIHTC deals unable to secure equity.
Bodaken noted the act also provides $2 billion for full funding of project-based Section 8 rental assistance contracts, and $4.25 billion to rehabilitate and make energy-efficiency improvements to public housing properties and to certain HUD-assisted multifamily properties. “There will be funding out there that can leverage investor money,” he said, noting the new HUD funds may make LIHTC investors more comfortable in investing in some deals.
Other Possibilities
Additional possibilities for developers are with funding from HUD’s new Neighborhood Stabilization Program (NSP). (For details, see HUD Launches New Neighborhood Stabilization Program, TCA November 2008)
HUD has allocated an initial $3.92 billion among 308 state, regional, and local grantees. The funds are to be used to help purchase, renovate, and recycle foreclosed, vacant, and abandoned properties – including homes and multifamily housing – located in designated neighborhoods characterized by high foreclosure rates. Each grantee had to submit a plan to HUD on how it proposes to use the funds (e.g., eligible uses and projects). HUD has been approving these plans, and grantees are starting to issue notices to make the funds available and solicit proposals from developers.
In Georgia, for example, the state Department of Community Affairs (DCA) on 2/18/09 made available $19.6 million in NSP funds for use with three programs including its LIHTC program. DCA official Laurel Hart said developers will be able to find out whether they will receive available NSP or HOME funds prior to the tax credit application deadline. Hart said that there are a number of foreclosed conventional properties and failed condo developments in the state, particularly in the Atlanta metro area and DeKalb County.
Matt Perrenod, of the nonprofit Housing Partnership Network, says 25% of NSP funds must be used to benefit households below 50% of area median income. “In almost every case, people are looking at that as being rental housing,” he said. “People are looking at rental preservation strategies for foreclosed rental properties.”
The economic stimulus law provides another $2 billion for the NSP program.
Additional opportunities are possible from new federal housing preservation legislation as well. House Financial Services Committee Chairman Barney Frank (D-MA) has cited passage of a housing preservation bill as one of his panel’s top priorities this year, and proposed legislation has been drafted. This could possibly be folded into a broader housing or foreclosure bill Congress is expected to write soon.
New Team at HUD
Washington, DC attorney Kristin Neun, a partner in the law firm of Hessel, Aluise and Neun, P.C., which works on numerous preservation deals, also hopes that the Obama Administration and new team at HUD under Secretary Shaun Donovan will reverse recent policy changes by the Department that discourage preservation deals, particularly transfers of properties by nonprofit owners to tax credit partnerships for new acquisition/ rehab transactions. She expressed hope for “a renewed look at a number of policies that have really impeded the ability to do preservation deals.”
