A Leading Urban Developer Discusses His Firm’s Development of Mixed-Income Housing, Future Trends

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Tax Credit Advisor, December 2009:

Excerpts from an Interview with Kevin J. McCormack, President, McCormack Baron Salazar

McCormack Baron Salazar, based in St. Louis, Mo., is a pioneer, major for-profit developer specializing in the creation of economically integrated urban neighborhoods. Since 1973 it has developed 124 projects with more than 13,895 housing units in 33 cities, including 19 HOPE VI communities. These developments have included a mix of public housing, low-income housing tax credit, and market rate rental units, as well as some for-sale units.

What has McCormack Baron achieved to date in development of mixed-income housing communities?

We’ve been in the development business since the late 1970s, starting out doing Section 8 housing. In the early “˜80s, we did our first mixed-income developments, without really thinking, are these mixed-income? We were typically redeveloping, revitalizing, blighted urban neighborhoods, and mayors and communities wanted new housing. But they didn’t want someone to come in and build 300, 400, 500 units in a neighborhood that would all be subsidized and assisted. So we came up with the concept – we’ll have different income tiers, including some Section 8. Then the low-income housing tax credit program came out. So [in a development] you might have had some Section 8s, some tax credits, and market-rate. We gradually developed that model through the early 1990s. We started out with HUD on the public housing side, with the Clinton Administration and Henry Cisneros in “˜94, talking about what do we do about these large old rundown public housing sites in the major cities. The concept was not to replace that with 100 percent extremely low or very-low income [households], but rather come back with a mixed-income environment to create a more viable neighborhood. Part of that was taking the federal program [URD, later to become HOPE VI], with its big slug of dollars, to clean up and reformulate some of problems that existed in major cities. And use that as a carrot to attract in city and state participation, saying that, if we can up, as a city and state, with low-income housing tax credits, with funds for public improvements, with assistance for workforce type housing, we can effectively compete for a large federal grant to deal with this public housing site.

Your company develops mixed-finance as well as HOPE VI projects, correct?

In 1996, we closed on what was in essence the first HOPE VI project, Centennial Village in Atlanta, which we did with Integral Partnership of Atlanta and the Atlanta Housing Authority. That same spring, we closed on a mixed-finance public housing site in St. Louis, Murphy Park, which we did with the St. Louis Housing Authority. Those funds were public housing capital dollars.

Do you usually have another partner in your developments?

Typically we are named the developer, and we typically have a local sponsor. That could be a housing authority, the city that pulled us in, or a foundation. In most cases we have some involvement with local not-for-profits, or local highly respected development partners.

What has been your company’s guiding principles and objectives in developing mixed-income housing communities?

That’s exactly right – communities. When you’re going to create a mixed-income community, No. 1, you’ve got to build to whatever market you’re trying to achieve on the market-rate side. Very typically that is moderate-income, 80 to 120 percent of area median income. Typically you’re looking to bring in the product and amenities that’s going to attract that group into the community and neighborhood. The next principle is: Everybody gets the same quality. It does absolutely no good to create a community in which one block is market-rate and the next is a low-income block. By the same token, if you’re going to mix everything in, you can’t have two different qualities of housing next to one other, or you will not attract the market-rate group that you’re trying to hit. Those people have choices; they can come to your neighborhood, or take their dollars and go someplace else. And, if you’re dealing with a neighborhood that’s been blighted or had a lot of challenges, you need to be sure that you’re working on sufficient critical mass so you can make a visible change. To get people in, you need to provide the appropriate amenities, from quality public improvements, to parks, to possible retail opportunities, to other services. And it’s important to have good access to good schools to make a neighborhood competitive.

Have you provided support for improving schools, or partnered with others who try to do that?

As a developer, besides coming in with a physical plan and a financing plan, it’s absolutely important, when redeveloping in the urban environment, to reach out and create a public-private partnership that gets all the stakeholders on board. A typical project we work on has a lot of  local and state and private philanthropic funding, so you really have to make the case that this is a top priority project for a city and for the funders – or they’re going to put their money someplace else. Part of doing that is getting the schools on board. For example, with Centennial Village, we were immediately south of Georgia Tech’s main campus. We went and talked to Tech, and some of their senior people got involved. The housing authority agreed to swap some land. We tore down an old school building and gave them some land. The city of Atlanta school district put in a brand-new school, and Georgia Tech more or less adopted it. And it’s one of the top-performing elementary schools in the city, which makes it a huge asset to us when we’re marketing to people with families, especially people who have choices, people who might otherwise say, “˜Gee, if there’s not a decent school here I’ll go live in the suburbs.’

Have you found any rules of thumb, in a mixed-income development, about what works in terms of the range of income levels of residents or the mix of housing units?

A lot depends on the market that you’re trying to attract. In Atlanta, which isn’t typical, our market-rate rents could be twice or double what the tax credit rents are, maybe even higher. The more typical situation we’re looking at is where the achievable market-rate rents may be 15 to 25 to 30 percent over tax credit maximum rents. We tend to do a lot of stuff around the Midwest, and that’s basically what the market is. Normally, on the market-rate side, we’re looking to accommodate people principally at 80 to 120 percent of area median. If you’re going to have a true income mix [in a development], you want at least 30 percent of those units to be market-rate, which means unrestricted [above 60% of AMI]. Between tax credit and public housing [units], we typically end up with a split that’s about 50-50. So the concept might be one-third public housing, one-third tax credit, one-third market. That’s approximately the split we’re using in New Orleans with our C.J. Peete project, which went under construction this year.

Where do you see the field of mixed-income housing development headed – the types of developments that get built, funding sources, etc.?

There are some main themes. People are concerned about energy. Not only efficiency as a green component, but also densities and less sprawl, which puts a fair emphasis on transit-oriented development. We’ve done a fair amount of that in Los Angeles, a little in St. Louis, and are looking at a few other places. It makes tremendous sense, especially for people with lower incomes, to be near mass transit. Also, we’ve received a few rounds of new markets tax credits. That’s a very important component to provide the missing links that go beyond housing to help create the kind of neighborhood you’re looking to create. An increasingly important theme – and you’ll see it in the [proposed] Choice Neighborhoods program, on the HUD side – is this holistic approach, where you’re not just talking about shelter. In other words, you’re getting beyond simply providing quality affordable housing, and getting into city development issues. Not only where do I put it, but how do I make this attractive? Where’s the transportation? Where are the retail opportunities? Where are the schools? How do you get the health care? What about jobs? If you just simply go out to exurbia, as some low-income housing developers have done, to find the cheapest land possible and put in a LIHTC project that’s 10 miles from the nearest public transportation, you’re going to find it difficult to keep the place occupied, to keep the rents moving in line to cover the operating expenses, because you didn’t pick a reasonable location. And in cities, in picking that location, a lot has to do with re-creating the infrastructure that is there – not just roads and sidewalks, but also a decent park to walk to, places to shop and to recreate. And certainly schools – that’s the biggest challenge that most cities find. You want to attract back people with choices, people who are moderate-, middle-income people. They can’t afford to send their kids to private schools, and if the public schools available are not competitive with what’s out in the suburbs, as soon as they have kids of school age, they’re going to leave.

It sounds like where you see the industry headed is going to make your job as a developer that much more challenging and complicated.

Yes, certainly in the affordable housing line. I see it more as an awareness that you just can’t slap up a hundred units someplace, and that’s all that affordable housing is about. If you don’t develop a place that people with choices say, “˜Gee, I want to live there,’ you’re not going to be sustainable over time.