CASE STUDY: Arlington County, Va., Mixed-Use Deal Combines LIHTC Apartments, Condos
By Caitlin Jones & A. J. Johnson
9 min read
Tax Credit Advisor February, 2006: Many cities and counties hope to reverse the growing scarcity of affordable housing through mandates. Most common is inclusionary housing, which requires developers to set aside a certain percentage of completed units for low and moderate-income households. The pot is often sweetened with offers of low-interest rate loans and zoning flexibility.
Lately, however, another approach to the problem is gaining traction: carefully structured incentives that encourage developers to voluntarily meet affordable housing targets. In Virginia, for example, Arlington County requests but does not require that developers make affordable at least 10 percent of all new rental units, about 400 units a year. In exchange, it provides an innovative project review process that offers considerable zoning flexibility.
A Project in Need of Flexibility
A recent project that has benefited from Arlington’s approach is the acquisition/rehab of Columbia Heights Apartments, formerly a rundown rental property in the western part of the county. The property’s original 152 apartments, spread out over seven three-story structures covering six acres, were built in 1948.
For the developer, Reston, Va.-based Silverwood Associates, the challenge was financing an unusually costly project, given skyrocketing property values and the $70,000 per unit expense of a gut rehab. To help surmount this challenge, Silverwood proposed a redevelopment plan that combined an overhaul of the rentals with construction of new mixed-income condo units.
The developer’s plan hinged on tearing down two of Columbia Heights’ buildings, and erecting a 96-unit condominium complex in their place. Eighty six of the condo units would be sold at market-rate prices, with the other 10 made affordable to moderate-income households. As for the 109 remaining apartments, Silverwood proposed a complete rehab, with each offered as affordable to moderate-income households.
Mark Silverwood, the company’s president, calculated that the added density from a net increase of 53 units would substantially lower acquisition and per-unit building costs. In addition, he hoped that the profit from the sale of condos would help offset the cost of the affordable rehab.
“With property and development costs as high as they are in Arlington County, this was one of the few ways we could begin make the rehab work,” Silverwood said. “It also allowed us to provide affordable homeownership as well as affordable rentals.”
The county’s zoning code, however, presented a serious obstacle to Silverwood’s plan. In order for the affordable apartment/condo proposal to work, Silverwood required that zoning density be increased.
The Site Plan Review
Fortunately, Arlington County was able to provide Silverwood with a way to obtain the density he needed, as well as save on a number of development expenses that would have normally been part of the cost of doing business in the county.
Under Arlington’s “Site Plan” review, a developer can request that its project be exempted from standard zoning restrictions. This review, spelled out in Administrative Regulation 4.1, first requires developers to complete an application designed to measure how well the proposal meets the county’s land-use goals, including those for transportation and the environment, as well as affordable housing. After the application is submitted, it is examined by various county departments, and then in public hearings before the County’s Planning Commission and Board of Supervisors.
The Site Plan review, which can take over six months to complete, contrasts with Arlington County’s “By Right” review. The By Right review involves a much less elaborate application, and does not require multiple public hearings but it also does not allow for any deviation from standard zoning guidelines.
“Providing zoning flexibility, [the Site Plan review] helps us move forward a number of community goals, and affordable housing is a very important goal,” said Ken Augenbaugh, Chief of the Housing Division of county’s Department of Community Planning, Housing, and Development.
Silverwood said that the Site Plan review of his proposal involved a fair amount of negotiation. In the end, the developer got most of what he asked for, including the requested density, as well as relief on some landscaping, parking, and building exterior requirements. But there were also compromises. For example, Silverwood noted that one of his requests was exemption from a zoning requirement that he replace all of the sidewalk surrounding the property. Initially the county rejected this request, but it eventually allowed him to replace just part of the original sidewalk. The developer also said that he agreed to share profits from the condo sales with the county.
Financing Help from Arlington County
In addition to providing flexibility on zoning issues, Arlington County supported the Silverwood project with low-interest-rate financing. This was a crucial to funding a project with costs totaling $37.5 million (See chart), with $10.8 million for property acquisition, and $26.7 million for development, he said.
At the same Board meeting that approved the higher density levels in February 2003, Arlington County authorized $3.2 million in funding for the apartment portion of the project. The financing was structured as an acquisition/construction/permanent loan through the county’s Affordable Housing Investment Fund (AHIF). The 30-year borrowing carried a 4 percent interest rate and was structured as a soft second loan. The $3.2 million included $500,000 that Silverwood was directed to use to reduce the rent on 25 percent of the units, allowing 27 low-income households to participate in the program.
In addition, Arlington County provided a two-year $1.9 million bridge loan to fund construction of the condominiums. The loan carried a 4 percent interest rate.
Other Funding Sources
Silverwood also secured other financing for the project. Units of Charlotte-based Wachovia Corporation provided two separate two-year loans for the apartments: a $6 million acquisition/construction loan from Wachovia Bank N.A. at 185 basis points over London Interbank Offering Rate (LIBOR) – then around 1.1 percent – and a $1.8 million mezzanine loan from Wachovia Affordable Housing Community Development Corporation (AHCDC) at 16 percent.
Wachovia offered short-term financing for the condominiums as well, with Wachovia Bank, N.A., providing a two-year $13.5 million construction loan at 250 basis points above LIBOR, and Wachovia Bank AHCDC a $2.8 million construction mezzanine loan at 16 percent.
The Virginia Housing Development Authority (VHDA) was an important player, providing $8.7 million in permanent financing to take out the short-term apartment loans from Wachovia. That financing comprised $6.3 million in taxable bond proceeds carrying a 35-year term and a 7.5 percent interest rate, and a $1.5 million Sponsoring Partnership and Revitalizing Communities (SPARC) loan carrying a term of 35 years and a 4 percent interest rate.
Because the project obtained taxable rather than tax-exempt bond proceeds, Silverwood was able to apply for 9 percent Low Income Housing Tax Credits from VHDA. After the LIHTCs were awarded in July 2003, they were syndicated into $7.0 million of tax credit equity by Boston Capital Partners. Winning the tax credits proved to be a special challenge. Silverwood’s initial LIHTC application in 2003 did not score well enough to be approved for credits because of the high cost-per-unit rehab expense, according to VHDA. Fortunately, the project was awarded a discretionary set-aside of 9 percent credits in July 2003.
Silverwood itself rounded out the funding for the project by providing two deferred developer fee loans: $210,000 for the apartment rehab, and $1.1 million for the of condo construction.
A Smooth Rehabilitation
The apartment rehab and the construction of the condominiums went smoothly, according to both Augenbaugh and Silverwood. The apartment rehab began in the Fall of 2003 and was completed by January 2005. All apartment units of the property, renamed Monterey Apartments, are now rented, with the developer serving as property manager.
As part of the renovation, 18 of the original two-bedroom apartments were expanded to three-bedroom units with vaulted ceilings and recessed lighting. Of Monterey’s 109 units, 82 were made available to families earning up to 60 percent of Area Median Income (AMI), with the remaining 27 to families earning up to 50 percent of AMI.
Monterey’s apartments range in size from 602 square-foot one-bedroom units to 1,133 square-foot three-bedroom units. Rents range from $790 to $1098 for households earning 50 percent of AMI, and from $958 to $1330 for households earning 60 percent of AMI. The apartments feature modern kitchens and bathrooms with new appliances, plumbing, oak cabinets, and flooring. Each apartment has individually controlled heating and cooling systems and access to high-speed internet connections. In addition to the apartments, Monterey offers residents a large new playground, a community business center, and guest parking.
Construction of the condominium complex, called the Sierra, was also begun in the Fall of 2003. It was completed in the Summer of 2005, with all units now sold. The affordable condos range from $135,000 for the one-bedroom units to $155,000 for the two-bedroom units. The market-rate units are priced from $223,000 to $449,000.
The Monterey/Sierra project received an honorable mention Affordable Housing Best Practices award in December 2005 from the Washington Area Housing Partner-ship (WAHP). The award was presented in December 2005 at the Metropolitan Washington Council of Government’s annual meeting.
Efficient Use of Public Dollars
Augenbaugh said that the county is pleased with the way that the Columbia Heights project has worked out. He said that because of its overall financial success, Silver-wood has been able to pay off all but about $1 million of the county’s $3.2 million in permanent financing from the AHIF Fund. With the condos all sold, the county’s $1.9 million construction loan on these properties has also been paid off.
“We consider the project a highly efficient use of the public dollars,” he said, adding that Arlington County is hoping to develop more projects like Columbia Heights to provide units that are affordable to both moderate-income renters and homeowners.
Creating a mixed-income project of affordable rentals and condos is a particularly challenging feat, says Silverwood. Combining them in one project, he said, “can probably only occur in a very strong housing markets,” he said. “The local government involved has to give you a higher density, and it also has to help provide funds to make the affordable piece work.”
The special reward of such projects, adds Brenda Champy, senior vice president at Boston Capital, the tax credit syndicator, is that “the condo side brings a real excitement to the project.”
Offering developers zoning flexibility in exchange for their commitment to affordable housing has helped Arlington County deal with its affordable housing problem, says Augenbaugh, and is a “big part” of its reaching its goal of 400 new affordable units a year, he said.
