Developers Taking Different Approaches to Preserve Properties as Affordable Rental Housing
By Caitlin Jones & A. J. Johnson
10 min read
DEVELOPERS ARE PRESERVING EXISTING properties for long-term affordable rental housing use in a variety of ways, often employing the lowincome housing tax credit (LIHTC). This diversity is reflected in actual transactions described by developers and others in recent interviews with the Tax Credit Advisor.
Those interviewed included: Nancy Rase, Homes for America, Inc., Annapolis, MD; Gerry Joseph, Community Preservation and Development Corporation,Washington, DC; Patrick Sheridan, Volunteers of America, Alexandria, VA; and Aseem Nigam, Fairfax County (VA) Redevelopment and Housing Authority.
Homes for America
Homes for America, Inc., a nonprofit developer and owner of affordable rental projects, is working to preserve a 269-unit property in Baltimore built in the 1970s with a mortgage insured by the U.S. Department of Housing and Urban Development (HUD) under the Section 236 program.
Rase said Homes for America (HfA), in a joint venture with another nonprofit, plans to purchase and renovate the property — now called Har Sinai House — for a total cost of about $17.8 million. She noted HUD has approved a “decoupling” of the mortgage interest subsidy stream (Interest Reduction Payment, or IRP) from the project’s existing Section 236 mortgage. This subsidy stream, of about $266,000 per year (the amount needed to buy down the mortgage rate of nearly 14% to an effective rate of 1%), will be captured over the remaining 7.5 years of the IRP contract and used to pay down a new 7.5-year, $1.6 million second mortgage.
Other parts of the financing package include a pay-off of the Section 236 mortgage, a new, 40-year HUD-insured Section 221(d)(4) first mortgage of $2.9 million, a $1.1 million subordinate loan from the state’s rental housing program, a $1 million subordinate loan from the city funded by federal HOME program dollars, a soft loan capitalized by a $2 million foundation grant, a deferred developer’s fee, and housing credit equity. Rase said the original underwriting for the project, which has a $1 million LIHTC allocation, estimated housing credit equity of $9.2 million. But she said the ultimate number will likely be lower given the drop in credit pricing. Rase said about $44,000 per unit in rehab costs is planned.
In addition to purchasing existing properties, primarily LIHTC projects past their 15-year compliance period and HUD Section 8 projects including those nearing the end of their projectbased contract, Rase said the other way HfA has been doing acquisition preservation transactions has been the purchase of general partnership (GP) interests in housing credit projects prior to the end of the 15th year. She noted HfA is “fairly selective,” purchasing GP interests in properties in “really good condition” that won’t need recapitalization at the end of the original compliance period.
Rase said the purchase of GP interests has been a lower-cost way for HfA to expand its portfolio of housing units — now about 4,500 units in 56 properties, all but four LIHTC, in Maryland, Pennsylvania, Virginia, and Delaware.
Rase said her firm, in its last three GP purchase transactions, offered $100 apiece for the GP interests in three small adjacent projects with a combined 150-plus units. The deals weren’t generating cash flow, and the general partners were individuals looking to retire.
“Most of the deals we’ve been purchasing,” said Rase, “have a lot of soft debt,” with not much cash flow, a fully paid developer’s fee, and no great value to the GP interest. “We’re buying them strategically in areas where we have other rental communities, so we already have a presence there,” Rase noted.
She indicated the sales price for GP interests can vary considerably. For instance, Rase said the purchase price for the GP interest in a nice 100-unit project with “reliable” annual cash flow might be $100,000 to $200,000. “As opposed to paying eight million, nine million dollars to buy the project,” she said.
Volunteers of America
The preservation transactions being done by the national office of Volunteers of America (VoA), a nonprofit developer and owner of affordable housing, have mostly involved renovation and recapitalization of properties it already owns, in many cases 20 to 40 years old, said VoA’s Patrick Sheridan.
For instance, he said VoA is now trying to structure preservation transactions for four of its properties, a Section 236 project in Chula Vista, CA, and three HUD Section 202 seniors housing projects.
Sheridan said the plan for the Section 236 project is to set up a limited partnership to own the project (with VoA as GP), use taxexempt financing and equity from 4% housing credits to help fund the renovations, and obtain enhanced housing vouchers for the residents from HUD.
Sheridan said VoA plans to renovate the three Section 202 projects, funding rehabilitation at two with tax-exempt bonds and 4% housing credits, and the third hopefully with 9% housing credits.
VoA’s portfolio includes about 320 rental housing properties nationwide with roughly 17,000 units.
CPDCTransactions
Community Preservation and Development Corporation (CPDC), a nonprofit developer of affordable housing in the Washington, DC metropolitan area, has done about 25 transactions, all but one acquisition/rehabs of existing buildings, said CPDC’s Gerry Joseph. He said a “good share” have involved HUD-assisted properties, a number Section 8 projects, and a number conventional apartment properties acquired and redeveloped as affordable housing. “Our efforts have been aimed at both preserving affordable resources and revitalization of affordable housing that’s in disrepair and substandard condition,” Joseph explained.
CPDC in late 2007 closed on three major transactions, all involving properties with Section 8 assistance tied to them. In two projects, Mayfair Mansions and Wheeler Terrace, CPDC was selected to participate via a right-of-first refusal by the existing tenants. Under District of Columbia law, an owner wishing to sell an apartment building must first give the tenants an opportunity to purchase it, or allow them to assign their rights to another party. Joseph said in many cases tenants have exercised their right of first refusal and have found development partners, or a developer to assign their rights to in exchange for agreements on how the property will be redeveloped.
In one of the recent transactions, CPDC with another nonprofit and aided by a loan from the city acquired a 17-building HUD Section 236 project (Mayfair Mansions) from the for-profit owner in 2006. In September 2007, it closed on the tax-exempt bond and tax credit financing for the current project and began renovations. Joseph said 410 of the 569 units will be maintained as affordable apartments. The remaining 160 units, pursuant to the wishes of the tenants, will be converted to condos and sold at prices designed to be affordable to current residents.
Various subsidies will be employed to subsidize condo purchases, including housing choice vouchers, local housing production trust fund dollars, and subordinate home loans from the city. Joseph indicated about $35 million of the $94 million cost of the rental portion of the development is from equity from the sale of federal housing and historic credits. Among the other sources are $31 million in bond proceeds, $23 million in loan proceeds, and $1.5 million generated by a decoupling of the IRP stream from the Section 236 mortgage. Joseph said the decoupling supported the issuance of additional tax-exempt bonds generating an extra $3 million in proceeds.
In a second transaction, CPDC purchased a distressed Section 8 property called Wheeler Terrace in October 2007 and will be rehabilitating the 113-unit property for continued use as affordable rental housing. Funding sources, totaling about $32 million, include $11-12 million in tax credit equity, $7-7.5 million in bond proceeds, $10 million in financing from the city, and other sources. Joseph said HUD is renewing the Section 8 rental assistance contract as well.
Joseph noted the renovation will incorporate a LEED-certified green building demonstration featuring ground source heat pumps, green roofs, and other measures to reduce energy use and promote sustainability. Enterprise Community Investments awarded a grant for the project through its Green Communities initiative.
Fairfax County Acquisitions
In Fairfax County, a Northern Virginia suburb of Washington, DC, the Fairfax County Redevelopment and Housing Authority (FCRHA) purchased two conventional apartment projects in prime locations from forprofit owners that might otherwise have been sold for upgrading to upscale rentals or conversion to condominiums, and has preserved both properties as affordable rental housing with plans to rehabilitate them in the near future.
FCRHA’s Aseem Nigam said Fairfax County has a “huge” current need for affordable rental housing; a recent study cited the need for an additional 10,000 affordable housing units just over the next few years.
In November 2007, the county purchased Wedgewood Apartments when it came on the market a second time, after the original top bidder failed to line up financing. Located in Annandale, the 672- unit property was purchased for $107.500 million.
Nigam said the purchase was funded mostly by taxable short term bond anticipation notes (BANs) issued by the county, plus monies from the county’s “penny fund,” a trust fund capitalized with one penny dedicated from Fairfax County’s property tax rate.
Nigam said the county plans to preserve Wedgewood Apartments as affordable apartments on a longterm basis but hasn’t yet decided how, such as whether to transfer buildings to a limited partnership to facilitate the use of housing credits. He anticipated some units will be reserved for residents at or below 50% of the area median income (AMI), some at 60%, perhaps some at 70% or 80%, and maybe some at 80%-100% of AMI.
In the second deal, the county in February 2006 purchased Crescent Apartments, a 180-unit, five-building apartment complex in Reston. The three-parcel property sits on a 15-acre site that Nigam says has “a lot of redevelopment potential.” He said the county envisions putting additional affordable and mixed-income housing units on the site and tying it all in with a nearby revitalization area.
Nigam said a team of consultants has been directed to formulate several different possible redevelopment options for the entire site. He said the county plans to preserve Crescent Apartments as affordable rental housing.
Nigam said funding for the purchase of Crescent Apartments included monies from the penny fund but mostly proceeds from the issuance of taxable BANs. He said these BANs were later refinanced with tax-exempt BANs after tenant income certifications were completed, and just lately taken out by a 3.30% five-year note that eventually will be taken out when permanent financing is put in place.
