The Art of Picking Projects

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15 min read

Five developers tell the why and how

Just about any good novelist, playwright or screenwriter will tell you that the way character is revealed is by the choices that character makes. We may define character by action, but every action is preceded by an intent and decision to act, whether that decision takes place three years or a split second in advance. Thus, it is the initial decision that ultimately determines the success or failure of the action, and the higher the stakes of the action, the more interesting the decision becomes.

The analogy to the affordable housing industry is clear, where the stakes of every decision are high and the consequences long lasting.

So we set out to look into the creative methodology and ask some of the leaders of the profession: What goes into the decision-making process to embark on an affordable housing project?

Absolutely Knowledgeable
Michael Costa, President and CEO of Highridge Costa in Gardena, California, has been responsible for around 40,000 units of multifamily housing in 33 states and Puerto Rico. In the affordable sector, his approach is QAP (Qualified Allocation Plan) first.

“We’ve been doing affordable housing for 22 years, all LIHTC-based, and we’ve always paid very close attention to the QAP. We’re always involved in the process, trying to get to know the state treasurer’s department, try to be part of their focus groups, see what the state is thinking and feeling and how they target their dollars. The QAP will probably head that way.

“We want to stay as absolutely knowledgeable as we can. Whenever the QAP changes, that changes the dynamics.”

Through this knowledge, Highridge creates a targeting plan for each state it wishes to operate in, focusing on the cities on which the authorities are concentrating and from there looking for specific sites. “We put them on a grid to score them point by point,” Costa explains. “We’ve pared our target back from a national approach, more or less to the west of the Rockies.”

The process is set up to be as efficient as possible. “We have an acquisition team constantly on the hunt and a group of brokers who work with us. Say there are
15 criteria for scoring, we will take the top 10 and say, ‘If you have a site that meets all of these, bring it to us.’”

Keeping the Sauce Liquid
Lyndel J. “Joe” Wishcamper, founder and President of the Wishrock Group in Portland, Maine, has been engaged in the real estate business for more than 40 years and has developed over 10,000 units of housing in 15 states. A graduate of Harvard University and Yale Law School, Wishcamper is a nationally recognized leader in affordable housing and has received numerous awards in recognition of his professional, civic and philanthropic activities. He worked with the creators of the Section 8 program in 1974 and was closely associated with George Mitchell when the Maine Senator’s office created the Low Income Housing Tax Credit to replace accelerated depreciation after the Tax Reform Act of 1986 essentially eliminated that form of paper tax losses for investors.

Wishrock’s website describes an acquisition strategy that “specializes in acquiring existing affordable and workforce housing complexes by leveraging tax credits or private capital with government backed debt, grants or other soft funding sources.”
In practical terms, Wishcamper says he goes through a series of what he calls screens or layers.

“First, we have a concentration on acquisition and rehab, not new construction. And as far as scale, we like the larger deals. Our first screen: Is the project located in a state with a user-friendly housing finance authority? Are they favorably disposed to preservation? Does the price fit into our transactional model, and are the risks and rewards in balance in terms of value? If there is a lot of downside risk, we won’t do it unless it’s something we have experience with and know we can manage.

“Next, is the regulatory framework one that places undue restrictions on the project? Or does it have potential to add value, such as the opportunity to mark-up rents in Section 8 properties, eliminate limited dividend restrictions or if an agency has placed soft financing and we can get them to go to the end and free up cash?”

Then he looks at the real estate tax framework. “If you can’t control taxes once the project is completed, you’re vulnerable.” He also admits to being “nervous” about potential environmental problems and always does a rigorous examination of the security of the area.

“We look at how thin or full the developer fee will be and whether cash flow is likely to be in the red or the black.” It is important to Wishcamper “whether the property is so leveraged that there’s not much value in Year 15,” because the company evaluates a “whole stream of financial rewards” and doesn’t “like to mortgage the back end.”

“We have a ‘special sauce’ that has worked for us. But the sauce can cook away pretty quickly if there’s not enough liquid in it.”

Through long experience, Wishcamper knows that “from closing to stabilizing the deal, things rarely get better. Surprises tend to be negative.”

Within 45 days of the commencement of the due diligence period, Wishcamper wants to feel comfortable with the deal on all fronts. Otherwise, he will generally bow out or ask for more time. “We are cautious risk-takers,” he observes, an approach that clearly pays off. Of the 75 to 100 most recent major deals he’s done, the margins are sometimes slim, but he can’t recall one where the company has actually lost a significant amount of money.

Everything Is Tied For First Place
Lawrence H. Curtis, President and Managing Partner of Boston’s WinnDevelopment and past president of NH&RA, starts from the premise Everything is Tied for First Place.

“Do we need housing for the elderly? For middle-income residents? For the homeless? For families? Greater neighborhood diversity and poverty deconcentrated?
Rehabilitation of empty or decrepit buildings? The answer to all of them is ‘Of course!’ So what we try to do is meet public policy objectives in ways that efficiently use scarce resources.”

This involves studying what a particular municipality states as a priority and delivering on that stated need.

“We don’t start with the QAP, but we want to make sure we understand it. What we don’t do is game the system, throwing in every element the housing authority says it wants and then, if you get it, trying to figure out what to do.”

Winn currently has more than 95,000 units under management in 23 states, with a specialty in property redevelopment and turnaround. “You can’t solve the affordable housing crisis just through new production,” says Curtis. “You have to save existing housing and use vacant buildings to create additional housing.”

There are multiple reasons for Winn’s focus on existing structures. “With ground-up new construction, you face a relatively lengthy approval process,” he explains. “You have the Not-In-My-Backyard neighborhood protests. You have higher costs and you have various community reviews. But if you can turn a historic shell that’s become an eyesore, dragging down the neighborhood, into something useful, everyone benefits. So we minimize risk by picking targets that are not only desirable architectural recipients of rehabilitation, but at a total development cost lower than new construction, with much less confrontation involved.”

Curtis aims to bring what he calls “off-balance sheet resources” to the project. “For example, there is often a four or five-to-one competition for available government housing dollars. But if we can get somewhere around 40 percent of the costs covered by marrying non-housing subsidy resources – such as state and federal historic tax credits that don’t have the same kinds of competitive limitations – and tax exempt bonds that most states haven’t fully utilized, then we can change the risk-reward development equation.”

A prime consideration is asking: Where are these buildings? “In terms of creating new housing, states have to spread money around; it can’t all go to major metropolitan areas. We go to various locations – secondary cities, you might call them – where historic buildings still exist along with affordable housing needs.”
Unlike some developers who use different architects and builders for every project, Curtis prefers to “use the product team that can deliver efficiently.” He notes, “A lot of the best affordable housing developers have learned to do that.

“So when you marry all of these considerations together – knowing what a community wants, picking a product type that serves the affordable housing goals and is rationally a good thing to do, looking for non-housing sources of funding, and bringing together an experienced and efficient production team,” Curtis summarizes, “we can differentiate ourselves and proudly know that we are delivering a quality product at a lower price than the competition.

“A lot of people look at affordable housing as formulaic. We feel it is well beyond that from a creative point of view. And our track record is very good.”

Getting Stakeholders on Board
“Our niche is low income housing and city redevelopment,” states Kevin J. McCormack, President of McCormick Baron Salazar of St. Louis, Missouri. “We tend to do multiple-block redevelopments in neighborhoods that have suffered substantial amounts of disinvestment and are interested in revitalization.” But how does he hone in on the choice of project?

“There are probably 20 to 50 times as many potential projects as resources to do them, so we are looking for city neighborhoods with support from a variety of important stakeholders, including the local politicians.”

McCormack’s aim will be high; to “come back with a neighborhood that has a mix of incomes; that has schools, public infrastructure and health initiatives. We are not looking to put people out of the neighborhood.”

He acknowledges that the potential positives and negatives for a political leader are substantial, depending on how the project fares. “So they want to see what you’ve done. Often it’s not something you’ve just done, but something 10 or 15 or 20 years old.”

This makes the initial decision-making process all the more critical and necessarily farsighted. “When we go in, we’re in it for the initial credit compliance period, after which we’d like to stay around. There are different exit strategies.

Sometimes, the public housing authority has a first refusal at favorable terms. But with about 60 percent of our properties, we’ve been able to re-syndicate and stay in.”

Dealing on this level, it’s impossible to eliminate all risk. “We try to do smaller deals, too, to balance out. But anything with a lot of players, there is a risk of the wheels coming off,” McCormick acknowledges. “We ask, ‘Is it the right project?’ and ‘Is it a city that’s going to put scarce resources into, say, a rundown public housing site?’ Emphasis can vary with each new administration. One might be more interested in the poorer neighborhoods while another might want downtown revitalization. “The pendulum keeps swinging. It can take between 12 and 18 months from the first talk to getting really serious, and another 12 to 18 months to get started. Then the actual development can be three, four or five years after that, so we try to calibrate the risk.”

Like others, McCormick looks at the state QAPs, but notes that some states have caps based solely on per-unit costs, which encourage studios and smaller one-bedrooms rather than the larger, three and four-bedroom units his company wants to provide for families. Therefore, he is prepared to put together a variety of funding sources to make a project viable, including federal and state housing grants, corporate and/or foundation involvement, tax credits and other state programs, together with market rate rents. “We’re ‘selling’ to a city and a neighborhood. If the city makes the project a priority, the state will usually get on board.”

But for Kevin McCormick and his company, the most important considerations remain the same: Are the people on board? Is there a will in the community to make this project happen?

“I Feel Very Fortunate”
Debra F. Koehler is President of Sage Partners, a multi-family residential real estate development company in Tampa, Florida. Prior to founding Sage in 2007, she was partner and Senior Vice President of the full-service Wilson Company developers and then another company she cofounded with former Wilson partners. As a small developer with only four full-time employees, Sage has developed a specific approach in looking for the right deal.

“I like high-rise and preservation, and we focus on preservation of senior housing,” Koehler declares, adding that she looks for solidly built buildings from the late 1960s and early 1970s. “We’ve found that the senior population has low turnover. It’s an audience that doesn’t leave unless they have to.”

She also likes to rehab occupied buildings and has worked out an efficient system for temporarily relocating residents to another floor while their floor is being worked on. Tenants remain happy, costly off-site rentals are avoided and there is no lease-up risk or delay once the rehab is complete.

The first test for her is proximity to services: transportation, medical facilities, grocery and drug stores, among other useful community features.

“None of this comes into play unless it fits into the state’s QAP. But Florida has a QAP lottery for tying projects, so you can’t eliminate the element of luck. We go through all Ability-to-Proceed verification items and map it all out. We do a lot of preliminary work and want to know if it will score before putting a property under contract.” A CPA and veteran of KPMG Peat Marwick, Koehler insists, “I’m one of the most conservative people you’ll deal with.”

A good example of Koehler’s approach is Viridian, an 11-story high-rise with 188 residential units for seniors and the disabled, built in downtown St. Petersburg in 1971 and rehabbed by Sage in 2009 and 2010. It has easy access to shopping, healthcare and public transportation and expansive windows offering panoramic views of Tampa Bay. The project was based on a Section 8 contract on 70% of the units and HUD approved a 20-year contract extension.

But financing remained a real challenge for the two-year-old company. Viridian did not win a nine percent tax credit and Koehler ultimately was faced with finding and putting together other sources of funding: First Mortgage and Interest Reduction Payments (IRP) Decoupling bonds, both from Bank of America; State Apartment Incentive Loan (SAIL) and Extremely Low Income Loan (ELI) from the Florida Housing Finance Corporation; a grant from the City of St. Petersburg; as well as a general partner contribution and deferred developer fee.

“Layer, layer, layer,” is Koehler’s approach to funding.

What the tenants, and through them the city, got was a complete modernization of all building facilities and completely upgraded apartments, all completed in less than a year, one floor at a time, without any off-site relocation.

“My previous company was vertically integrated. This time out, we hire the best general contractor and management company we can, and then manage the heck out of them.”

Since then, Koehler has been consistent in her approach and Sage has successfully undertaken and completed a number of similar developments in Tampa. These include Metro 510 and Vista 400, two affordable housing communities from rehabbed historic buildings, and Aqua, a 40-plus-year-old high-rise facility for seniors with no more than 60 percent of the local median income. After Sage gutted and completely refurbished the building, the Tampa Bay Times ran an article proclaiming, “Tampa residents get new apartments for the same low rent.”

“I feel very fortunate,” Koehler says. “I have the tremendous opportunity to serve the most vulnerable segment of our society. That passion is what drives me.”

Passion
Passion is a word heard frequently among this group. Each of these developers wants to run a successful business and make a profit. But none will deny that there is something special about working in affordable housing and that they are similarly driven by that passion. And this brings us back to our original observations about character and choice.

In reaction to receiving several local and national awards for Metro 510, Koehler replied, “We appreciate the recognition, but what really motivates us is who we serve. Our biggest reward is having residents who are very happy.”

“At a certain point,” says Larry Curtis, “I had to decide: What do I want to do when I grow up? You see people who have done everything right in life and because of one factor or another, they can’t afford to live decently where they want. So yes, I’m mission-driven – in a common sense way. Building, running and managing high quality affordable housing is a wonderful thing to do.”

Kevin McCormack, whose company is well known for its social values, modestly comments, “To a certain extent, you can talk about mission, but it’s also where our strength is: mixing rental subsidies, tax credits and market rate.”

Michael Costa says, “The challenge of doing this every day is what I love: the passion of getting to know residents, of hearing a single mom with a couple of kids tell me, ‘I never had a place I could call home before.’ I’d do this for that alone.”
And from Joe Wishcamper: “I came of age during Vietnam and the Civil Rights struggle, thinking about how I could do something of social value. I am very lucky that I had the opportunity to go into affordable housing; that it draws on my skill sets. And when I hire people, I look for those same values: passion not only for the business, but for the work.”