Preservation of Affordable Multifamily Housing
Nonprofits Meet Housing Preservation Challenges
Mercy Housing — Catalina Apartments in Tacoma, Washington.
Yorktown Square II in Yorktown, Virginia.
by Letty Shapiro, Community Development Expert, OCC
Nonprofit organizations, seeking to preserve the stock of affordable multifamily housing in America, face enormous challenges. These include the expiration of project subsidies, competition from for-profit investors seeking acquisitions, and the sheer difficulty of pulling together multi-layered funding from public and private sources of support.
Despite those challenges, nonprofits are successfully preserving affordable multifamily housing in a variety of market settings, often with the help of bank partners. Given the localized nature of both the real estate market and the programs aimed at preserving affordable housing, some of the most successful nonprofits operating in this sector take widely differing approaches to overcome common issues that cross market lines. The following article presents four snapshots of successful nonprofit affordable housing developers.
Preservation of Affordable Housing: Serving the Neediest Renters
Preservation of Affordable Housing (POAH) is headquartered in Boston. It works in an extremely slim niche of the housing market: the preservation of existing privately owned rental stock that serves residents earning as little as 30 to 50 percent of area median income.
The national nonprofit has acquired, financially restructured, and/or physically rehabilitated to date more than 4,500 apartments in 37 developments in eight states and the District of Columbia.
While POAH’s projects cross geographic boundaries and are located in urban, rural, and suburban areas, they have one thing in common. The properties are at risk of being “lost” because of the expiration of the funding agreement that subsidizes tenants’ rents, such as the HUD’s Section 8 program.
As those decades-old agreements approach expiration, project owners in strong real estate markets can reap large gains by converting their holdings into market-rate rental apartments or selling them as condominiums. In rural markets, property owners who do not sell may still be unable to generate enough cash flow to support debt service after the expiration of the subsidy. “In weakened markets, we see a different problem. Landlords stop investing in the building because they decide there is no upside, and the building degrades until it’s uninhabitable,” says POAH Manager of Communications Karen Blomquist.
POAH’s first task is often to raise awareness of the niche of housing preservation in which it specializes. Local government officials and the populations they serve are often unaware that there are subsidized housing units in their communities because these buildings seem to have always been there, says Blomquist.
Public policy supporting funding for affordable housing has been weakened since many of these properties were built, she points out, so an aggressive set of policies are needed to secure funds to subsidize these properties for low-income families and seniors.
POAH often turns to bank partners to enable it to put together projects at a fair price to sellers and fund the substantial capital and energy improvements older projects require. “We are always looking for allies in this transaction-to-transaction business,” says Blomquist. The majority of POAH’s bank partners participate through the purchase of LIHTCs. Other banks supply acquisition, rehabilitation, and construction loans.
A Hot Market Deal
A recent POAH transaction saved an 82-unit high-rise serving low-income elderly residents and two others nearby with 172 additional apartments. They are located in a “hot” downtown Providence, Rhode Island neighborhood, where nearby parks, restaurants, and shopping had driven up market prices. “As the mayor said, if we lost those units, the city could not replace them,” says Blomquist.
It’s unusual to have local government quickly join in on the preservation effort. In many markets, the need to preserve a low-income multifamily property is not always apparent because the buildings blend into the neighborhood and become a natural part of its fabric.
There is no typical POAH transaction. Each project involves an alphabet soup of all levels of government agencies and programs that are put together with grants, loans, tax credits, and bank funding. Every time POAH goes into a new city or state, it has to figure out what funding is available. And, at each round of state and federal funding, the rules can change, explains Blomquist. “It’s a continually evolving process.”
POAH’s knowledge of the many ways the preservation puzzle can fit together enables the nonprofit to successfully preserve low-income housing. That expertise, along with POAH’s national scope; familiarity with federal, state, and local housing finance; and financial acumen, makes it an attractive partner to many capital providers, including banks, insurance companies, and foundations that want to participate in preserving affordable housing.
National Church Residences: Pressure to Turn Market Rate
One of the toughest challenges facing organizations trying to preserve affordable units in recent years is the increasing flow of capital into the multifamily markets.
“When use restrictions are coming to an end,” says Jim Baugh, Vice President for Acquisitions and Development for National Church Residences, Columbus, Ohio, “owners know the property is more valuable because it can be converted to a market-rate project. They’re looking for the highest bidder.” National Church Residences (NCR) frequently finds itself bidding against investors looking to park funds from the Internal Revenue Service Section 1031 like-kind exchanges, in which investors avoid capital gains by reinvesting the proceeds of a property sale.
NCR is a faith-based, mission-driven organization that was created in 1961 by the Reverend John R. Glenn and four Ohio Presbyterian churches to serve older adults’ housing, social, and human needs. NCR today boasts a $700 million portfolio of affordable housing, health care, assisted living, and supportive services for modest-incomes seniors and families throughout the United States and Puerto Rico.
“One of our objectives is to preserve all the affordable housing we can because of the increasing numbers of baby boomers aging at a time when affordable senior housing is dwindling through attrition and turnovers to market rate,” says Baugh.
Fortunately for NCR, there are many financial options, and cities are recognizing the importance of inclusionary housing, which brings diverse income groups together in a single neighborhood, he points out.
One locality that seriously considers the need for senior housing is Pacifica, California, which in 2000 became one of the first jurisdictions in the United States to use eminent domain to take an at-risk affordable senior property, the Ocean View Senior Apartments.
The city stepped in when the owners of the 100-unit project approached the expiration of their HUD-subsidized loan and revealed plans to turn the property into market-rate apartments. “That would have left 100 seniors, many of whom had lived there for decades, with few options since no other affordable senior facility existed within 60 miles,” Baugh says.
The owners, who had purchased the Ocean View the year before, realized a $1.1 million profit. However, the property still required significant rehabilitation. The city did not want to hold or manage the property, so it turned to NCR, which purchased the property with funds from the Housing Authority of the county of San Mateo, the city of Pacifica, the California Housing Finance Agency, and banks that invested in the deal through LIHTCs.
Mercy Housing: Big Deals No Problem
Not all subsidized multifamily projects fall under HUD’s jurisdiction. The USDA also administers several programs that support the development and preservation of affordable multifamily rental housing (see sidebar article on rural preservation issues).
Affordable developments subsidized by USDA programs are facing preservation challenges similar to those encountered by developments supported by HUD programs. As in urban and suburban areas, nonprofit organizations are often at the forefront of efforts to preserve affordable rental housing in rural areas. Recently, USDA needed a nonprofit developer to bid against a for-profit developer for a package of 30 multifamily properties with expiring subsidies. USDA turned to Intercommunity Mercy Housing (IMH), the Washington state regional office of the Denver-based national nonprofit Mercy Housing, because it is an experienced owner, manager, and preserver of low-income housing.
The 30 properties, spread throughout Washington, had been owned by a single investor who built them in the 1970s and 1980s. The investor did not want the units he had worked hard to keep affordable over the years to be sold at market rate, but the buildings were appealing to for-profit developers who saw the potential for higher cash flows because of their location in strengthening markets, explains Walter Zisette, Intercommunity Mercy Housing Vice President of Real Estate Development.
Mercy credits US Bank, Minneapolis, with making the deal occur. US Bank provided nearly $20 million in financing and agreed to purchase tax-exempt bonds issued by the Washington State Housing Finance Commission to fund 30 individual transactions. Mercy acquired 926 units for nearly $33,000 per unit.
Each property was separately financed and structured. In each case, Mercy took out a USDA rural development Section 515 loan, paid off the previous owner, and carried a balance with new sources of funding, including new Section 515 loans and the tax-exempt bonds US Bank purchased. The state also provided a $1 million investment from its Housing Trust Fund, which made the properties eligible for permanent real estate tax abatements.
Ultimately, US Bank’s involvement gave it additional leverage in its relationships with public sector officials. Additionally, the bank’s flexibility in both timing and loan terms was essential in enabling Mercy to complete the transaction while adhering to the state and federal funding programs’ more rigid requirements.
Community Housing Partners: Preserving Rural Affordable Housing
Community Housing Partners (CHP) of Christiansburg, Virginia, focuses on acquiring aging rural multifamily properties, refinancing them to raise funds for their rehabilitation, and managing the refurbished units. CHP’s primary service area is the southeastern United States, where it has found a strong unmet need for this activity. There are thousands of units in these aging developments that are often in poor condition and could be lost from the affordable housing supply. To rehabilitate these units and maintain their affordability for low-income tenants, CHP has become an expert in combining resources from different subsidy programs and other funding sources. CHP is adept at using the complicated management systems that such financing schemes require.
CHP’s Property Management Division has also become expert in managing properties with tiered rent structures that target both very low- and low-income residents, says Director of Multi-Family Housing Development Operations Kathy Talley. CHP was one of the first nonprofits to rehabilitate a low-income property using USDA Rural Development (RD) program funds combined with LIHTCs. “We’ll have different basic rent levels for households at 40 percent, 50 percent, and 60 percent of area median income for one-, two-, and three-bedroom units,” she explains. “So, we’ll literally have up to nine basic rents and up to to nine waiting lists, one for each tier.”
CHP receives funding regularly from NeighborWorks America (NWA), of which they are a member organization. They have also received, through their bank partners, grants from the Federal Home Loan Bank of Atlanta’s AHP (see sidebar on "FHLBanks Affordable Housing Program Offers Grants for Development and Preservation "). CHP’s bank partners have been valuable resources, not only for delivering AHP grants but also for providing construction loans and permanent financing for their projects.
Timing is the biggest challenge in bringing together RD, LIHTC, NWA, and AHP funding. Each of these programs have different grant application cycles. (LIHTC and RD are annual, and NWA and AHP are semiannual.) Each program also has different sets of requirements for preconditions for committing or disbursing funds. Ultimately, experience in navigating this funding mechanism maze is one of the valuable attributes strong nonprofits like CHP bring to the table. By working with the right nonprofit partners, banks and other investors are insulated from these types of issues.
CHP improves efficiency and generates fees by serving as its own developer and construction manager and by maintaining architectural and construction management functions internally. Although construction management and architectural fees are earned up front, CHP often defers developer fees, putting them back into the deal to help cover expenses. If the property operates as expected, it will generate enough income to allow CHP to recoup these fees over time.
CHP’s dedication to green construction also sets it apart from other nonprofit developers. It recently completed one of the first green low-income multifamily renovations, Yorktown Square II in Yorktown, a USDA Section 515 deal. For example CHP’s Energy Services Department helped shepherd the Yorktown Square II project by training subcontractors how to recycle materials on the job. “Banks like to invest in green construction projects, because it shows their support of innovative affordable housing efforts,” CHP’s Talley reports. Green construction also indirectly improves housing affordability for tenants through significantly reduced utility costs.
What Banks Can Do
While each of the four nonprofits profiled in this feature have a unique approach to preservation issues, they all agree on the vital role banks can play in preserving low-income housing.
The most important way banks can support the preservation of low-income housing is to provide nonprofit developers serving that market with the funds needed to do this work, Mercy Housing’s Zisette says. This includes debt and equity financing for predevelopment, acquisition, and construction/rehabilitation phases of preservation projects. A capacity grant from the MacArthur Foundation enabled Mercy to hire the development professionals that accomplished the Washington state deal. Banks that provide grants may see a downstream benefit from future loans, Zisette adds.
Another way that banks can support the preservation of low-income housing is by bringing deals to the attention of nonprofits. “I have a couple of bankers who tell me when new properties come on the market, or when they are approached by borrowers who are either in trouble or want to sell,” Zisette says.
“Word of mouth deals are our most successful,” according to NCR’s Baugh. “The HUD office is more likely to play ball with us than a profit-focused group, because of our mission orientation and willingness to do difficult deals.”
Nonprofit developers also qualify for tax exemptions, special financing, soft funding, deferred amortization schedules, and grants that can help improve a property’s cash flow and occupancy.
“I’d like banks, when they see an at-risk project, to think about the nonprofits and how they could assist with refinancing and restructuring,” Zisette says.
For more information, contact POAH, NCR, Mercy Housing, and Community Housing Partners.
Rural Preservation Issues and Resources
Rural areas face the potential loss of not only HUD- or LIHTC-financed rentals but also units funded by the USDA Section 515 rental housing program. Since 1962, Section 515 has enabled the USDA to provide low-cost loans directly to the developers of affordable rentals. The vast majority of Section 515 tenants have incomes under 50 percent of area median income, and more than half of the tenants are elderly or disabled.
The majority of the more than 400,000 units in the Section 515 portfolio were constructed in the 1970s and 1980s and now need repairs and updating. In addition, many owners of developments funded in 1989 or earlier seek to prepay their Section 515 mortgages, and some prepaid units cease to be affordable for their low-income tenants. (Section 515 mortgages made after December 15, 1989, cannot be prepaid.)
While USDA does not have the equivalent of HUD’s Mark-to-Market program, a variety of resources can help finance the preservation of Section 515 properties.
Section 538 guaranteed rental housing loans can be used by purchasers or stay-in owners of Section 515 properties, alone or with tax credits or other financing. USDA provides a 90 percent guarantee and interest credit on $1.5 million of the loan amount down to the long-term monthly applicable federal rate at the date of loan closing. Program terms include a minimum 1.15 debt service coverage ratio and 40-year amortization. Eligible lenders are those approved by, and active with, Fannie Mae, Freddie Mac, or the FHA, or those approved by USDA.
Rental assistance for tenants may be available to increase the viability of some preservation deals. Some current Section 515 tenants receive Section 8 vouchers from HUD or Section 521 rental assistance from USDA. USDA sometimes provides new rental assistance units as incentives to owners to stay in the program rather than prepaying their mortgages. In addition, since fiscal year 2006, USDA has provided its own vouchers to enable current tenants to remain in prepaid properties.
For more information about rural preservation, visit Housing Assistance Council and USDA’s Multi-Family Housing Preservation and Revitalization Restructuring Demonstration Program page. Examples showing how the resources previously mentioned have been used for rural preservation are highlighted in the summer 2007 issue of the Housing Assistance Council’s Rural Voices magazine. For further information, e-mail Leslie Strauss.
OCC's Community Affairs Department
to receive a hard copy of Community Developments.
Articles by non-OCC authors represent their own views and are not necessarily
the views of the OCC.