Valuation

The Affordability Question

Commercial real estate pros find local answers to low-income housing challenges.

Highland Park, Ill., a Chicago suburb where the median home price is $430,000, recently passed a zoning ordinance mandating that 20 percent of new multifamily developments with five or more units must be sold as affordable housing.

It's an indication that all communities -- regardless of their wealth -- need affordable housing.

What Is Affordable?

More than 200 U.S. communities mandate affordable housing as part of new construction, bringing attention to a growing disconnect between what housing costs and what people earn.

But what constitutes affordable housing? It's spending no more than 30 percent of your income on housing and utility costs, according to the federal government. So if you're a company chief executive officer making $300,000 per year, you have $90,000 annually to spend on housing. And if you're the person who cleans the CEO's office making $30,000, you have $9,000 to spend on housing.

Unfortunately that's not quite enough. The average national housing wage is $31,637, which provides $9,509, the median annual cost of renting a two-bedroom apartment, according to the National Low Income Housing Coalition. That's an hourly wage of $15.21, almost three times the minimum wage.

That housing wage has risen 37 percent since 1999, according to the coalition's annual survey, reflecting the rising costs of both rental and for-sale housing, pricing out large population sectors. Nearly 57 percent of renters earn less than $30,000 annually, according to Harvard University's Joint Center for Housing Studies, and more than 5.4 million renter families and senior citizens pay more than half their income for housing or live in severely distressed housing, according to the U.S. Department of Housing and Urban Development.

The complexity of financing affordable housing has limited the number of private-market participants. Despite this, it is a growing field. Demand for federal low-income housing tax credits increased 20 percent in 2003 over 2002, according to a recent study of tax-credit-allocating agencies. Requests outnumbered supply nearly three to one, the study found, and 71 percent of 2002 awards went to individual for-profit developers or those with nonprofit partners.

Affordable-housing brokerage also is growing, as nationally, "a considerable amount of capital is chasing a limited amount of product," says Robert Di Pietrae, CCIM, an associate partner with Hendricks & Partners in Seattle. He has focused on affordable housing since 1998. "On a national level, the affordable-housing market is very good. Transactions go together quickly and then take forever to close," he says.

Today the sector has its own subdivisions: low income, mixed income, moderate income, senior housing, workforce housing. This brand extension of what was once collectively called low-income housing has created a thriving industry among brokers, developers, and nonprofit agencies. Increasingly commercial real estate professionals are involved in developing, brokering, and preserving affordable housing and even creating nonprofit organizations that provide low-income multifamily rental and for-sale housing.

Housing the Very Low Income

While housing advocates decry the failure of affordable-housing supply to meet demand, that isn't necessarily true in all markets. "In many non-urban areas of the country, market-rate housing is serving affordable needs," says David J. Latina, CCIM, a vice president at A.F. Evans Development Co. in San Francisco. "In those areas, land is still cheap, and a family of four can rent housing that doesn't exceed 30 percent of their income," he says. "As you get closer to the cities where the jobs are, land costs go up and housing costs go up."

The most underserved population are those making 20 percent or less of an area's median income, often seniors and persons with disabilities on fixed incomes. In 2002, 9.9 million renters fell into that category, outnumbering the housing supply available to them by 2 million, according to State of the Nation's Housing 2003.

"The tax credit can't serve people below 20 percent because the subsidy isn't big enough," Latina says. Therefore, private developers often ignore this sector and nonprofit agencies struggle to fill the need. Latina cites A.F. Evans' redevelopment of Marlton Manor, a 151-unit multifamily building in San Francisco's Tenderloin district, as the type of effort necessary to serve this population.

Marlton's resurgence represents several affordable-housing trends. Originally built in 1924 as a tourist hotel, it operated as Section 8 subsidized housing, where residents are required to pay only 30 percent of their income as rent. In 1999, the owners wanted to sell, which put the building at risk for conversion to market-rate housing. A.F. Evans partnered with Mercy Housing California, a nonprofit organization, to purchase and redevelop the building as affordable housing.

The retrofit financing came from $10.7 million in tax credits sold to Fannie Mae. The San Francisco Redevelopment Agency, Citibank, and Alliant Capital also provided financing for the project. The redevelopment included a seismic retrofit, creation of accessible units, expanded common space, and the addition of a computer learning center.

Marlton Manor also has a small retail development, which added about $6 million to the $16 million total project cost. It's difficult to add retail to such projects since "tax credits restrict commercial development to 20 percent of the total square footage. It's more a community-building strategy than an economic decision," Latina says.

A.F. Evans needed a separate commercial operating budget to support a $200,000 tenant improvement allowance for the three retail spaces totaling about 3,500 square feet. The commercial tenants -- grocery store, credit union, and restaurant -- pay market rent; any surplus rent over the operating expenses and ground lease payments must be used for public benefit, supporting a tenant services program.

In addition, A.F. Evans had to find commercial tenants acceptable to Mercy Housing and the building's tenant organization, as well as ones that met its own goal of providing an active, welcoming street presence. This precluded obvious tenants such as liquor stores and even social service agencies, which are over-represented in the neighborhood. A.F. Evans did a market analysis to locate appropriate tenants and also paid about $70,000 in relocation fees to the grocery store.

Latina readily admits that the only reason A.F. Evans does very low-income projects such as Marlton Manor is because the company's founder pushes them. "Art Evans has a particular interest in reviving neighborhoods," he says. "He does community development as well as real estate development." About 50 percent of the company's portfolio of more than 7,000 units is affordable housing, located in California, Nevada, and Washington.

Going Nonprofit

Mercy Housing is one of the largest nonprofit developers in the country, having created around 14,000 affordable units in 34 states. Often nonprofits are the only source of affordable-housing development in rural areas.

Many times small organizations work locally to alleviate the problem. As the only nonprofit group building low-income housing in Martin County, Fla., Indiantown Non-Profit Housing is in the process of expanding into adjacent counties to serve the Treasure Coast area north of Palm Beach, says Malcolm N. Crabtree, CCIM, CRB, a retired architect and general contractor who is the organization's president. By using a combination of federal and state government financing programs including Rural Development and HOME funds, the organization constructed and manages three multifamily developments housing 150 families. It also is building 44 three- and four-bedroom affordable for-sale homes and redeveloping a mixed-use project of affordable rental apartments and a grocery store.

As a community development corporation, the organization is exempt from real estate property taxes and can leverage private donations. "We are in the process of utilizing tax credits as a funding source," says Crabtree, who volunteers his time along with 13 other board members. Still, "Raising funds is the most challenging and time-consuming process," he says.

Ted W. Dang, CCIM, CPM, a private developer in Oakland, Calif., points out that financing can be complex for nonprofits too. He is a founding member of the East Bay Asian Local Development Corp., one of the first community development corporations in the country, which has developed more than 800 affordable-housing units.

One of its more ambitious projects is Swan's Marketplace, a mixed-use development containing 18 affordable rental units, 20 co-housing condominiums, and 18,000 sf of office and commercial space in a renovated historic building. "The project required about 12 different funding sources with subsidies accounting for about $6 million of the $16 million price tag. There are usually different types of funding available for different types of uses, but the financing can be very complex. We actually had to do a master condo plan for Swan's Marketplace where different financing sources were secured by different sections of the building," Dang says. The project, which houses a children's art museum, restaurants, and a fresh-food marketplace, has won several awards for design, historic building reuse, and as a model for mixed-use, mixed-income development.

Preserving Affordable Housing

Nearly 83 percent of tax credit awards are for new construction, which frustrates many affordable-housing advocates, because it is cheaper to preserve existing housing than to build new. About a million subsidized housing units are nearing the end of their affordability requirements and may be converted to market-rate housing by new owners. Nearly 200,000 subsidized units have been converted since 1996, experts estimate, further limiting the overall affordable-housing supply.

But in 2000, Richard G. Knutson, CCIM, of Moison Investment Co. in San Leandro, Calif., brokered a deal that preserved 2,174 affordable-housing units, one of the largest low-income housing preservation transactions in California. "The financing was a fairly complicated mix of state-issued low-income housing bonds, state-allocated federal tax credits, and local soft second mortgages," he says. The deal was a 1031 exchange that allowed the seller to diversify out of affordable housing into commercial and market-rate apartment investments. The two-year timetable included putting together financing through the California Housing

Finance Agency, California Debt Limit Allocation Committee, federal tax credits, and local government subsidies. The buyer, Related Cos. of California, rehabilitated the five 30-year-old HUD properties and is preserving them as affordable housing for the next 55 years.

Preserving these properties makes sense for large buyers and managers like Related, which recapitalize the projects through current debt and equity financing transactions. Overall, affordable housing is viewed as a stable investment with secure cash flows and strong occupancies. Most are rigorously managed financially, owing to the oversight required to avoid tax-credit recapture. An Ernst & Young survey of 7,800 tax-credit properties found a statistically insignificant foreclosure risk compared to other real estate.

Emerging Trends

Although rental affordable housing better serves low- and very low-income renters, for-sale affordable housing is attracting a growing sector of the working population, usually those making 60 to 120 percent of an area's median income.

Mixed-income housing is one way to provide workforce housing. Financing involves many layers and can include HOME and community development block grants, tax-exempt bonds, tax credits, housing trust funds, tax increment financing, and revolving loan funds. A number of large infill projects such as Denver's Stapleton Airport redevelopment have workforce-housing components. In the Denver project, 10 percent of the homes developed are reserved for people making 80 percent or less of area median income. A 30-year price restriction that allows owners to realize appreciation but keeps the properties under market rate guarantees long-term affordability.

Another tool for financing for-sale housing is the new markets tax credit. Triwest Group in Bonita, Calif., which specializes in the rehabilitation, conversion, and development of affordable housing for workforce families and seniors, recently has been approved as a community development entity for the NMTC program, says owner J.R. Chantengco, CCIM.

As a CDE, Triwest can provide its investors with tax credits, similar to the housing tax credits, which can be used to raise capital for a broader variety of developments, including affordable for-sale housing, mixed-use, and other commercial/retail projects. Unlike the low-income tax credit, the NMTC cannot be used to finance residential rental projects, although mixed-use projects can contain small residential rental components, provided the residential rental income is less than 80 percent of the property's gross income.

"Triwest CDE will be able to attract investments from third-party investors in need of pure tax shelters in the form of tax credits. This is a seven-year program and investors will obtain an additional tax credit of 30 percent (present value). These funds may also be converted into equity ownership in real estate projects," Chantengco says.

The combined 2003 and 2004 NMTC allocations total more than $3 billion, part of an overall $15 billion allocation for the program, which Congress created in 2000. Triwest, in a joint venture with master developer Urban Innovations, is investing the funds raised through tax credits and corporate and private investment in the mixed-use Barrio Logan redevelopment project in San Diego, Filipino Village District in National City, Calif., and the Logan Heights/Imperial Avenue Corridor in San Diego.