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.