New Funding for Affordable Housing Encourages Public/Private Partnerships
Affordable housing is a critical socioeconomic issue in many regions, and demand is rising nationwide. Yet financing and developing affordable housing can be challenging. Many affordable-housing projects involve more planning and entail greater risks than similar market-rate projects due to the layers of financing required and the complexities of public/private partnerships.
However, some of today's most creative affordable-housing solutions arise from innovative collaborations among nonprofit groups, private companies, and government agencies. Private companies that partner with public and nonprofit groups to pursue these projects have produced a number of profitable, successful communities. Commercial real estate developers should stay abreast of affordable-housing activities in their markets as the number of opportunities for public/private partnerships for these projects continues to grow.
State Program Boosts Funding
Obtaining the financing necessary to get affordable-housing initiatives out of the ground is the first hurdle. The federal government and select state governments are addressing the affordable-housing problem with meaningful programs. For instance, California's affordable-housing industry experienced a tremendous boost with the November 2002 passage of Proposition 46, a bond measure that provides new funding for affordable-housing preservation and development.
Proposition 46 guarantees capital to fund affordable housing for the next five years, with projects gaining assistance through various multiyear spending plans. Specifically, the multifamily program provides the largest amount of funding, roughly $910 million. The plan is expected to bring 131,000 to 134,000 affordable-housing units online over five years.
One benefit of the measure is greater flexibility for affordable-housing developers to utilize multiple funding sources; the security of these funds should stimulate better planning, designs, and construction. Additionally, the funds are expected to act as a development catalyst, resulting in at least $13 billion in private investment and federal funds to build new affordable housing in California.
Creative Financing Saves Property
Creative financing was the key to acquiring and renovating Beechwood Manor, a 100-unit affordable-housing rehabilitation project in Lancaster, Calif. Though California currently has more than 148,000 affordable-housing units financed through various programs, many of the units are being converted to market-rate housing. Beechwood Manor was slated to be one of them.
The property had been neglected for years. Although some residents had lived in the complex for more than 15 years, frequent tenant turnover, along with limited maintenance and almost no significant renovation left the property in disrepair.
But it did not go unnoticed: Limited Income Communities, a California state government-sponsored organization that works in partnership with existing public organizations and private developers to maintain and increase the long-term supply of quality affordable housing, saw it as an opportunity to preserve housing in an area that was in desperate need of affordable alternatives.
LINC acquired the property, which was renamed the Village at Beechwood at the start of the project, for $3.29 million; construction and related costs totaled $5.03 million. Housing Partnership Fund supplied the predevelopment loan, while the acquisition loan came from four different national lenders. Half of the permanent financing came from the state Multifamily Housing Program funds; 30 percent came from federal tax credit funds; and 20 percent came from a California Housing Finance Authority loan. This financing structure allowed for the combination of several funding sources and also permitted very low rents (35 percent of the median income for Los Angeles County).
Keeping costs in check has been critical to the project's success. Affordable-housing rehabilitation projects often can be acquired and refurbished for one-half to two-thirds the total cost to develop a new property. For example, the cost to rehab the Village at Beechwood is averaging about $83,000 per unit. If a market-rate developer were to purchase the land and execute design, entitlement, and financing processes, the cost most likely would exceed $140,000 per unit. Also important in controlling costs was the decision to rehab the project in phases so most residents, especially families with children, could stay in the complex, thus reducing relocation expenses.
New Partnership Opportunities
Increased government-sponsored funding could make affordable housing a profit center for private commercial real estate developers, particularly small companies wishing to diversify their products and find a niche in today's increasingly competitive market.
As the need for cost-effective housing alternatives grows nationwide, nonprofit organizations and federal and state government-sponsored entities will seek partnerships with the for-profit real estate community, lenders, and investors to complete these important projects.
To be prepared when new opportunities arise in their markets, real estate professionals should stay aware of local activities and state and federal funding programs.