Jamboree Housing's Granite Court is the epitome of Orange County, Calif., multifamily living. When it opens in December 2008, the podium-style project of one-, two-, and three-bedroom apartments in the heart of Irvine will boast an outdoor courtyard with barbecues; a “tot lot” children's play area; a Wi-Fi active clubhouse with a demonstration kitchen and art gallery; a state-of-the-art fitness center; and earth-friendly finishes like bamboo flooring and low-flow appliances. Embracing New Urbanist concepts, Granite Court is also less than one-quarter mile from public transit and within walking distance of shopping, medical services, churches, and schools.
It's just the type of property that well-heeled, flashy suburbanites across the L.A. Basin would line up for, but they would be turned away. All of the 71 units at Granite Court are reserved for workforce residents making between 30 percent and 60 percent of the area's median income. For Jamboree senior project manager Michael Massie, the project demonstrates a growing tendency among tax-credit developers to rely on financial and logistical teams that include architects, developers, builders, and public and private bridge financiers. “That is going to be the case with just about any affordable housing development these days as costs have increased and you start dealing with more and more complex construction and site issues,” Massie says. “It takes a village. It takes a lot of people.”
Granite Court, which broke ground this summer, shows how far affordable housing projects have come since Congress created the low-income housing tax credit in 1986. Forget the imposing and dreary projects of yore—today's affordable communities are pioneering progressive transit-oriented and green-building practices while design and amenities. “The idea is that no one is going to be able to drive by and say ‘That's affordable,'” explains Michael Costa, president of Long Beach, Calif.-based Simpson Housing Solutions. “You're going to have all of the market-rate amenities—swimming pools, Jacuzzis, clubhouses, exercise rooms, play areas for kids, the whole bit.”
FINANCE TEAMS That's the aim of the Auburn Development Group's Villages at Delray project in Delray Beach, Fla. On the site of a former housing authority project destroyed by Hurricane Wilma in 2005, the developer's master plan calls for 1,000 Caribbean-style, LEED-certified housing units, 264 of which will be affordable and/or workforce apartments. All residents will enjoy jogging trails, tennis courts, basketball courts, and a water park for children. Plus, large clubhouses will serve as hurricane emergency centers with independent generators, impact-resistant windows, and commercial-grade demonstration kitchens. A trolley line will take residents from the community to beaches on the Atlantic Coast as well as to work and retail centers in downtown Delray Beach.
“At the end of the day, we wanted to develop a place where you can truly go through all stages of life without moving out of the neighborhood,” explains Cito Beguiristain, vice president of the Delray Beach-based Auburn Group. “This is affordable product, but it is nicer than the majority of the market-rate housing [here]. A lot of that was made possible through our partnerships with the local, county and state government.” In particular, Beguiristain points to $16 million in city density bonuses, $14 million in public land contributions, and a $900,000 county demolition grant for making development of the $200 million community achievable.
Similarly, Coconut Grove, Fla.-based Carlisle Development Group is leveraging partnerships to help finance a redevelopment of Miami's historic Royalton Hotel. “I think we used six or seven different kinds of financing,” says Carlisle chief operating officer Matt Greer. “We've got 9 percent LIHTCs, historic tax credits, a state apartment incentive loan from the state of Florida, Dade County documentary stamp surtax funding, home funding from the city, and shelter -plus-care funding from HUD—all on that one project.”
The complex penciling isn't new for Carlisle, where Greer says dealmakers pride themselves on squeezing every last possible subsidy avenue. And while subsidized housing providers have always secured financing from multiple sources, establishing ever-increasing—and tighter—relationships with municipal money providers looks to become the norm rather than the exception as tax-credit developers continue to stretch the limits in environmental, smart growth, and quality-of-life amenities.
BARRIERS TO ENTRY Finding success with complex municipal partnerships—financial or otherwise—has often been one of the humps keeping traditional market-rate developers out of the tax-credit game. Turnover at city, county, and state housing authorities and agencies often means that projects change direction several times during a development lifespan. And those changes are often left at the discretion of committee or board members with little or no construction and development experience.
To compensate, tax-credit developers work at relationship building and contingency planning to make projects succeed. “You always have to have an A, B, C, and D strategy,” Greer says. “Certainly we have versions of the deal where we don't make any money. That's never good, but at least you avoid the version of the deal where you lose your shirt.”
Despite the difficulties intrinsic to affordable development, tax-credit veterans expect more market-rate developers to begin testing the waters as construction costs rise and competition for affordable land—especially in high-barrier markets—increases. “Right now, everyone is just trying to make the deals pencil ... by trying to do things like historic tax credits or affordable tax credits or even sustainable tax credits,” says Kevin Ratner, senior vice president of development for Cleveland-based Forest City Residential Group. “Whatever you can do to offset that development cost is the whole game right now, because construction costs are all so [extremely] high.”
Costa says that as affordable developers create larger portfolios of market-rate quality product, he is seeing a definite rise in interest among the larger money players in the multifamily industry. “One of the large REITs and a lot of large institutional investors are starting to look at affordable housing portfolios that, for the most part, were developed to the standards of market-rate and seeing value and cash flow,” he says.
Asked if he expects those investors to knock on Simpson's door in the near future seeking a portfolio buy, Costa had a concise and telling reply: “They are knocking on our door right now.”
MAKING TAX-CREDIT PROJECTS WORK
- Choose your partners wisely. Be upfront about what your expectations are and what their expectations should be. Don't get into deals where you do not bring a significant value- add to the table.
- Have a contingency plan. Then have a contingency to your contingency plan. Assume the project is going to be longer, harder, and more expensive than you anticipate and decide if there is still a comfort zone to the deal.
- Look to your syndication partner. Most of the larger and established tax-credit syndicators will walk developers through any issues on how deals are structured, including the ins and outs of Section 42 and other tax issues.