The Sec. 42 low-income housing tax credit program has provided this nation with more than 1.7 million affordable housing units for citizens earning 60 percent or less of the area median income (AMI). Unfortunately, there remains a large gap in the supply of housing for individuals and families earning between 60 percent and 100 percent of the AMI. Moreover, this segment of the population is the backbone of the workforce in the United States.
HYPOTHETICAL WORKFORCE FUNDING
Historic equity, federal $25,650/Per Unit
Historic equity, state $29,363/Per Unit
Sales tax exemption $9,000/Per Unit
Energy grant $1,000/Per Unit
State historic trust fund $1,667/Per Unit
Investor equity $15,000/Per Unit
HUD loan $68,320/Per Unit
Total project cost $150,000/Per Unit
There is no federal program that provides funding for affordable housing targeted to those members of society earning more than 60 percent of the AMI.
However, with creativity on the part of professionals in the apartment industry working in partnership with corporate employers along with state and local governments, it may be possible to avoid launching yet another federal initiative while still addressing this issue.
Developing affordable workforce housing requires an extensive patchwork of various programs as well as the invention and implementation of some new measures on a case-by-case basis. Success can only be achieved— and let me stress this again—through innovation, flexibility, and partnership. Let's take a hypothetical scenario and explore how these three elements can be applied for the benefit of all parties involved.
Assume that a Midwestern community of 15,000 has an opportunity to attract a new company that wants to build a manufacturing facility. The proposed facility will employ 200 people, each earning approximately 70 percent of the AMI.
In this example, the AMI for a family of four is $55,000. A developer could build quality two- and three-bedroom apartments to meet the needs of this additional workforce at a total cost of approximately $130,000 per unit. Assume economic occupancy at 93 percent; $4,000 per unit expenses per annum; a loan constant of 8.5 percent at 70 percent debt; and a return on equity of 10 percent.
Based upon these assumptions, a monthly rental rate of $1,400 would be required—obviously far higher than a prospective resident can afford.
Let's further assume that a factory employee should only spend 30 percent of his or her monthly income for rent and utilities. This produces a monthly rental rate of $850 in our example, or a differential of $550 per month.
Clearly, a solution must be found to close this substantial gap between actual development costs and what the consumer can afford to pay.
Our Midwestern community is ready for the challenge. A meeting of the stakeholders is called by the developer, including the company that wants to build the plant, the city, the state housing agency, and the state historic preservation office.
A decision is made to convert a historic high school that was closed two years ago into 60 multifamily units. The conversion of this existing structure into housing costs $150,000 per unit (versus $130,000 for new construction). A plan is devised to include the following components:
”¢ Federal and state historic tax credits
Federal historic tax credits are utilized at 20 percent of eligible costs (assumed to be $135,000 of the total $150,000 cost).
State historic tax credits are also utilized at 25 percent of eligible costs.
The federal historic tax credits are sold at $0.95, and the state historic tax credits are sold at $0.87. The result is $46,682 per unit of equity generated by the sale of the tax credits.
”¢ Historic preservation grant
A preservation grant from the state historic trust fund of $100,000 is received to help defray the cost of renovation.
”¢ HUD Sec. 221(d)(4) loan
A Department of Housing and Urban Development (HUD) Sec. 221(d)(4) loan is obtained with a 40-year amortization period and a loan constant of 7.6 percent. This loan is calculated at the lesser of 90 percent of cost, or a 1.11x debt-service coverage ratio (DSCR). However, with the use of historic tax credits, only $70,000 per unit in debt is required—far less than a loan at either 90 percent loan-to-cost ratio or a 1.11x DSCR.
”¢ Tax abatement
The city and state work together to devise a 40-year tax abatement program for the property, thereby saving $600 per unit per year in real estate taxes.
A deed restriction is incorporated that requires the project to rent to residents that earn no more than 80 percent of the AMI at the time of occupancy.
”¢ Energy and weatherization grants
The state offers a grant program to developers that are willing to install energy-saving windows and energyeffi cient heating and cooling systems. This project qualifies for a grant of $1,000 per unit for this purpose.
”¢ Sales tax abatement
The city and state also agree to exempt this project from paying sales tax on its construction. The abatement of the 6 percent sales tax saves an additional $9,000 per unit for the project.
”¢ Investor equity
Investor equity of only $15,000 per unit is required for this project. The developer finds several local investors willing to provide the equity at a projected return of 10 percent. Ultimately, a rental rate of $841 per month is derived through the various funding sources.
The stakeholders then work together to develop a unique structure for the long-term operation of this property.
The developer agrees to rent to residents who earn no more than 80 percent of the AMI. He also agrees to charge rents that total no more than 30 percent of the monthly income for a family of four earning 80 percent of the AMI. However, if the median income level ever drops, he does not have to lower rents.
The state agrees to monitor the project similar to the manner in which it monitors Sec. 42 projects.
The employer agrees to guarantee occupancy at 85 percent for 10 years, simultaneously giving the investors comfort while signaling to the other stakeholders that it is making a longterm investment in and a commitment to the community.
Other potential funding sources for such projects might include stateadministered Community Development Block Grants for infrastructure development including streets, sidewalks, sewer, water, etc., as well as the HUD Sec. 108 loan program.
It is possible to develop affordable workforce housing for citizens earning 60 percent to 100 percent of the AMI. However, it requires an incredible amount of cooperation on the part of many different parties as well as considerable patience and perseverance, from project conception through completion.
And, a developer must have a solid understanding of HUD loan programs, as well as a firm grasp of the multitude of state and local funding opportunities that are available to help fund affordable workforce housing.
R. Lee Harris, CRE, CPM, is president of Cohen-Esrey Real Estate Services, LLC, a Kansas City-based commercial real estate organization that has managed more than 56,000 multi family units since 1969. The firm is active in 95 markets spanning 17 states and is actively involved in the development and acquisition of apartment communities.