As recently reported in The State of the Nation’s Housing: 2014, although the multifamily housing sector may be booming by some metrics, the crisis of affordability remains quite dire. On one hand, 2013 saw the number of renter households grow by more than 500,000 while multifamily housing starts increased by 25 percent. On the other hand, the nation’s 11.5 million extremely low-income renters competed for a mere 3.2 million units that were both affordable and available, according to the report by the Joint Center for Housing Studies of Harvard University.

Brian Coate

Brian Coate

Despite the signs of a flourishing multifamily sector, clearly there is still a desperate need for additional affordable units. While both new construction and rehabilitation of existing affordable units remain viable options, there is another solution that is perhaps too often overlooked—converting existing market-rate units to affordable units. The story of Zollie Scales Manor demonstrates how that process can work.

Owned and operated by the Cesar Chavez Foundation (CCF), Zollie Scales Manor is a 158-unit affordable housing property in Houston. The CCF was founded in 1966 to serve the economic and health needs of farm workers across the United States. It has expanded its services over the years and today focuses on providing affordable housing and safe neighborhoods for working families in addition to improving education for children. The CCF builds and renovates multifamily properties to make affordable housing available to low-income working families and seniors. More than 4,500 rental units have been developed in the five-state area the foundation serves: Arizona, California, New Mexico, Texas, and Washington.

Forty units at Zollie Scales Manor in Houston have been converted to affordable housing.

Forty units at Zollie Scales Manor in Houston have been converted to affordable housing.

Recently, the CCF worked closely with the city of Houston to renovate Zollie Scales Manor, which was in disrepair due to Hurricane Ike. The market-rate tenant base had dwindled, causing blight to the neighborhood. CCF officials targeted the property for substantial rehabilitation and set aside a portion of the property for very low-income tenants, which would come primarily from the existing tenant base.

When initiating the acquisition and renovation of Zollie Scales Manor, the CCF obtained one of the largest Neighborhood Stabilization Program (NSP) grants ever awarded by the Department of Housing and Urban Development. Working with Mercy Housing, the CCF used the NSP grant and funding from Mercy to complete the acquisition and renovation. In the process, 40 units were converted from market-rate to affordable apartments for very low-income residents. The rest of the units were restricted for moderate-income households. The transition was fairly seamless as the age of the property and existing tenant base made it a natural fit for a mixed-income conversion. The decision to convert a portion of the units to affordable was essentially a proactive response to the demographics of the neighborhood, as the difference between market-rate and affordable complexes in the area was not great and thus it made sense for the two to co-exist in an upgraded complex that citizens of varying incomes could all enjoy.

The total development cost of the project was $11.5 million of which $8.8 million came from the NSP grant. As the construction loan duration was coming to an end, the CCF was facing rigid time constraints to obtain permanent financing and complete the process. Lancaster Pollard recommended the Fannie Mae Multifamily Affordable Housing (MAH) Program as the permanent financing source because of its timeliness, competitive pricing and term flexibility. During the application process, Lancaster Pollard presented the property’s credit (relatively low loan-to-value, high debt service coverage, strong occupancy and seasoned owner/manager) to Fannie Mae in a manner that resulted in a Tier IV designation, the strongest possible designation. The strength of the CCF’s current portfolio and the financial strength of the foundation were also highlighted, resulting in lower guarantee and servicing fees.

An aging complex has been rehabilitated under the $11.5 million deal.

An aging complex has been rehabilitated under the $11.5 million deal.

By closing on a $2.7 million loan via the Fannie Mae Multifamily Affordable Housing (MAH) Program, the CCF was able to pay off the construction/acquisition loan and provide a permanent financing solution in a timely manner. The non-recourse loan carries a 12-year term and a low interest rate. In addition, the transaction allowed for the majority of the developer fee to be paid to the CCF. The end result is a permanent financing solution that will allow the CCF to focus on its mission of providing high-quality, service-enhanced affordable housing for working families and seniors.

Upon entering the newly renovated units at Zollie Scales Manor, several of the residents shed tears of joy. What was once an aging complex in disrepair had been completely transformed with upgrades typically enjoyed at high-end communities in upscale markets. The renovation of Zollie Scales Manor is truly a success story as it has revitalized a blighted neighborhood and provided high-quality affordable units to an area that desperately needed them.

Brian Coate is a vice president with Lancaster Pollard in Columbus, Ohio. As a housing banker, he represents Illinois, Indiana, and Wisconsin.