UPFRONT: NEWS

APARTMENT FINANCE TODAY • NOVEMBER/DECEMBER 2007

Workforce Housing Goes Mainstream

New York City—This September, as the housing credit crisis on Wall Street stretched into its third month, Moody’s Investors Service issued a report trumpeting the “great demand” for housing targeted to workers such as teachers, policemen, and nurses.

This summer, Moody’s tightened its subordination standards for bonds backed by commercial mortgages, drawing a hard line against what Moody’s analyst Florence Zeman called soft underwriting practices by many lenders.

Zeman went on to co-author the September report, titled Workforce Housing On the Rise. It cites several of the ways states and municipalities are confronting the severe shortage in workforce housing. The programs many localities have set up are financed by bonds ranging from general obligation bonds issued by municipalities to tax-exempt bonds issued by housing finance agencies (HFAs). Moody’s differentiates workforce housing from the broader category of affordable housing, which is available to any individual or family that meets the development’s income targets. “Workforce housing is designed for specific employment groups such as teachers, police officers, or health care workers who struggle to buy homes in the affluent communities where they work,” said Moody’s analyst Rachael Royal McDonald, a co-author of the report.

When rating bonds that back loans to these projects, Moody’s considers the potential strengths and challenges of targeting housing to a specific worker population.

Despite the smaller number of residents that could move in to a workforce housing project, the demand is high in many markets, Moody’s said.

To support this point, Moody’s quotes a series of reports. In most of the nation’s 25 largest metro areas, people holding three of the most important community service jobs—police officers, teachers, and nurses—could afford homes in less than one half of the census tracts, according to a report by the National Association of Home Builders. In 28 metro areas studied by the Center for Housing Policy, families earning between $20,000 and $50,000 per year paid an average of 57 percent of their incomes for housing and transportation combined.

Moody’s rates bonds that back loans to several types of workforce housing developments. State HFAs issue bonds that back home mortgages. These programs, like Louisiana’s “Teacher Assisted Program Loans,” provide assistance payment grants that can be used to pay closing costs and a portion of the required downpayment.

Moody’s also rates tax-exempt bonds that are often mixed with low-income housing tax credits to finance rental housing projects, in addition to bonds used to fund loans to employerassisted housing and even military housing projects.

Seniors Housing Privatization Faces Criticism

A $6.3 billion deal made last summer to take HCR Manor Care, Inc., private has attracted criticism by the Service Employees International Union (SEIU), Michigan legislators, and activists with talk that the state of Michigan could block the sale.

The Carlyle Group, a Washington, D.C.-based private equity firm, plans to buy the Toledo, Ohio-based real estate investment trust (REIT), which owns about 500 nursing homes, assisted-living, and rehabilitation facilities across the country. A group of 17 Michigan state representatives has asked the Michigan Department of Community Health to block the sale after the SEIU issued statements claiming that privatizations result in staffing cuts and worse service for residents. The seniors housing REIT owns 28 properties in Michigan, including assets in 30 states—most concentrated in Florida, Illinois, Ohio, Pennsylvania, and Michigan.

“When [residents] are put at risk and bought and sold like some sort of asset or revenue stream for a company, it raises a lot of concerns,” said Rep. Fred Miller.

The SEIU, the nation’s largest health-care union, has 1,000 Manor Care employees as members, out of about a total of 60,000 Manor Care employees nationwide. The union cited a Sept. 23 investigation by The New York Times, which detailed how cuts in staffing and operations at nursing homes bought by private equity firms were correlated to a rise in serious deficiencies—patient restraint for long periods, medication mix-ups, and spoiled food served to residents.

Manor Care has issued statements denying that the sale would result in staffing cuts or changes in quality of care for residents.

“We’ve told our employees they should see little or no change as a result of this transaction,” said Manor Care spokesman Rick Rump.

Another private equity firm, Kohlberg Kravis Roberts and Co., owned Manor Care from 1987 to 1991 before current CEO Paul Ormond arranged financing and took it public.

At the end of the second quarter, the company recorded a total occupancy rate of 89 percent. The REIT owns and operates its properties primarily under its Arden Courts, Heartland, and ManorCare Health Services brands.

A vote by Manor Care stockholders on the acquisition was scheduled for Oct. 17.

House Extends Flood Insurance

The House of Representatives passed a bill extending the National Flood Insurance Program (NFIP) for five years until 2013. The measure adds optional wind damage coverage, increases coverage limits, and provides for improved flood mapping and “multiperil” coverage for damage resulting from combined windstorms and floods.

The bill phases out subsidized rates on commercial properties, vacation homes, and second homes built before 1974. Multifamily rental properties were originally included in this subsidy phase-out, but the National Multi Housing Council and the National Apartment Association successfully lobbied to amend the bill to maintain the subsidy for apartments.

Apartment owners are also eligible for business interruption coverage under the NFIP. The Senate had yet to introduce a bill as of press time.

Properties of Developers in Mortgage Scheme On Sales Block

A bankruptcy trustee has hired Massai Knakal Realty Services to sell 22 buildings in Manhattan after the two individuals who owned them were arrested and charged with a scheme to fleece more than 70 investors of more than $27 million. The portfolio could sell for more than $80 million.

Michael Hershkowitz and Ivy Woolf-Turk convinced investors to fund the renovation of 16 apartment buildings in Upper Manhattan. Investors were allegedly told that the properties would be made available for sale or rental at higher prices or would be refinanced. They were purportedly promised first mortgage interest on various properties in 16 buildings as collateral within three years.

Hershkowitz and Woolf-Turk gave the investors phony mortgage and title insurance documents. Earlier investors already held first mortgages on the properties, prosecutors said. The victims were promised above-market interest rates within 18 months to three years. The developers are facing up to 20 years in prison each in the mortgage scheme.