Many cities are hungry for mixed-use affordable housing developments. City planners believe housing complemented by retail is key to community revitalization.

But before you jump into this niche market, understand that it’s much harder than it looks. Affordable Housing Finance talked to two developers about their experience with mixed-use affordable housing and asked what advice they would give readers.

Managing your sources

David Aposhian, a developer for the Somerville Housing Group Trust (SHGT), is overseeing the new mixed-use Union Place development in Somerville, Mass., a small suburb of Boston. SHGT borrowed $3.5 million from Wainwright Bank to build the fourth phase of the nearly 200-unit project.

“The city was very keen on mixed use,” said Aposhian. “It’s a good, solid planning issue. There would be people there all day and night.”

Not only would a project help create a vibrant neighborhood, the city and state could also realize additional tax revenues from the development.

A mixed-use project, however, presents a new set of challenges. To begin with, developers are going to have to think about forming a different kind of business structure than a typical limited partnership.

“Most affordable housing is financed with low-income housing tax credits, and investors want nothing to do with the nonresidential component. They can’t underwrite the income from nonresidential use … [because] it is not includable in tax credit basis,” said Bill Witte, president of The Related Companies of California.

Affordable housing developers can “condominiumize” the retail space to be held by another partnership or sold, said Witte. Then the tax credit investors can own the housing space above the retail in buildings that have both components. You want to have as little as possible to do with the retail operation, Witte added.

In some cases, a public housing agency would fund the retail component as an amenity, he added.

In Los Angeles, Related is about to embark on the $1.8 billion, nine-acre Grand Avenue master plan development. The first phase will include 400 luxury condominiums, 100 low-income housing tax credit units and a 275-room boutique hotel.

Finding the market

Experts stress that understanding the market for a mixed-use project is vital.

Developers need to be realistic about what kind of mixed-use project a location can support. There is currently little demand for new office space, and probably no affordable housing is being built now with office space, said Witte.

Retail must be compatible with the housing as some form of amenity to residents and the neighborhood, Witte added. This means that the retail tenant may not necessarily be the highest paying.

For example, there’s a Related mixed-use development recently built in a working-class Hispanic neighborhood in San Diego. It replaced several “ramshackle” stores with new retail tenants that are small and service-oriented, including a grocer and taqueria, said Witte.

In contrast, the more ambitious Grand Avenue project will have a high-end grocery store, bookstore and health club. It’s located across the street from downtown’s Walt Disney Concert Hall and will attract people from far away, he said.

Partners and investors sometimes don’t realize that benefits to mixed-use development take time, said Aposhian. They expect the retail to quickly resuscitate struggling neighborhoods, but it takes a while for these businesses to get up and running, he added.

One strategy to make up for the operating deficit, said Aposhian, is to build housing aimed at different income levels. “Mixed income is very doable. There’s a million-dollar condo on the top floor [of Union Place]. You can easily internally subsidize [the affordable units] with mixed-income.”

SHGT is setting aside 18% of its units as for-sale condos affordable to residents earning between 80% and 100% of the area median income (AMI). For the units that don’t sell, the developer will convert them to affordable apartments for those earning between 60% and 80% of AMI. None of the units are financed with tax credits.

Planning properly

While working through the business structure and identifying the best uses are two key considerations, experts also point out that there will often be unique design issues that need to be addressed.

Both Witte and Aposhian agree that parking is a major problem in designing mixed-use developments.

“Many towns have laws about new developments requiring no parking, so you need to think about public transit and pushing down the prices [of the housing],” said Aposhian.

If you can build parking, you need to deal with commercial tenants who prefer surface parking and residents who desire parking underneath the housing, he said.

Another problem is that developers tend to design the residential component of the building first and then fill in the blanks with retail, said Witte.

“Retail is not the same as residential. The ground floor needs to be taller than the rest. It needs 12-foot ceilings and depth and has to be divisible in a rational way. You need to involve someone on the development team with retail experience,” he said.