Credit: Courtesy Cohen-Esrey Real Estate Services
Credit: Courtesy Cohen-Esrey Real Estate Services

When you ask why we do what we do, we’ll tell you that we believe that everyday working people and seniors deserve an affordable Class A living environment. And this is an equal opportunity belief—it doesn’t matter whether someone lives in an urban area or in small-town America. Beginning in 1994, this belief drove us to focus our affordable housing development activities on smaller communities throughout the Midwest. We launched our development program with a ground-up new construction model and built several projects in multiple states.

Upon evaluating the results we produced, we concluded that this program wasn’t working as well as we had hoped.

The properties looked like, well ... “projects.” It’s no secret that rents are lower in rural communities, and it was very difficult to justify creating a Class A environment within an acceptable cost structure. We also generated more debt than we had hoped, which forced us to keep rents at higher levels. We decided to move away from the new construction platform and dabbled with tax-exempt bond-financed acquisition/rehabs in urban areas. While this type of product was profitable, it missed the mark in delivering the Class A environment we were seeking.

Then we moved to a different new construction concept by building small single-story properties for seniors in small towns. The product was good, but again we encountered debt levels that pushed rents higher than we wanted.

Finally we identified an approach that fulfilled the “why” we were seeking to achieve. Many small towns are replete with vacant historic buildings—schools, mercantile buildings, hospitals, and hotels. The high-quality craftsmanship and materials that were utilized in the late 1800s and early 1900s offer a unique opportunity to restore these magnificent structures and create Class A living environments.

We completed several historic renovations in urban areas to learn how to deploy this concept and realized that there would be many challenges when developing similar properties in smaller communities.

Eventually our development concept took shape. We would use low-income housing tax credits (LIHTCs) as well as federal and state historic tax credits along with a myriad other sources of funds. Notice that there is no mention of debt. That was a key element of our plan. By eliminating debt, we could push rents down to levels that would be easily afforded by working folks and seniors. Construction financing would be the only debt, to be paid off by the various sources of equity. Then we set about to implement our new strategy.

We opted to use our construction affiliate as the general contractor. This was critical because we found there to be few contractors in small towns that have experience with historic renovations.

Local subcontractors were used whenever possible though another one of our business units provided some subcontracted labor. Another of our companies aggregated our purchasing power to acquire a wide range of building components for our developments. The vertical integration we brought to a project was very effective in controlling quality, cost, and schedule. And we did not have to educate a new general contractor every time about the intricacies of the historic renovation process.

Our property management unit was involved from the very beginning with each property in terms of feasibility, financial modeling, marketing, and the initial lease-up. Once the buildings were complete, it became responsible for day-to-day operations.

One of our business units was launched in 2000 to syndicate state LIHTCs. Over the years we’ve expanded its scope of services to include federal and state historic tax credits. When the capital markets froze during the recession, we couldn’t find anyone interested in providing federal LIHTC equity so we created our own equity fund—certainly no easy task. By providing all of the equity through our various tax credit funds, we again were able to control our own destiny and do so in profitable fashion.

Our development concept has now matured, and we’re increasing our production each year. The deals we do are complicated. Historic renovation is an expensive undertaking, especially when incorporating all of the requirements of the National Park Service (that administers the historic program), building codes, and physical elements necessary to create the environment we’re seeking. But we’re fulfilling two public policy missions— delivering affordable housing and preserving historic buildings. The biggest win, however, is being able to deliver spacious, charming historic one- and two-bedroom apartments that rent for $350 to $450 per month. We create construction jobs in the communities where we work, and our housing may be just the spark that is needed for a local industry to expand or a new business to come to town.

Let’s examine what we’ve learned through the evolution of our development program.

1. Understand your “why.” Be able to answer why you do what you do. And if you say it’s only to make money, you may be limiting your upside.

2. Always look for ways to fine-tune and adjust what you are already doing.

3. But also look for opportunities to pivot to a new and better approach. Do your homework first, and then don’t be afraid to make wholesale changes in your approach to accomplish your objectives.

4. Pay attention to your risk profile and strive to lower it wherever possible. Getting rid of debt was huge for us. There’s little margin for error when developing apartments in small markets. Eliminating debt offered us the margin of safety we needed.

5. Don’t be frightened of complexity. If you can keep things simple, by all means do it. But sometimes a few layers of complexity can be just enough to break the code to launch a new and different concept.

6. Be patient. This may sound trite, but it’s true. You have to be willing to stick with an idea long enough to see if it will work.

R. Lee Harris, CRE, CPM, is president and CEO of Cohen-Esrey Real Estate Services, LLC, a Kansas City-based commercial real estate organization that has managed more than 60,000 multifamily units since 1969. The firm is active in 95 markets spanning 17 states and is involved in the management, development, and acquisition of conventional and affordable housing. Other business units are involved with construction, apartment acquisition, and tax credit syndication. For more information, visit