HAYWARD, CA. - Volunteers of America (VOA) overcame regulatory and financial challenges to rehabilitate and preserve the affordability of a key housing development.
Located in the San Francisco Bay Area, the Lord Tennyson Apartments is home to low- and moderate-income workers. Its location allows it to serve workers at nearby industrial parks, shopping centers, and hospitals. Without this large development of 252 units, the residents would be hard pressed to find affordable housing in the area.
Lord Tennyson was built in 1968 and its mortgage was close to being paid off, plus its affordability requirements were expiring. It was a project that could have been sold and turned into a market-rate development, but VOA, the longtime nonprofit owner, was committed to maintaining its affordability.
“We wanted to keep this asset available as affordable housing in the Bay Area,” said Patrick Sheridan, senior vice president of housing development. VOA came up with a plan to refinance and rehab the aging property.
VOA won an allocation of LIHTCs and tax-exempt bonds for the deal. Initially, local HUD officials indicated that the low-income households would receive “enhanced” Sec. 8 vouchers, which would subsidize rents upon prepayment of an existing HUD 221(d)(3) loan. However, late in the process, after new bonds had been issued, HUD officials in the national office determined that the owner’s nonprofit status made the project ineligible for the vouchers, according to developers.
Faced with this challenge, the development team decided to defer half of the developer fee to fund a reserve that would subsidize rents for existing very low income residents. Through consultation with the California Debt Allocation Committee and the California Tax Credit Allocation Committee, a plan was formed to charge full LIHTC rents to those residents with incomes between 50 percent and 60 percent of the AMI. This helped generate more revenue to protect the rent levels for those at or below 30 percent of the AMI.
Although all of the households were qualified under Sec. 221(d)(3), some were over-income under the tax credit regulations. VOA encouraged higher-income residents, whose units could not be counted in the tax credit basis, to relocate and become homeowners by offering relocation and home-purchase incentives. Twenty-eight households became first-time homebuyers.
Lord Tennyson residents were relocated in phases while the apartments and common areas underwent a major rehabilitation. Apartments were also individually metered for gas and electricity. The development has a new clubhouse, playground, and other improved facilities. The property was physically “reborn,” according to developers.
But, most importantly, Lord Tennyson remains affordable. Rents are about 25 percent below market rates. The project is an example of how creative structuring can help a project remain affordable to low-income residents without the use of any federal or state tenant subsidies, Sheridan said.
The city of Hayward issued $13.9 million in tax-exempt bonds (plus a $700,000 taxable tail), which were credit enhanced by Freddie Mac in a deal put together by PNC MultiFamily Capital and Merchant Capital. LIHTCs generated about $8.9 million in equity. The credits were syndicated by the National Affordable Housing Trust, and the investor was MassMutual.
Additional project information, as provided in application by the nominator.
Q. Why does the nominated project deserve to be recognized based on the award criteria of this contest?
A. Lord Tennyson deserves to be recognized based on numerous award criteria. First, Lord Tennyson demonstrates creative financial problem-solving. Initially, local HUD officials indicated that low-income households would receive “enhanced Section 8 vouchers,” which would subsidize rents upon prepayment of existing HUD 221(d)(3) loans. However, after new bonds had already been issued, the national HUD office determined that the current owner’s nonprofit status rendered the project ineligible for the vouchers. In response, the sponsor decided to defer half of the developer fee to fund a reserve, which will subsidize rents for very low-income residents over a long transitional period. Through consultation with the California Debt Allocation Committee and the California Tax Credit Allocation Committee, a plan was devised to charge full tax credit rents to those residents with incomes between 50 percent and 60 percent of the area median income. The additional revenue that was generated allows the new owner to leave rents at their current levels indefinitely for all 44 families with incomes at or below 30 percent of the AMI. Those residents will only be subject to cost-of-living increases in rents for so long as they reside at Lord Tennyson.
An additional financial challenge was posed by higher-income residents, whose units could not be counted in tax credits basis. The sponsor offered generous relocation and home purchase incentive, resulting in 28 households becoming first-time homebuyers. Of 72 over-income households, only six chose not to relocate.
Furthermore, the long-time nonprofit owner was able to take equity, and as through a related acquiring entity, was able to earn a reasonable developer fee. Low-income residents have been protected from rent increases, and 244 units of affordable housing have been preserved in a community where they are desperately needed. Following the renovation, the property has been physically reborn with lush landscaping, attractive units, and extensive amenities.
Lastly, Lord Tennyson has received substantial community support in an effort to preserve the affordability of the development in an area known to have one of the most expensive housing markets in the U.S. It has had a tremendous impact on low-to-moderate-income workers who would otherwise be unable to find affordable units in the San Francisco Bay Area, of which Hayward is a part.
Q. How does this project represent an innovative solution to a specific development challenge?
A. The owner was able to overcome regulatory and financial obstacles to raise the capital necessary for rehabilitation of an aging asset while preserving affordability for an extremely low-income resident population.
Refinance of the property raised renovation capital:
- The new first mortgage is $14.6 million, with $13.9 million in tax-exempt bonds, and a $700,000 “taxable tail.” Combining seven-day floater bonds with a rate swap resulted in a low fixed rate on the permanent debt: 5.45 percent, inclusive of all fees. This inexpensive debt helped raise capital for the rehab, keeping rents low. A debt coverage ratio of more than 1.40 ensures cash flow over time.
- Bond proceeds were invested in a General Investment Contract during construction to generate $250,000 for development costs. Credit enhancement was provided by Wells Fargo during construction and by Freddie Mac for the permanent debt.
- The National Affordable Housing Trust, a nonprofit syndicator, placed the equity at a price of $.90 per tax credit dollar, with Mass Mutual as the sole equity investor.
- While the owner was able to take out substantial equity from the refinance, much of the acquisition price—at the appraised property value—was covered by a seller note, to be repaid from cashflow.
- The owner deferred approximately half of the developer fee to fund a reserve protecting low-income residents from rent increases. This deferred fee will be repaid from cashflow during the first four years of stabilized operations.
- By maximizing tax-exempt bond debt and tax credit equity, and by creative use of sponsor financing, the project was financed without any further public subsidy.
The refinance and rehab program was a win for all concerned: A total of 244 units of affordable housing was preserved for the long-term; very low-income residents were insulated from rent increases; higher-income residents were enabled to become first-time homebuyers; and the owner was able to pull both equity and a developer fee out of the project, and expects substantial cashflow from operations.