Cleveland—Before it was rescued by National Church Residences (NCR), the Villa St. Rose of Kirby Manor (Kirby Manor) was headed straight to default and eventually to the auction block.
To save Kirby Manor, NCR had to convince the Department of Housing and Urban Development (HUD) to go along with a bold new financing strategy to fix up the crumbling, 202-unit high-rise and keep the community affordable to low-income seniors. This same financing strategy could, if HUD would allow it, be used to save hundreds of other projects like Kirby Manor.
Built in 1970 by Cleveland’s Catholic Charities Facilities Corp., Kirby Manor is from the first generation of HUD’s Sec. 202 seniors housing program. Unlike later Sec. 202 projects, Kirby Manor received no project-based Sec. 8 rental subsidy, even though by 2000 the average household at Kirby Manor earned just $10,000 a year. These elderly tenants could pay very little in rent and as a result, the project no longer had enough money coming in to pay for even its basic operating costs. Worse, more than 10 percent of the apartments were empty.
But if Kirby Manor could draw in new tenants to mix with the very low income residents already living there, the new seniors, even those classified as low-income, could pay somewhat higher rents. Unfortunately the tiny units at Kirby Manor, which were as small as 300 square feet for a studio apartment, attracted only the most desperate elderly renters.
“Anyone who had money would live somewhere else," said Michelle Norris, senior vice president of development for NCR.
NCR created a plan to merge Kirby Manor’s smaller units into much larger apartments, starting at 618 square feet for a one-bedroom, and build apartments in new, three-story buildings on the site.
This required HUD to approve a bold, new strategy: allowing NCR to keep the original Sec. 202 mortgage on the property, with its very low interest rate of just 1 percent, even though the development’s stock of Sec. 202 apartments was shrinking from 202 units to 147. HUD could easily have refused, forcing the project to either stay as it was for as long as it could, or leave the Sec. 202 program.
The cost to redevelop Kirby Manor totaled $15.8 million. Most of this money, $9.1 million, came from the sale of low-income housing tax credits through NCR’s National Affordable Housing Trust to Fifth Third Bancorp and National City Corp.
When these investors bought Kirby Manor’s tax credits, they also purchased a 99 percent ownership stake in the property, requiring HUD to approve a second untried strategy: allowing a for-profit partnership to own the old Sec. 202 project, which was unaffected by rule changes in 2000 allowing such ownership on newer projects.
To pay for the reserve and capital improvements might have required a large, expensive mortgage. Fortunately, HUD made one last concession and allowed the original, low-interest Sec. 202 mortgage to be subordinated to a new, fixed-rate, 40-year $4.5 million Federal Housing Administration-insured 221(d)(4) mortgage provided by Love Funding Corp. at an interest rate of 6.08 percent.
The redevelopment of Kirby Manor was finished in December 2005, and the project is now fully leased. The tenants brought in after the rehab earn up to 50 percent of the area median income and include a few very low income seniors who receive Sec. 8 vouchers.
With a turnover rate of about 10 percent, its developers expect Kirby Manor to eventually fill up with these new tenants. In the meantime, NCR created a $1 million rental reserve when the project was financed to help pay the gap between what the existing, very low income residents can afford to pay and the rental income the building needs.