Hayward, Calif.The redevelopment of a 37-year-old property here required careful handling of the tenants, regardless of whether they would be remaining on the property or would be leaving it permanently.

There are 252 units in the 24 buildings that make up the Lord Tennyson Apartments, in Hayward, Calif. Built in the 1960s by Volunteers of America (VoA), which still owns the property, the project was overdue for an extensive rehabilitation that VoA began in late 2004. The owner is spending about $50,000 per unit on the rehab, which includes rewiring and replumbing, switching from master-metered electrical and natural gas to individual metering, renovating kitchens and bathrooms, upgrading fire alarms and security doors, replacing boilers and renovating common areas and community buildings.

Tennyson’s original financing was through the Department of Housing and Urban Development’s (HUD) Sec. 221(d)(3) program. It included no deep subsidies such as project-based Sec. 8 funding.

VoA’s plan was to “convert the property to a new ownership entity using low-income housing tax credits (LIHTCs),” said Pat Sheridan, VoA’s vice president for real estate development. It won allocations of 4% LIHTCs and tax-exempt bonds from the California Tax Credit Allocation Committee (CTCAC) and the California Debt Limit Allocation Committee (CDLAC), respectively.

The city of Hayward issued $13.9 million in tax-exempt bonds (plus a $710,000 taxable tail), which were credit enhanced by Freddie Mac in a deal put together by PNC Capital and Merchant Capital. Wells Fargo is administering the construction draws. The tax credits were syndicated by the National Affordable Housing Trust, and the investor was MassMutual, working through Babson Capital.

VoA had kept rents pretty low at Tennyson over the years; they were about 32% of the median rents in the Hayward area when planning for the rehab began. Sheridan said they needed to be closer to 50% of median rents to help finance the construction costs. That higher rent rate would have been acceptable to both HUD and the tax credit program, “but we didn’t want to have that big of an impact on the tenants,” he said.

The organization had agreed with CTCAC and CDLAC that it would not raise rents faster than the inflation rate for residents earning no more than 30% of the area median income (AMI). But rents on the tenants earning between 50% and 60% of AMI were allowed to increase to the maximum tax credit rents, which helped subsidize the under-30% AMI units. For those households between 30% and 50% of AMI, rent increases were set to phase in over a two- to five-year period.

The heavy lifting

The significant level of rehab meant that entire buildings would have to be shut down for about four weeks at a time, so residents would have to be relocated temporarily or permanently. Though all of the households were qualified under Sec. 221(d)(3), about 75 were over-income for compliance with tax-credit regulations.

VoA teamed up with Overland, Pacific & Cutler, Inc. (OPC), a real estate services company with expertise in relocation and compliance issues.

VoA and OPC held meetings with the tenants who were still income-qualified and separately with those who were over-income. The first group was told about the process for temporarily moving people out of their apartments while their buildings were being rehabbed. The second group was told about an incentive plan to move them into off-site rental housing, move them to homeownership opportunities or let them stay at Tennyson if they were willing to pay market rates. In the end, only a few residents chose to stay, preferring the higher rates to leaving their long-time residences, and about 30 households took the opportunity to purchase homes, according to David Richman, regional director of OPC.

The relocation incentive package tended to be around $12,000 per household, but it could go up to $18,000, depending on the size of the units they were vacating and whether they were also taking advantage of assistance for buying a home.

The incentives were also based on a declining schedule to encourage residents to move earlier rather than later, to facilitate the rehab work. Sheridan estimated VoA’s per-unit tax-credit equity was between $20,000 and $30,000, so getting as many of those units eligible to be included in the tax credit program made the expenses an acceptable trade-off.

But tenants got more than just a group meeting. OPC staff met individually with each household to “make sure the residents understood their choices and the implications of those choices,” said Richman.

Tenants signed a memorandum of understanding, indicating that they understood the incentive package and its requirements (such as the need to provide proof of intent to buy a home).

Richman is a strong advocate for interviewing each household, noting “It’s a chance for communication [and] for identifying problems ahead of time, such as bugs, or pack rats, or other issues that might arise.”

The Tennyson rehab was about 40% complete at press time.n

Volunteers of America needed to clear financing, logistical and compliance hurdles to undertake its ongoing major rehabilitation of the Lord Tennyson Apartments in Hayward, Calif.