Fannie, Freddie have limited appetite for mixed-use

The growing trend toward urban infill development is helping increase the popularity of mixed-use projects, in which residential and commercial elements coexist in the same development. Fannie Mae and Freddie Mac both finance mixed-use projects, but one important critic wants them to do even more.

The two government-sponsored enterprises (GSEs) have been reluctant to back housing-and-retail mixtures, according to John Norquist, president of the Congress for the New Urbanism and former mayor of Milwaukee. Norquist, speaking in October at AHF Live: The 2005 Tax Credit Developers’ Summit in Chicago, said that mixed-use was even being adopted in urban locations by big-box retailers, which had long resisted the form, but more involvement by Fannie and Freddie would be a big help.

“They really skew the real estate market against mixed-use housing and affordable housing,” Norquist told Affordable Housing Finance in December. “This restriction basically segments the housing market toward separate use, which is anti-urban. It’s a real problem. … Mixed-use is one of the best ways to provide affordable housing. It’s popular with consumers. They’re paying a premium to live in an urban form – and now Fannie Mae and Freddie Mac need to change.”

But both GSEs are active in the mixed-use market, and their lenders said developers who can show need for the housing and potential market support for the commercial elements can successfully do some mixed-use business with the companies.

How the GSEs see mixed-use

Fannie and Freddie have similar guidelines for mixed-use projects, noted Trent Brooks, CEO of Freddie lender Sierra Capital Partners. There’s “a good percentage” of mixed-use properties that the GSEs can finance, he said. “There’s a lot of very lendable properties that have mixed-use [from which] Freddie will buy the mortgages.”

Fannie Mae requires that no more than 20% of the effective gross income come from the commercial space and no more than 20% of the net rental space of the building be commercial space. Freddie Mac does not have a square footage restriction, but it limits the commercial income to no more than 25% of the property’s gross income.

Developers might be able to get slightly larger commercial presences. “They do make exceptions to that for public-purpose projects, but they won’t go way above that,” said Todd Rodenberg, senior vice president and chief operating officer for KeyBank Real Estate Capital. “We did a downtown deal that’s got a grocery store serving the residential tenants above it. [Fannie and Freddie] will do deals like that, but the predominant percentage has to be housing.”

“The 25% is not an absolute hard and fast rule,” agreed Mitchell Kiffe, vice president of multifamily flow-sourcing at Freddie Mac. “There is a little flexibility about that.”

Like Fannie, Freddie’s expertise – and mandate – is in residential housing, but it will do mixed-use as long as it is convinced that the commercial activity will enhance the residential community and is compatible with housing, Kiffe added. The GSE also needs to know that the commercial space can be absorbed into the local market.

Fannie Mae, too, can go above its ceiling for the commercial portions. Green Park Financial, a Fannie Mae Delegated Underwriting and Servicing lender, has done a number of projects with ground-floor retail below housing. It has been able to get waivers to go over the 20% ceiling on some projects. “We’ve done some deals up to almost 30%,” said Richard Warner, chief underwriter for Green Park. He said Fannie is very interested in urban redevelopment such as the projects Green Park finances in cities like Baltimore or Portland, Ore.

Green Park announced in November that it had secured a $29.9 million Fannie Mae forward-commitment for the credit enhancement of tax-exempt and taxable bonds to fund the construction and permanent financing of Museum Place South. The development, a mixed-use and mixed-income building in downtown Portland, includes a 47,000-square-foot Safeway grocery store on the ground floor, 140 mixed-income, loft-style rental apartments on the top six floors, and 12 townhouse units adjacent to Safeway. Twenty-eight of the lofts are reserved for households earning no more than 50% of the area median income; the remainder are market-rate. Sockeye Development is the developer.

Where mixed-use makes sense

The high cost of land and development has made many developers look hard to find ways to fund their developments and generate cash flow. “In a lot of downtown areas, the only way you can afford to buy the land and make rental [housing] work is to have ground-floor retail, and that’s something [Fannie Mae] looks at,” said Warner.

Commercial uses – such as grocery stores, health clubs, sundry shops, card shops, and dry cleaners – help make the numbers work, and if they are well chosen, they can help attract tenants.

Large, older cities such as New York City and Chicago are obvious markets for mixed-use development, but “given the urban-infill trend and more focus on city living and development of sites near transportation hubs, a lot of cities that are not known for light-rail transit or subway transit are developing them,” said Kiffe. He said Freddie Mac has seen an increase in mixed-use in recent years, though it has not been a dramatic rise.

As more than one expert told Affordable Housing Finance, the two GSEs are unlikely to seek to expand their mixed-use activity because it lies outside their core competency in housing. They won’t want to do anything that increases the perception of their risk when they are facing intense scrutiny by the administration and Congress, which is debating new, tougher regulatory legislation (see page 14).