Los Angeles -- Alpha Development is completing a four-year effort to preserve all of its affordable housing – 1,330 apartments spread across 69 properties. The portfolio required intricate layers of financing that added up to more than $90 million.

At press time, Alpha had just closed on $9.3 million in tax-exempt bond financing for the fifth of six phases, which they call Concord Apartments. The last phase, known as Windward Apartments, is expected to close in fall 2006.

These six phases make up one of the largest affordable housing rehabilitation projects ever in the U.S., according to Court Allen, a principal with Treadstone Housing, LLC, an affordable housing consultant on the project. That the properties were scattered throughout Los Angeles and in nearby suburbs also made it one of the most difficult.

Alpha could have taken the easy way out when this all started in 2002, Allen said. “We reasonably estimated that the units could sell for $60,000 to $80,000 per unit. [Alpha was] able to opt out of their Sec. 8 contracts,” he said.

“We said to [them], ‘Rather than selling them outright and making a boatload of money, why don’t you stay in the business of being a property owner and manager and we’ll process the tax credit applications?’” Allen added.

He and Hampstead Partners then took the lead on the development. At the time, Allen was a vice president at Hampstead, a development and consulting firm specializing in preserving affordable housing.

“These were probably the most complicated transactions I have ever worked on,” he said.

The joint venture between Alpha and Hampstead, with Allen as consultant, was named the LA Housing Preservation Group.

Preservation deals – even typical one-site transactions – are already difficult, with the overlay of new and old regulations, low-income housing tax credits, tax-exempt private-activity bonds, seller financing, Federal Home Loan Bank financing, HOME funds, etc., according to Allen. “It’s a lot for any participating lender or agency to swallow.”

Despite the complications, many partners, including government agencies, enthusiastically stepped up to the challenge of doing a massive multi-site preservation.

Forming the team

LA Housing Preservation Group required the participation of owners from 16 different partnerships, as well as financing partners; members of the federal, state and local government; and consultants.

Allen said that one partner, the city, responded particularly well. “The city’s attitude was, “As long as you’re bona fide developers, then we’re putting our support behind you,’” he said.

He also noted that Eric Garcetti, city council president and a major force behind the city’s Affordable Housing Trust Fund, was critical in drumming up support and cooperation from various agencies.

Another crucial player was the Department of Housing and Urban Development (HUD).

“Many owners leave the affordable housing program [at the end of the affordability agreement], take the equity and run,” said William Bolton, program director for the HUD office in L.A. “When Alpha approached us, we knew they were good owners before. They stepped up to the plate; they are a long-term player wanting to preserve affordable housing. We both had the same vision.”

Through this project, Alpha became one of the first owners to refinance its properties with Sec. 236 interest reduction payments (IRP) decoupling, Bolton added. In general, this allows the owner of a Sec. 236 property to prepay the Sec. 236 mortgage with a new mortgage while continuing to receive the IRP. The IRP income can be a source for funding acquisitions and renovations. HUD also extended the Housing Assistance Payment contracts by another 20 years.

MMA Financial provided both debt and tax credit equity financing for all phases of the project except the first. “We took a look at the rehab [from the first phase] and saw how thoughtful and detailed they were with it,” said Catherine Talbot, MMA’s managing director of acquisitions. “It’s the largest preservation deal we’ve ever done.”

When completed, the portfolio will qualify for more than $50 million in tax-exempt bonds and accrue more than $25 million in 4% low-income housing tax credits (LIHTCs).

What made it work

Allen said the development team decided to pursue tax-exempt bonds rather than 9% LIHTCs because it needed to refinance the properties on a tight schedule and did not want to risk delays that might result from competing for 9% tax credits.

One of the first steps the developers took was to group properties so that each would be strong enough to support its share of the overall financing.

“We couldn’t have a group that had too many of the smaller, weaker properties or else that group would end up being more troublesome to finance,” said Allen. “Lenders only want strong properties or, at least, safer properties.”

The properties ended up being grouped by unit mix, so that the groups would have a balance of efficiency apartments and one- to three-bedroom units. This strategy gave the groups better income and expense structures, according to Allen.

The first phase, LA 78, was financed in 2002 using debt provided by the California Community Reinvestment Corp., with the decoupled IRP supporting the extra bonds. MuniMae was the tax credit equity investor.

When MuniMae acquired Lend Lease’s tax credit operations in 2003, it became MMA Financial. The new company then provided both debt and tax credit equity for the other phases.

The portfolio was underwritten conservatively with sufficient reserves, said Talbot, describing how she approached the challenge of financing the portfolio. “[The units] always had good management and high occupancy,” she said. “It’s the volume of properties and piecing it together with state [funding] and bonds and decoupling IRPs and renewing Sec. 8 contracts … that made it incredibly time consuming.”

The fruits of labor

LA Housing Preservation Group moved as quickly as it could to preserve these apartments, which were classified as “at-risk” due to their expiring Sec. 8 rent subsidy support.

The funds the team pieced together will maintain and upgrade the units, while keeping them affordable for another 30 or more years. These improvements include rehabilitation of the units, structural and mechanical upgrades to the buildings, and improvements to the buildings’ curb appeal.

The units are subsidized by Sec. 8 funds and serve tenants earning 30% of the area median income or less.

The development team also acquired additional units to expand the preservation effort and explored development opportunities to provide retail and neighborhood services.

Alpha will provide a centralized office that offers social programs such as job training and seniors services.

Other partners on the project include Reznick Group; the Los Angeles Housing Department; the California Debt Limit Allocation Committee; the California Tax Credit Allocation Committee; Ballard Spahr Andrews & Ingersoll, LLP; Nixon Peabody, LLP; Kutak Rock, LLP; Holland & Knight, LLP; Gallagher Evelius & Jones, LLP; and Laquer Urban Clifford & Hodge, LLP.

LA preservation portfolio: financing approach

($ in millions)

Phase II III IV V* VI*
Units 78  239 251 257 244 261
No. of properties 1 15 17 12 18
Bonds debt $2.6  $8.8 $10.3 $10.2 $9.3 $9.9
4% low-income housing tax credits $1.2 $4.5 $4.7 $5.6 $4.6 $5.0
Other financing $0.5 $1.8 $1.2 $1.6 $1.5 $1.5
Total development costs $4.9 $15.6 $17.3 $18.1 $15.9 $17

Note: *Cost estimates for Phases V and VI were preliminary and subject to change at press time.

Source: LA Housing Preservation Group