Dominium Group, Inc., knows a thing or two about flexibility. The Plymouth, Minn.-based developer has been active in affordable housing since the early 1970s, beginning life as a developer and manager of Sec. 8 properties. Over the last few years, Dominium has positioned itself as a leader in the acquisition-rehabilitation market for affordable housing in the Midwest.
“With 35 years of history in the affordable housing business, it’s been one of constant change,” said Paul Sween, a principal of the company and a co-founder of its Dominium Development and Acquisition, LLC, division. “Organizationally, we’re adept at looking for changes and responding.”
The company’s level of low-income housing tax credit (LIHTC) and tax-exempt bond deals has risen dramatically over the last few years. Dominium is projecting 14 project starts in 2007, totaling 1,491 units, nearly three times its development volume in 2006, when the company had eight project starts, good for 586 units. Specifically, the company’s work in acquisition-rehabilitation has taken off, growing from nine projects (429 units) in 2005 to 22 projects (1,736 units) projected for 2007.
This furious pace is the result of a decision Dominium made in 2005 to shift its business toward acquisition-rehabilitation deals. At that time, construction costs were outpacing rent growth dramatically, making new construction projects increasingly unfeasible. But there was another reason for the developer’s shift in focus.
“At both the federal and state levels, there are mandates and priorities for preservation transactions,” said Armand Brachman, a principal with the firm and co-founder of Dominium Development and Acquisition, LLC. “We figured that in the near term, we could generate the largest growth for the organization focusing on that area,” said Brachman. Such flexibility is a key differentiator for the company. “We change with the times, and as such, we’ll constantly be busy due to the fact that we are not a one-trick pony,” said Brachman.
While the company develops and manages mixed-income, market-rate and luxury projects, the bulk of its portfolio, about 70 percent, is affordable housing. Nearly 100 percent of its current development activity is based on affordable housing.
Recently, the company began to favor tax-exempt bonds to finance its projects, mainly because of the ability to generate LIHTCs without having to compete for an allocation.
“One of the trends that we’ve seen over the last year and a half is that various credit allocators have begun to give a preference to nonprofit sponsors for their 9 percent credit allocations,” Brachman said. “So the use of tax-exempt bonds allows us to procure the 4 percent tax credits.”
Turning it around
Another aspect that makes Dominium unique is its expertise in acquiring nonperforming tax credit projects and turning them around. “We have the financial strength to come in and assure the syndicator that they’ll receive their tax credit stream in exchange for their financial assistance in stabilizing the portfolio,” said Sween.
In 1996, the company purchased a 3,862-unit multifamily portfolio from Nationwide Housing Group. Two years later, it acquired a 745-unit portfolio, and in 2005, it acquired an 855-unit portfolio. The company is in negotiations to purchase a 600-unit portfolio and expects to complete the transaction by July.
The Midwest challenge
About 60 percent of Dominium’s activities are centered in Minnesota, but its footprint stretches from Colorado to Ohio, and from Minnesota to Missouri.
While the company develops and rehabs properties in cities like Kansas City, Minneapolis, and Milwaukee, 30 percent of its portfolio is in towns with less than 25,000 people, and 15 percent in towns with less than 5,000. The geography presents a sizable challenge: The heartland is a lower-growth market compared to the coasts. In high-cost areas, the Sec. 42 rent limits provide a ceiling that represents a market advantage to affordable housing developers.
In the Midwest, “we have very few projects that run for Sec. 42 ceilings, so our Sec. 42 portfolio competes with market-rate housing,” said Sween.
One way the company differentiates is in centralized support efforts such as its national call center. If a prospective tenant calls a local apartment building and the resident manager can’t take the call, it gets routed to a national call center, where an appointment is made for the tenant to see the apartment.