The ability to tap into the broad range of experience and knowledge within the affordable housing industry is a too-rare opportunity for most developers.

To help change that, Affordable Housing Finance assembled a roundtable of experienced affordable housing professionals to review two deals and suggest ways to overcome hurdles and improve the projects. The panelists didn’t agree on all of their suggestions, but that was part of the goal: Offer developers diverse expert opinions that they may not have heard without the panel.

In a future issue, we’ll check back with the developers to learn how their projects are coming along – and to what use they put these experts’ advice.


Developer: Norfolk Redevelopment and Housing Authority (NRHA)

Location: Norfolk, Va.

Synopsis: NRHA is looking for the right mix of housing for an area that includes public housing, unassisted affordable units, and market-rate homeownership units.

The main challenge is finding the best way to reposition a 250-unit low-income housing tax credit (LIHTC) project that has reached the end of its tax credit compliance period, according to John Kownack, NRHA’s director of program services. An adjacent 138-unit public housing community might also be redeveloped. Both properties are located next to Norfolk’s 634-unit Broad Creek HOPE VI project. Funding applications are scheduled to be prepared for spring 2006.

The HOPE VI mixed-income development helps the very low rental and the market-rate homeownership components, but “there is a lack of market-rate rental units or assisted units with income restrictions [serving] tenants over 60% of area median income,” noted Kownack. He said that the ideal use of the LIHTC and the public housing sites would be for high-quality affordable and market-rate rental units that allow tenants to stay in the neighborhood even as their incomes rise.

Tackling the main challenge

Jim Gillespie, senior vice president, Red Stone Partners: Due to its proximity to other recently redeveloped sites, as well as its location adjacent to a public park and lake, the various sites identified in the master plan represent a great opportunity. The time constraints placed on the project present the most significant issue; negotiating extensions of the current deadlines would allow the developer to pull together a comprehensive master plan for the construction/redevelopment of the various sites … as well as put together a cost-effective financing program that combines the various debt, equity and public subsidies to allow the property to maximize ongoing net cash flow to better serve the property.

The existing rental site – currently at the end of its LIHTC compliance period – is an ideal candidate for an acquisition/rehabilitation utilizing new 4% LIHTCs combined with tax-exempt bonds.

Patrick Sheridan, vice president for real estate development, Volunteers of America: Finding the correct mix of financing sources and then coordinating their closings will be a major challenge. Also, it would be important to determine the scope of the overall project early in the process so it can be priced. Once priced, it will be much easier talking to financing sources about the concept.

Richard Price, vice president, GMACCH Capital Markets Corp.: These deals get done with a strong market verification. If there is demand at the various price points, it should work even with the multitude of rents pegged to various income restrictions. It will be a difficult sell to a conventional lender; the challenge is overcoming negative neighborhood perception and complexity. Also, [find] an appraiser who understands the deal and measure the market accordingly.

Mark Shelburne, counsel and policy coordinator, North Carolina Housing Finance Agency: The developer should consider doing the work in two or three phases. Even if local, state and federal governments could allocate all the necessary resources in one year, developers need to be aware of their capacity.

Possible alternative approaches

Sheridan: One thing to consider is to break the project into different projects so as not to overstretch staff or financial capacity.

Shelburne: I would not have market-rate (unrestricted) units in the same ownership entity as LIHTCs. Doing so outside of a major urban area results in the low-income tenants paying more rent. This is due to the foregone equity being replaced by loans, and the market-rate rents not being high enough to cover the costs of this increased debt service. This effect is even more exaggerated in what is likely a qualified census tract and a deal that would attract a high equity price.

The stated goal of people remaining in units as their incomes increase is permissible under the federal rules. However, this can become a compliance concern if the property is mixed-income. Having a 100% housing credit property where some of the units are also [federally subsidized, publicly owned units] does not create the problems mentioned above.

Project design suggestions

Sheridan: If possible, scatter the income groups throughout the property rather than building one project at a time, each with their own distinct income requirements.

Shelburne: The keys to this proposal are timing and using the correct resources. Based on the description provided, the existing 260-unit housing credit property is a good candidate for rehabilitation and refinancing with tax-exempt bonds and 4% credits. The developer could treat this as separate from the other activities, and may be able to turn over some of the work to a joint-venture partner. This would be the first phase of the overall effort.

The developer has many options for rebuilding on the former public housing site. One possibility to consider is including some non-residential uses. While the HOPE VI model has been very successful in revitalizing communities, a drawback is that it does so almost entirely with housing. In this immediate area there will be more than 3,000 people – counting the other development – who will need commercial and supportive services.

An often overlooked opportunity is to build a community service facility. This is nonresidential space that is open to the public and yet still counts toward the eligible basis of a housing credit property. Only projects in qualified census tracts are eligible and the use has to be designed primarily to serve persons at or below 60% of the area median income. There are other limitations covered in Internal Revenue Service (IRS) Revenue Ruling 2003-77.

Additional comments

Price: First stop on the way would be to take the deal to the Department of Housing and Urban Development (HUD) and the Federal Housing Administration; second stop would be Fannie Mae.

Shelburne: [Take a look at] the first HOPE VI development in Raleigh, N.C. (Capitol Park): The Raleigh Housing Authority included housing credit, market-rate and public housing replacement units on one large tract.


Developer: West Central Missouri Community Action Agency (WCMCAA)

Location: Rural Hermitage, Mo.

Synopsis: WCMCAA poses a question familiar to many affordable housing developers: What is the best financing source for a seniors housing development – LIHTCs or the HUD Sec. 202 program?

The proposed project, known as Hickory Estates, would have 24 one-bedroom units, all of them restricted to tenants at or below 50% of the area median income. The garden-style buildings would be located in rural Missouri near the town of Hermitage, according to S. Chuck Kohzadi, WCMCAA’s housing director. Kohzadi summed up some of the main trade-offs between the two funding sources in the table below, and he asked the panelists which route would be best for a small nonprofit developer to take.

Tackling the main challenge

Van Vincent, senior manager, Virchow, Krause & Co., LLP: If you are able to secure the Sec. 202 funding, I recommend pursuing tax credits as well. Mixed-finance transactions involving Sec. 202 have only been allowed for the past few years. The tax credit equity allows the project to include many more amenities than would be allowed using only the Sec. 202 funds, thereby making a significantly more attractive housing project. The biggest issue with this recommendation is that there will be some learning pains. To date, there have only been several new construction Sec. 202/tax credit projects in the country, so all parties involved in the process will need to be patient with each other and learn how everything works together.

Gillespie: The borrower/developer notes under “Ownership” of the tax credit project that “Limited partner (LP) will own. Sponsor will be managing general partner (GP); no guarantees after compliance period.” I would recommend that the GP negotiate favorable buyout provisions in the partnership agreement that allow for buyout of the LP at the end of the compliance period.

Sheridan: Make absolutely sure that the market is there for seniors. [That is] likely less of a problem for Sec. 202 as the deep subsidy will help tremendously. If built under the LIHTC program, be sure to include at least a six-month lease-up period if not a full year. Include funds for a possible incentive program for lease-up if it begins to lag. Aggressively market the project at least three months before certificate of occupancy.

Price: [A challenge will be] overcoming HUD’s prejudice in funding capital advances to LPs.

Shelburne: At this stage the only challenge is receiving an award of housing credits or HUD Sec. 202 capital advance funds. Both are very competitive processes. Depending on the timing deadlines, it may be possible to apply for both, and withdraw from one if the other is approved.

Level of difficulty

Vincent: It just takes willing parties working in close unison to make sure all regulations are being followed. Mixed finance was allowed for a reason, and the reason is to make quality projects. In a project we are currently assisting with, the HUD office has been very receptive of the project.

Sheridan: [This is] very doable if sufficient safeguards are taken and the market is there. HUD’s Sec. 202 program has been substantially reduced in size, so funding under Sec. 202 should be considered a long shot.

Price: Making the case for the larger units and amenities and convincing HUD that by doing so, the deal doesn’t violate cost containment issues.

Shelburne: Depends on the competing proposals in the particular cycle.

Possible alternative approaches

Sheridan: If the market is strong with at least a two- or three-to-one demand, I would try to build more units; 24 is small in size to be able to justify on-site management and to pay for or accommodate any seniors services that might be anticipated.

Shelburne: I would consider trying to have both HUD Sec. 202 and housing credits in the same property. This is still a very new process with many potential problems and pitfalls, but if it works it should provide the benefits of both programs.

Project design suggestions

Price: Try to match HUD proceeds with LIHTC proceeds to demonstrate an equal division of costs and risk but maximize the number of units and size to meet obvious demand.

Sheridan: Make sure that if the project goes with LIHTCs, the units are upgraded somewhat because they need to be competitive in the market. Additionally, it was good to see that no two-bedroom units were anticipated, as they can be very hard to lease-up in LIHTC seniors projects.

Shelburne: If the developer does combine the two sources, the property could have 36 housing credit units, of which some are also Sec. 202.

Other projects that may stimulate ideas

Vincent: There is a project located in Washington, D.C., which utilized LIHTC as well as a HUD Sec. 202 capital grant, a Modernization Funds Loan from the District of Columbia Housing Authority, a Community Development Block Grant loan from the District of Columbia Department of Housing and Community Development, and a Federal Home Loan Bank Affordable Housing Program grant.

We are also currently assisting a nonprofit developer with a mixed-finance HUD 202 new construction project that has been allocated credits and will begin construction in the spring.

Price: I have heard some [similar projects] are in the pipeline, but questions remain as to how the IRS is treating the capital advances as eligible basis.

Shelburne: Genesse Housing in Seattle. This is a much larger project, but it demonstrates that with a lot of work the new HUD rule allowing mixed-financing for Secs. 202/811 can produce successful results.

Additional comments

Price: Why bother with the tax credits? It’s too complicated and costly. Do the project in phases over a couple of years. HUD is favorably inclined to fund Sec. 202s in phases if the first phase proves up.

Sheridan: A Sec. 202 project [and] a LIHTC seniors project are very different. If the organization hasn’t leased or operated a LIHTC project before, I suggest staff obtaining training before taking over the project even if the sponsor has Sec. 202 experience, or hire LIHTC-experienced management and strike a deal for the sponsoring organization to “shadow” the third-party manager so that the sponsor management agent has an opportunity to learn the program requirements.

Shelburne: To answer the question of which resource is best to use, I would say that mostly depends on two factors: the market and development team. A housing credit property will need to have income-eligible households who are able to pay rent, which can be a challenge for seniors properties in smaller towns. … On the other hand, a Sec. 202 should be able work in most places due to the project-based rental assistance.

Developers should not attempt to participate in either of these programs without either having done so successfully before or [working with] a partner with experience.

Meet the panelists

Mark Shelburne is the attorney and policy coordinator for the North Carolina Housing Finance Agency’s rental programs, which include federal and state low-income housing tax credits, HOME funding and tax-exempt bonds. Before working for NCHFA, he was general counsel of Community Affordable Housing Equity Corp., a regional tax credit equity syndicator.

Jim Gillespie is senior vice president of Red Stone Partners, a real estate finance company focused on financial products and programs using tax-exempt bonds. Capitalized by Prudential Real Estate Investors, Red Stone offers credit enhancement facilities and bond purchase programs.

Patrick Sheridan is vice president for real estate development for Volunteers of America (VOA). VOA is a 110-year-old nonprofit human services organization that provides services and affordable housing to low-income, seniors and disabled populations.

Van Vincent is senior manager in the Chicago office of Virchow, Krause & Co., LLP. Virchow, Krause is one of the largest certified public accounting and consulting firms in the nation.

Richard Price is vice president and branch manager for Federal Housing Administration financing at GMACCH Capital Markets Corp., which offers tax-exempt and taxable debt products in public- and private-placement formats.

Do you have a project for a makeover?

At AHF Live: The Tax Credit Developers’ Summit, developers can submit a deal that is in the planning stages and have it reviewed by a panel of affordable housing experts. Panelists offer advice for overcoming hurdles and suggest alternative ways of doing the project.

If you would like to submit a deal for the next AHF Live or for a makeover in the pages of Affordable Housing Finance, e-mail AHF Live 2006 is scheduled for November 1-3, 2006, at the Hyatt Regency Chicago. Deadline for AHF Live deal submission will be in late summer. See for more information.

Seniors housing funding trade-off

Item HUD capital advance Tax credit 
Ownership: Owned by nonprofit subsidiary for 40 years Limited partner will own. Sponsor will be managing general partner; no guarantees after compliance period.
Management: Nonprofit will manage  Will depend on the agreement; no guarantees.
Developer fee: 8% Up to 13%
Eligibility: 62 and older  55 and older. 
Service coordination: Included in the budget Will have to be approvedby the state agency.
 Debt service: None May include HOME loan, adding to the rent.