HAMBURG, N.Y. - Workers began to renovate both the apartments and common areas at Creek Bend Heights Senior Apartments in August, adding new windows and a new roof to the 43-year-old building.
The $12.7 million rehab is part of a big change for New York state’s affordable housing programs, in particular the taxexempt bond program. The New York State Housing Finance Agency (HFA) is opening its wallet wider for affordable housing projects, and stealing resources from market-rate projects to do it. That means affordable housing developers are in a better position to win financial support from the state than just 12 months ago—especially those doing preservation deals. The state has tripled the number of preservation deals that received taxexempt bond financing.
For years, the HFA rarely financed affordable housing projects like Creek Bend Heights, a 130-unit community just outside of Buffalo. “HFA has not been in the game for preservation,” said Priscilla Almodovar, who became the CEO at the agency early last year. “We have been substantially only in Manhattan doing 80- 20s.”
Such projects are known as 80-20s because their units are divided up so that 80 percent rent at market rates while the remaining 20 percent are reserved for low-income residents. More than a third of the apartments financed by HFA in 2006 and the years before were 80-20 projects.
In 2007, 80-20 projects are projected to make up barely an eighth of the more than 6,000 total units financed by HFA. Instead, the agency is focused on affordable housing. By the end of November 2007, HFA had already financed projects to create or preserve more than 5,255 units of affordable rental housing for the year, an increase of more than 40 percent from the 3,706 units financed in 2006.
Preservation projects were the biggest driver behind that gain. By November 2007, HFA had financed projects to preserve 2,500 affordable units, more than triple the 700 it preserved in 2006.
To swell those numbers, HFA had to turn down some mixed-income 80-20 projects. By the end of November, HFA had financed 783 market-rate apartments at mixed-income projects, less than half the 1,688 it financed in 2006.
HFA shifted its priorities in part because 80-20s give the agency less bang for its buck, producing fewer affordable apartments per subsidy dollar than projects where 100 percent of the apartments are affordable, said Almodovar.
Many 80-20 developers never even use the 4 percent low-income housing tax credits (LIHTCs) that come with taxexempt bond financing, said Almodovar, usually because they don’t want to sell a 99 percent stake in their project to an outside investor as the LIHTC rules require, or go through the hassle of creating a separate ownership structure for just the affordable apartments.
The agency still plans to allocate resources to some 80-20 deals. For example, HFA has committed to reserve $468 million in tax-exempt bonds over three years to developer Larry Silverstein’s $916.7 million plan to build 1,157 mixedincome apartments in two towers on Manhattan’s Far West Side.
The agency is also willing to focus new tax-exempt bonds on deals that serve a clear public purpose, like bringing development to a new residential area. HFA will also support mixed-income properties with long-term affordability restrictions. For example, New York City has created areas in which projects can be re-zoned for high-density multifamily development in exchange for pledging to keep some apartments affordable in perpetuity, so projects in those areas would be eligible for HFA support.
Spirit of cooperation
Another bonus for affordable housing developers is the new spirit of cooperation between New York’s state housing agencies.
Officials at the state Division of Housing and Community Renewal (DHCR) partnered with HFA to help identify promising developments that could be preserved as affordable housing, including a portfolio of 190 developments originally financed through the state’s Mitchell-Lama program. DHCR officials have managed the portfolio for decades and know the properties inside and out.
“They could literally, off the top of their heads, say ‘This is a good target for preservation,’” said Deborah VanAmerongen, DHCR’s new commissioner.
Creek Bend Heights was one of those Mitchell-Lama projects. The old mid-rise received a package of low-interest taxexempt bond financing and LIHTCs. In exchange, the owners, Creek Bend Apartments, L.P., committed to keep rents affordable for an additional 40 years.
As of November, another Mitchell- Lama project had closed its financing through New York’s program. Another 15 projects are in HFA’s pipeline.
On top of DHCR’s work on behalf of HFA’s preservation efforts, the two agencies are now coordinating their work in other areas to help streamline the application and financing process for developers.
Affordable developers can now apply for funding from both HFA and DHCR with a single application. “We were costing ourselves money,” said VanAmerongen. That’s because the extra cost of preparing two separate applications, one for a taxexempt mortgage from HFA and another for soft financing from DHCR, went straight to a project’s bottom line, and developers paid for it by asking for extra subsidy.
The two agencies have also merged their underwriting for projects financed by both agencies, so developers won’t have to convince separate sets of officials that their projects are feasible.
Both agencies are providing more gap financing to make projects work. HFA expects to close $40 million in gap financing in 2007, more than eight times the $4.7 million it closed in 2006.
DHCR is also planning to change the rules of its Housing Trust Fund to work better with preservation projects financed with HFA loans. The rules now require rehabilitation projects to be at least 40 percent vacant, which worked fine 10 years ago when DHCR was focused on rehabilitating abandoned properties in New York City. But projects to preserve existing affordable housing these days are often fully occupied. The Housing Trust Fund has between $29 million and $35 million a year to hand out, said VanAmerongen. DHCR hopes to raise that funding level with income from the repayment of loans.
In addition, DHCR is compiling information on other portfolios of aging affordable housing that the two agencies can partner to preserve, such as the state’s remaining portfolio of 71 public housing projects. DHCR is also looking into rural Sec. 515 properties and projects originally financed with federal LIHTCs and the state Housing Trust Fund.
This kind of cooperation was unheard of in the past, said VanAmerongen, when some officials had assumed that sharing information between the agencies about applications for subsidy must be against some rule (it isn’t). In 2007, DHCR and HFA even turned in a coordinated budget request, which should clearly send the message to the state Legislature that the two agencies share an agenda, instead of competing for funding, said VanAmerongen.
Making deals work
To triple the volume of affordable apartments it could preserve this year, HFA needed more than just cooperation from its sister agency. Officials also had to invent a new way to structure deals that would make it feasible to finance even small projects with tax-exempt bonds.
Issuing tax-exempt bonds is often so expensive that only the largest projects, with hundreds of apartments, have enough scale to pay the price of closing the deal.
HFA found a solution by originating loans from its balance sheets and holding them until it had enough loans to issue bonds backed by a pool of loans to several properties. The closing costs are spread over the whole pool.
In November, HFA planned to issue tax-exempt bonds backed by its first pool. The $80 million in bonds were backed by seven loans, ranging from a $3.1 million, 34-year loan to the Pine Street Homes in Nyack to a $30.5 million, 35-year loan to Rochester Civic Housing. Most of the loans are for less than $10 million.
Unlike most tax-exempt bond loans, which have floating interest rates, these loans have fixed rates, said Almodovar. HFA expected the bonds to earn an AA2 rating from Moody’s Investors Service.