Developers Navigate the Complexities of Rehabbing Aging Properties

The nation’s affordable housing crisis could get worse in the coming years as the number of affordable housing units with expiring subsidies increases. In Massachusetts alone, more than 9,100 affordable apartments that have recently been occupied by extremely low-income households are in line to lose their subsidies by 2025, which could leave 25 cities and towns without subsidized housing, according to a Federal Reserve Bank of Boston report.

Other states also will see more and more low-income housing tax credit (LIHTC) developments and other privately owned affordable properties near the end of their affordability restrictions in the years ahead. In addition, the nation’s public housing system has an estimated $35 billion backlog of deferred maintenance, with roughly 10,000 units lost each year due to disrepair, according to federal officials.

To ensure that these properties remain in the affordable and public housing stock, developers and their finance partners will need to dig in and preserve these developments for the long term. That means not only extending critical affordability restrictions but also performing significant physical renovations on the buildings.

In Boston, nonprofit developer Inquilinos Boricuas en Acción (IBA) is working to renovate the 28-building, 146-unit West Newton/Rutland Street Apartments in the city’s South End after acquiring the brownstone buildings a year ago from the Boston Housing Authority.

In addition to upgrading the apartments, IBA’s $29.5 million in renovations include extensive exterior masonry and carpentry work, roofing repairs, installation of new interior and exterior doors, new HVAC systems, and plumbing improvements. The first five buildings were on track to be completed in mid-February, with the entire project expected to be completed by spring 2021.

Supported by the federal Rental Assistance Demonstration program, the work includes rehabbing 11 units that have been uninhabitable due to fire damage and converting eight units to be fully accessible. Financing for the West Newton/Rutland development includes LIHTCs as well as state and federal historic tax credits.

IBA, which dates back to 1968, has done both new construction as well as acquisition-rehab projects.

“Our strategy is looking to have better energy efficiencies and improvements as well as more sustainable and durable materials,” says CEO Vanessa Calderón-Rosado. “We look at renovations and rehabs as an opportunity to prolong the life of the property and do it in a way that is more sustainable for the environment.”

Bringing New Amenities to Old Properties

Although the ultimate goal of preserving a property remains the same, affordable housing developers have had to adapt their strategies as building technology and residents’ needs have changed.

“In recent years, Wi-Fi has transformed from an affordable housing luxury to a necessity,” says Anand Kannan, president of Community Preservation Partners, an affordable housing rehabilitation company that owns more than 8,000 units across the United States. “Everything from media and education to health care and shopping has become a digital experience, and just because a group of people do not have a lot of disposable income does not mean they are to be left out of this part of our society.”

Internet access is even more important in lower-income communities than higher-income ones, Kannan says, because in many cases it’s the portal to a better life. “You can take classes, earn certifications, and advance your career. In today’s world, a mobile internet is critical to upward mobility.”

Smart amenities, such as Nest and artificial intelligence–powered energy consumption, are also starting to emerge within the affordable housing space. “The economics are such that owners are seeing financial advantages to these investments, and it’s facilitating a lot of change. It’s an exciting time in the rehab space right now,” Kannan says.

One challenge for developers is how to provide enhanced amenities, such as solar energy, Wi-Fi, or other resident services, at a property that is 40 years old or older.

“Sometimes it’s best to make use of existing infrastructure and simply repurpose it for a new, modern purpose,” Kannan says. “For instance, at many communities, we install solar panels on top of our carports and run power lines underground to the main building or storage batteries. For telecommunications projects, we like to build antennae, small cells, and cabling into the walls and cover them with aesthetic molding, landscaping, or artwork so you can hardly tell that they are there.”

The outcomes for individual residents is measured in terms of their energy use, participation in programs, turnover, and timely payment of rent, says Richard F. Burns, president and CEO of The NHP Foundation, a nonprofit affordable housing owner and developer.

“In most old properties, we see a lack of both indoor and outdoor community space,” he says. “This means that we work to repurpose excess parking lots or land to build or expand a community building and/or outdoor recreation space, and also reconfigure indoor spaces that allow for both large group events and individual resident service meeting space.”

His organization recently rehabbed the Mark Twain, a mixed-use property with 148 SRO units and retail space in Chicago. Financing for the $54 million project included a Federal Housing Administration Section 220 loan that can be used for urban properties and allows commercial income to be underwritten and raise additional loan proceeds that ultimately fund the construction of the low-income housing.

Job No. 1

The most important renovation is always the one that keeps residents safe, says Kannan.

“Without safety, the other higher-profile amenities don’t really matter,” he says. ”Sometimes when we go into a distressed neighborhood, there are families who are living in genuine fear because of violence and crime in their community. We put together a comprehensive security plan to not only address the short-term scares but to also make the community an area to be proud of. We always address that first by making sure there are plenty of lights and security cameras installed throughout the public areas of the property. We also build fencing, hire independent security guards, and work closely with local police departments to ensure a safe environment—not only for the residents, but for the contractors who work on our renovations as well.”

Completing rehabs on 10 properties with 1,611 units in 2019, Preservation Partners is among the industry’s most active renovation firms. Ensuring the safety of their residents is one of the biggest aspects of their work, according to company leaders.

The firm acquired the 458-unit Allen Hills property in Atlanta in 2018 and is more than halfway through an extensive rehabilitation. “There is no blanket scope to a renovation,” explains Nick Tufano, vice president of construction at Preservation Partners. “We go into a community, talk with the residents, pastors, police departments, and create our scope based on the specific needs of those tenants.”

Lights, security cameras, gates, and patrol stations are some of the security features that have been added. A large part of the $27 million renovation also went into creating new community spaces, including playgrounds, business centers, and a pavilion. This expands the property beyond one’s apartment.

More Extensive Repairs

In addition to green features, renovations tend to be more extensive than they used to be, according to Kevin Beard, director of acquisitions at Evergreen Real Estate Group, a Chicago-based developer and owner.

“We are doing deeper rehabs than we were five or more years ago,” he says. “I see deals from 10 years or 15 years ago where the rehab was very light. These deals may have received $6,000 to $7,000 per unit in rehab. It’s very uncommon for us to do less than $40,000 per unit in rehab today.”

Part of the reason for this has to do with the useful life of building components. “In earlier rehabs, owners may not have redone kitchens and baths or cabinets that were 20 years old at the time,” explains Beard. “If those cabinets were not done 15 years ago, they are now 35 or 40 years old and are not going to make it for another 15 or 20 years. Work that was skipped in the first renovation definitely needs to be done today.”

In addition, many state housing finance agencies are pushing for deeper rehab work by increasing minimum requirements.

“Another factor is that the Department of Housing and Urban Development, to its credit, has enabled developers to make rehab deals work by recognizing that rehabbed units would be able to demand higher rents in the market,” he says. “The ‘value-add’ strategy that drives many market-rate deals by creating incentives to upgrade properties is mirrored in Section 8 preservation. Without the ability to realize higher rents for significant upgrades, it would be economically infeasible to do the deep rehabs that are needed at many affordable properties.”

The materials inside developments built 40 years ago have reached the end of their useful life expectancy, says Chris Auvil, director of design and construction at The Millennia Companies. “As you get into these projects, you will find a lot of infrastructure that needs to be replaced,” he says. “That is not easy to do.”

For example, the ground floor slab may have to be torn up to replace the aging plumbing.

Finding Financing

On the positive side, the financing environment has been generally good, and interest rates remain low. On the other side, many states emphasize new construction projects over rehabilitation deals in the 9% LIHTC programs. As a result, developers working on preservation deals often have to use the 4% credit and tax-exempt bond program, which typically requires soft funds from a city or a state agency.

“These funds have become increasingly scarce,” NHP Foundation’s Burns says. “Also, we used to rely on the Federal Home Loan Bank Affordable Housing Program funds, but they have also become very competitive. The major change to finance preservation projects these days is the difficulty to find gap funding. This steers us toward preservation projects that have the local community and public agency support from the start.”

In an effort to help preserve subsidized housing at risk of converting to market rate in California, state legislators recently introduced a bill to create a $500 million Affordable Housing Preservation Tax Credit, with the goal of preserving 25,000 units over the next five years.

“Preservation is a huge area that we need to keep the focus on,” Preservation Partners’ Tufano says. “There are a lot of deals that were done 15 or more years ago that now have different needs. These properties need to be renovated and repositioned.”