Developers of affordable seniors housing face growing difficulties as the amount of available equity is set to decline and competition for other funds intensifies.
By Jane Adler
While the need for affordable seniors housing continues to grow, owners and developers face an increasingly challenging environment to create new projects. Low-income housing tax credits that finance many affordable buildings are still difficult to obtain, even though investors that buy the credits have returned to the market amid an improving economy.
Competition is also intense for the dwindling pool of public money available to fill financing gaps as new threats emerge. Industry insiders are worried that a growing appetite for federal tax reform could dismantle the program altogether.
Their more immediate concern is that less project equity will be available as certain program provisions determined by the federal government sunset at end of 2013.
“Developers are doing everything they can to make deals work,” says Beth Mullen, partner and national affordable housing industry practice leader based in the Sacramento office of the accounting and advisory firm CohnReznick. “It’s a pretty challenging situation.”
Tax credit formula
Since the mid-1990s, the Low-Income Housing Tax Credit (LIHTC) program has financed about 1,400 properties annually with approximately 105,000 units, according to the U.S. Department of Housing and Urban Development (HUD). Although production of affordable housing slowed during the Great Recession, activity has returned to pre-crisis levels.
The government doesn’t track exactly how many of the affordable projects target seniors, but HUD estimates that about 25 percent of the buildings are meant for the elderly.
In order to create more affordable housing, the LIHTC program provides a large subsidy of equity to finance the project. The subsidies allow tax credit properties to offer low rents because they carry little debt.
Developers typically sell the tax credits to investors in exchange for the equity. To ensure that equity subsidies would be obtained, the U.S. Treasury Department created a formula to determine the LIHTC rate, depending on current interest rates.
The so-called 9 percent tax credit provides a 70 percent subsidy, and the 4 percent credit, issued in conjunction with tax-exempt bonds, provides a 30 percent subsidy.
The 9 percent credits result in a greater amount of equity for the project, making them the most popular. About three applications are submitted for every 9 percent award granted, sources say.
In 2013, about $7.3 billion in 9 percent low-income housing tax credits were available. About $2 billion was available for the 4 percent credits.
Though the value of credits was originally designed to vary based on current interest rates, in 2008 Congress fixed the rate of the 9 percent credit. But that provision was set to expire at the end of 2013 and new deals starting in 2014 will be subject to a floating interest rate.
A credit worth 9 percent in 2013 will be worth about 7.5 percent in 2014, according to Mullen at CohnReznick. That will result in about a 15 percent loss in the amount of equity that can be raised for a project. “It’s a significant issue,” she says.
In August, a bipartisan group of 20 senators, led by Sen. Maria Cantwell, D-Wash., introduced legislation to make permanent the fixed 9 percent rate for low-income housing tax credits, although no action has been taken so far.
“We’re not optimistic that there’ll be a fix in the near future,” says Mullen.
The fight for funding
Lower amounts of available equity will only make the scramble for financing that much more difficult — and the process is already daunting.
A new tax credit-funded affordable apartment project is underway on Chicago’s North Side by Senior Lifestyle Corp. Senior Suites of Norwood Park is a $24 million project that consists of a 100-year-old monastery being converted into about 30 affordable apartments for seniors. A new three-story addition on the back of the existing building will include about 50 apartments.
Senior Lifestyle has 22 affordable Senior Suites buildings in the Chicago area. Most of the projects are located in city neighborhoods. A Senior Suites building just opened near Midway Airport, and another project breaks ground in January in suburban Bellwood.
Work on the Norwood Park project started in September, and the building is expected to open next November. Monthly rents will range from about $386 to $990.
About $16.3 million of the project’s financing stems from low-income housing tax credits. The developer obtained a historic tax credit worth $1.6 million after the original monastery was listed on the National Register of Historic Places.
Other financing sources include a first mortgage, a loan from the federally funded HOME Investment Partnership Program, and a small $139,000 grant from the state to meet certain energy efficiency standards.
“Every little bit helps,” says Bob Gawronski, vice president of acquisitions and development at Senior Lifestyle. Though new ground-up tax credit projects sometimes take years to win approval, the Norwood Park building was approved on the first application round because the project is an adaptive reuse of a historic building, explains Gawronski.
At the same time, Senior Lifestyle has a new market-rate $50 million assisted living building underway in north suburban Chicago. “That transaction was infinitely easier,” notes Gawronski. The loan documents for the market-rate project fit neatly in a three-inch binder, while the paper stack for the affordable project was two feet high.
The market-rate project includes a single equity partner and one mortgage lender. In contrast, the affordable project has six funding sources and required the work of seven law firms. “Nothing is a foregone conclusion with these deals,” says Gawronski.
Filling the gap
The Norwood Park project demonstrates the importance of supplemental financing pools, though worries are growing that the sources of gap financing are dwindling. The automatic spending cuts or sequestration that were part of the Budget Control Act of 2011 cut funds that have traditionally been used to help finance affordable apartment projects for seniors.
HOME funds decreased from $1 billion in fiscal year 2012 to $948 million in fiscal year 2013, according to the National League of Cities. And though Community Development Block Grant funds were not cut in 2012 and 2013, funding levels for 2014 remain uncertain while the U.S. Congress considers appropriations based on a December budget agreement.
“Unfortunately, we cannot continue to build the number of units we have been with sources of gap financing drying up,” says Beth Stohr, director of LIHTC production at the U.S. Bancorp Community Development Corp. in St. Louis. The bank has helped to finance 115 seniors housing projects totaling about 10,000 units through the low-income housing tax credit program.
Ryan Companies US Inc. was just awarded tax credits for a new seniors project in Lisle, Ill., a relatively affluent suburb just west of Chicago. The developer is expected to break ground in June on the $20 million project with 80 units.
In 2013, Ryan opened Thomas Place Orland Park in Orland Park, Ill. The $22 million affordable project is located in a pricey suburb southwest of Chicago. The building has 80 units, and monthly rents are about $775. Ryan has similar affordable projects in Fox Lake, Glenview and Gurnee. “These communities have relatively high home values, but also a lot of seniors who live on limited incomes,” says Dan Walsh, vice president at Ryan’s regional office in Naperville, Ill.
Lutheran Social Services of Illinois recently completed Gable Point Senior Housing in Crystal Lake, Ill., another town with relatively high home values. Lutheran Social Services estimates that about 3,800 seniors with poverty-level incomes live in the area. The affordable rental building has 59 one-bedroom apartments. The general contractor was Minneapolis-based Weis Builders.
In order to encourage the development of affordable projects in areas where housing is expensive, the Illinois Housing Development Authority had previously offered more funds for those projects. But the agency no longer provides extra money.
“It’s tougher to make these deals work,” notes Walsh. “Dollars have to stretch further.”
Some new programs are helping to fill the gap. In 2012, HUD and FHA introduced a pilot program to join tax credits and FHA financing in order to help building owners upgrade existing affordable buildings.
The program was used recently to make improvements at Garden Park Villa, a 50-unit affordable seniors housing complex in Cañon City, Colo., owned by National Church Residences (see sidebar). Columbus, Ohio-based Lancaster Pollard arranged the financing.
The $3 million funding consisted of 4 percent tax credits coupled with tax-exempt bonds and a fixed-rate FHA mortgage. Renovations included new building systems, a roof replacement, and upgrades to the units.
Another idea that’s helping to provide more capital is the Rental Assistance Demonstration program, which was established in 2011 to convert public housing projects in need of repair to a project-based voucher system.
By altering the funding stream, the housing authorities gain access to private and public funding sources, such as tax credits, to finance renovations.
“There is a huge backlog of projects that need capital improvements,” says Ryan Miles, vice president at Lancaster Pollard.
Despite program tweaks to boost affordable housing, a big concern is the prospect of comprehensive tax reform. Tax reform proposals would lower the corporate income tax rate, but a number of corporate tax deductions, such as low-income housing tax credits, would possibly be eliminated.
“The tax credit program is at risk,” says Aaron Pechota, vice president of development at The NRP Group based in Cleveland.
The company builds, owns and operates apartments and currently manages about 13,000 units in a mix of affordable and market-rate projects. Approximately 3,000 units are set aside for seniors, all of which are classified as affordable housing.
NRP plans to break ground in the first quarter of 2014 on the new Parsons Village in Columbus, Ohio. The development will have 54 units with rents averaging about $600 a month. The city is building a new health facility next door.
“This is a sound public-private partnership with great checks and balances,” says Pechota.
Parsons Village will be financed with tax credits as well as a mortgage and gap financing from the City of Columbus — the kinds of funding that could be at risk under tax reform. But the industry is being proactive and talking to members of Congress about the benefits of low-income housing tax credits, Pechota emphasizes.
“We are trying to foster support for the program.”