An Array of Investors
A variety of funding sources also lowers the cost of capital, allowing developers to do projects with lower returns or higher risk without paying a premium for debt. Private financing allows multifamily builders to create high-quality, but still affordable, inventory. And public funders don’t require a return on their contributions so total return on cost is much lower than traditional privately-funded projects.
The Housing Corp. of Greater Houston used public and private funding to renovate an abandoned hotel into a veterans’ residential facility. The $3.5 million DeGeorge at Union Station project was financed by HUD, the Houston Endowment, Sterling Bank, H-E-B Pantry Foods, and the Downtown Historic District, among others.
“There’s often one thing missing in public development, and that’s the strong support of the business community,” notes Tom Lord, president of The Housing Corp., which has developed 4,000 residences in and around Houston. Public-private partnerships prevent that gap. “You need their involvement for capital and expertise,” he says. “I know I’ve appreciated having that leadership behind me.”
Complicated Deals
But mixed-finance deals aren’t easy money. “Even nonprofit developers have to make money,” says David Hartzell, a professor of finance and director of the Center for Real Estate Development at the University of North Carolina’s Kenan-Flagler Business School.
“The bottom line is the driver for any real estate project,” Hartzell says. “Add to that the vagaries of individual markets and the oftentimes labyrin-thine entitlement process, and you’ve got something that’s complicated enough for MBAs to work through.”
That difficulty increases exponentially for these blended transactions. Instead of meeting the requirements for a single funder, mixed-finance deals require developers to manage multiple sets of instructions and deadlines. “Each program has its own rules, its own goals,” MMA Financial’s Husser says. “They often don’t match well or are even in direct conflict. The more parties at the table?attorneys, groups trying to protect their interests?the more time and cost.”
There’s also the age-old perception of bloated public housing authorities, which can keep private investors at bay. “The biggest challenge that we faced was overcoming the history of public housing, the institutional warehousing of the poor, bad management, and political patronage organizations with inefficient, ineffective employees,” Greene notes.
The Philadelphia Housing Authority combated that image by adopting private-market business practices and operating like a corporation. “You do that by creating an organization with qualified individuals,” he explains. “You have to demonstrate your ability through successful execution of these developments. That leads syndicators to continually give us even higher payouts on our tax credit deals.”
After all, the keys to making these projects work are the same principles that apply to any successful business deal. “The housing government mentality must be put aside and replaced by the principles of a good MBA student who understands enough about every aspect of running a private business, even though he or she is performing the job in the public sector,” Greene says.
At the same time, you can’t forget to assess and manage the political landscape. “Include the community stakeholders and get them coordinated on the same page early. But do this while doing reality checks with the private sector to avoid making promises that can’t be kept,” Husser advises.