At a Crossroads Mercy Housing’s Wehrwein says the Mason School Apartments is the only one of Mercy’s 160 affordable properties to reach expiration. Mercy is working on a retention plan for a second, the Peter Claver Community in San Francisco, whose compliance period ends in December.
Judy Schneider, vice president and CCO for National Equity Fund, a Chicago-based nonprofit syndicator, says NEF has sold all 15 of the expired properties in its portfolio to their original developers for continued low-income rental. Nonetheless, she fully expects some NEF properties will ultimately convert to market.
According to Joseph Purcell, vice president of finance for Michaels Development Co., a Marlton, N.J.-based for-profit firm specializing in low-cost housing, the major problem preserving affordable housing is finding funds. He says the primary preservation strategy of his company, which owns some 29,000 affordable units in 22 states, will be to resyndicate properties by using new tax credits. About 30 states have set aside a portion of money from low-cost housing bonds to preserve existing projects, Purcell says.
None of these sources, however, is likely to be sufficient to save all at-risk properties. Fortunately, Schneider says, the situation is helped enormously by the limited market value of many affordable projects. “Our properties primarily are not located in the highest value markets. There aren’t that many markets where you’re going to be hitting home runs in terms of income, so private buyers generally will not want them,” she says.
According to Schneider, the lowest price at which a project can sell is the cost of the outstanding debt plus the amount of exit taxes levied on investors. Exit taxes accrue when losses exceed the value of the capital invested, resulting in so-called phantom income. The taxes can sometimes be quite hefty, she notes, and that can drive up the cost of purchase. Properties with high exit taxes tend to be problem projects that will require a significant infusion of new capital to make them viable. Consequently, they are the least likely candidates for acquisition, and some may face foreclosure.
But by and large, those involved in affordable housing seem relatively philosophical about losing some properties because of poor performance or market forces. They can be equally philosophical about losing some to market forces.
“I don’t think the loss of the 15 percent of existing units is unhealthy,” says Netzer. “There are a lot of nonprofit developers out there, as well as for-profit developers dedicated to building affordable housing. They’re all very committed to the affordable housing mission, and I think they’ll be able to replace whatever we lose and replace them with much better projects.”
Though some affordable-housing advocates panicked initially, at the approach of this milestone year, most have concluded the situation is far short of catastrophic. “Because we pass year 15, it doesn’t mean something dire happens,” says Janet Falk, vice president of real estate development for Mercy Housing California. “Acquisition money is there if people know how to use it.”
The training pays off. About two years ago, a 3-year-old boy was drowning, and his mother couldn’t help him because she didn’t know how to swim, says Michael Martin, executive director of human resource development at Calex. “One of our employees rescued him, giving him the gift of life,” he says.
Purcell agrees there’s no need for alarm. “There’s a big push for preservation,” he asserts. “The existing stock of affordable housing isn’t enough to meet our needs, so state and local governments know they can’t afford to lose any of it. They’re going to make sure that doesn’t happen.”
–John McCloud is a freelance writer in San Francisco.