Apartment Finance Today: Partnering for Public Purpose, and Profits, in Mixed-Income Development
May 01, 2012
As more cities enact inclusionary zoning laws, the trend of mixed-income development continues to grow stronger.
But deep levels of income mixing require deep rosters—a gathering of different skill sets—and some developers are uncovering more opportunities by partnering with nonprofits.
Though it’s known as a luxury developer, about 10 percent of the Bozzuto Development Co.’s portfolio is mixed-income. And the developer often finds mixed-income opportunities through small regional nonprofits looking to hitch their wagon to a large balance sheet.
Such was the case on the 116-unit vPoint, a tax-credit project in Arlington, Va., that opened its doors in April. Bozzuto was brought in on the project as a fee developer, partnering with nonprofits First Baptist Church of Clarendon and the Virginia Housing Development Authority, as well as Chesapeake Community Advisors.
“They’ll come to us for the wherewithal—you have to guarantee the construction loan, and the cost to get any project going before it even breaks ground is probably about $1 million,” says Toby Bozzuto, president of the Washington, D.C.–based Bozzuto Development Co. “And they help us, in many cases, with the political relationships and the tax-credit application work. When you compete for tax credits, the scoring system gives disproportionately more points to people who partner with nonprofits, and it’s almost undoable without that.”
The Class A vPoint sits on land that once housed the Church at Clarendon, which had its steeple—a local landmark—incorporated into the design. Forty-six units are market-rate and 70 are affordable, of which 12 will be supportive housing for very–low-income households.
The project’s financial feasibility determined the unit mix. “There was some tempering of the pro forma to make it work,” says Bozzuto. “It was backed into the economic feasibility of the project and then sought tax credits to fill the remainder.”
Village at Santa Monica
In February, Related California broke ground on the $350 million Village at Santa Monica, a 318-unit mixed-use development that utilizes 4 percent low-income housing tax credits (LIHTCs) and tax-exempt bonds. When the developer won the project's request for proposal in 2006, it was given affordability parameters by the city: Roughly half of the 318 units had to be affordable. To make the deal work, the company decided to develop the other half as high-end condominiums.
“At the time, for-sale housing was literally riding into the boom, so the residual land value for condominiums was much greater than for apartments,” says Bill Witte, president of Irvine, Calif.–based Related. “The way to make this project work financially was to pay the city for the land in a sufficiently large number that [would allow city officials to] take the proceeds and use them to subsidize the affordable units.”
Related is partnering with nonprofit developer Community Corp. of Santa Monica, Calif., on the affordable units, and with Los Angeles–based Resmark Cos. on the condos.
But the decision to develop condos instead of market-rate rentals proved to be a setback for the development team. Scoring the tax-exempt bonds and related LIHTCs for the affordable units was the easy part. Finding construction debt for a condo project remains a wild goose chase.
As recently as last October, Witte told the city council that attracting lenders was still proving difficult. But the company finally found a 65 percent leverage loan from Wells Fargo and HSBC, with 35 percent equity coming from the development team—a capital stack that was impossible two years ago, when the developer was raring to break ground.
“The recession probably cost us a couple of years,” says Witte. “But that’s a very good deal in today’s world for condominiums, if you can finance them at all.”
Related hopes to sell the condos for upward of $800,000 when they come on line in 2014 and is confident that such a price can be achieved in a high-cost seaside area like Santa Monica.
“From a financing point of view, mixed-income works best in very strong markets—the higher the rent, the easier it is to [get it to] work financially,” says Witte. “By contrast, a working-class neighborhood—where the tax-credit rent and market rent are relatively close—doesn’t work very well.”