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Affordable Housing Innovators

Thirty years ago, as the World Series played out at Yankee Stadium, many baseball fans were riveted not by the batter at the plate, but by what they saw in the distance from the stands. The Bronx was burning, and they saw torched buildings, flaming like candles.

The Bronx was a cauldron of unrest in 1977, when R. Randy Lee, Esq., CEO of Leewood Real Estate Group, was a young man in his 30s, building a career as a developer in the boroughs of New York City. He realized that tenants in the most anguished parts of the Bronx and Brooklyn had little stake in their communities, since they were excluded from homeownership by price and lenders' practice of “redlining,” denying mortgages in minority districts. Some neighborhoods were infested with drug dealers and crime, and ultimately rage at a system that seemed to work against tenement-dwellers finally boiled over.

When Lee brought a construction crew into Bedford-Stuyvesant in central Brooklyn, working in partnership with the New York City Department of Housing, Preservation and Development, he broke a barrier and took a daring step toward a solution. Bed-Stuy had been the site of race riots a decade earlier. “There hadn't been a new house built in that part of Brooklyn in 40 years,” Lee recalls.

Later, he marched into scorched sections of the Bronx, where buildings had burned to the ground, and created his trademark two-and-three family homes patterned on houses in higher-income neighborhoods. A family could live in one spacious unit and rent out the other.

Over four decades, Lee has built more than 6,000 housing units, 70% of them for people who could not afford market rates. “It wasn't our goal to build houses with smaller rooms, or to stigmatize them at all. These were delightful houses with plenty of rooms, plenty of bathrooms.”

Today, owners are selling the homes for substantial profits. Houses that originally sold for $55,000 now fetch $350,000, Lee says. “Our idea was to bring to the affordable community an opportunity to get a bite of the Apple.”

A stake in the community

Across the country, community leaders long ago concluded that when residents become stakeholders through homeownership, not only do buyers' personal fortunes rise as values appreciate, but whole neighborhoods benefit. Owners take a more active role in fighting crime, and communities tend to be more stable, a climate in which businesses can flourish.

But although developers like Lee have spent their careers creating affordable housing, today the need is more acute than ever. After steep increases in real estate prices, some 17 million American households now spend at least 50% of their income on housing, and many families are forced to cut back on food and healthcare to pay housing costs, according to The State of the Nation's Housing 2007, a report by Harvard University's Joint Center for Housing Studies. One-third of households spend more than 30% of their income on housing, Harvard reports.

Ambulance rescue teams, nurses, teachers and trash collectors unable to buy or rent apartments near their jobs commute up to two hours. A number of hospital workers in pricey Naples, Fla. rise early in their Miami apartments and drive 100 miles, past the Everglades, to ER rooms and nursing stations. Meanwhile, thousands of Los Angeles workers travel from San Bernardino or Riverside because they're priced out of the City of Angels.

The lengthy commutes mean less time with families, more stress, high transportation costs and energy consumption. It's a pattern repeated in the Northeast and major inland cities. But a wave of innovation is presenting fresh solutions.

Filling a void

Collier County, Fla., is so expensive that even professionals with incomes of $80,000 have a rough time finding homes. “As long as the median wage is $34,000 in Collier County and the median sales price is around $400,000, we have a gap and therefore we have a need,” says Marcy Krumbine, director of housing and human services for the county.

Several projects offer part of the solution, including 64 new condos at Botanical Place priced from $125,000, and developed by Phil McCabe, who also offers market-rate condos, Krumbine says.

Developer Waterways of Naples recently sold 16 attached villas at its Bristol Pines project for $165,000 to $185,000, Krumbine adds, and Lennar Homes and Pulte Homes offer specially priced units to buyers based on income. A future project involves a partnership among hospitals and government groups to provide housing for essential area workers.

Other communities are taking similar steps to help workers. It will be a long time before salaries catch up with housing costs, says Delores Conway, director of the Casden Forecast at the University of Southern California Lusk Center for Real Estate. But creative housing policies can lower costs. Among possible solutions:

  • Higher density housing: Taller buildings put more units on a footprint. In August, the Los Angeles City Council agreed to allow slightly taller buildings.

  • Smaller units: San Francisco buyers snapped up 900 sq. ft. units much smaller than many builders' 1,200 sq. ft. units.

  • Zoning: Adaptive reuse and progressive zoning policies can allow old factory sites, for instance, to be used for housing and mixed-use projects.

  • Transit-oriented growth: Locating condos or apartments near transit stops may lower costly parking requirements, with savings passed to buyers.

In the 1960s and 1970s, when cities built public or low- income housing, too often it consisted of big, ungainly projects that became instant ghettos. Now the popular approach is closer to Lee's vision — units that look like market rate housing and offer comparable features.

“If you cut corners, then you're just causing problems for yourself,” says Jay Stark, a managing director of New York-based Phoenix Realty Group, which has 3,000 units under construction or planned in California and the Northeast.

At the Puerto del Sol condo project in Los Angeles, Phoenix oversaw creation of units priced from the $200,000s to the high $400,000s. About 30% of buyers receive subsidies from the Los Angeles Housing Department, based on incomes of about $45,000 to $84,000 per year, Stark says.

A lucrative niche

Stark and others have discovered a little-known aspect of affordable housing: Producing it can be highly lucrative, and the market is voracious. “There is an almost unlimited demand for affordable housing,” Stark says.

He estimates returns on funds to Puerto del Sol investors at 16% to 19%. Phoenix Group contributed $6 million of the roughly $40 million upfront costs for the project, which is 80% sold and has generated more than $60 million in revenue, Stark says.

Asked if that means gains of more than $15 million for the project, Stark replies, “We have to share that with our development partner.”

Matt Papunen, the 28-year-old principal and co-founder of Miami-based Alterra Capital Group, which owns 1,400 workforce apartments and is buying another 1,700 over the next two months, knows how lucrative the affordable housing niche can be.

On a recent deal, a 120-unit apartment rehab in Montgomery, Ala. called Hidden Creek Village, his company realized a profit of $1.6 million. Alterra renovates garden-style apartments and townhomes, typically earning returns of 25% to 40%. “We've had deals that are 100% plus,” he says. He calls those returns home runs.

“What we tend to do is buy these homes out of foreclosure or some sort of bank-owned situation, where a slumlord ran them into the ground,” he says.

Alterra invests a lot of capital, transforming the properties into clean and safe residences and adding amenities normally found in luxury complexes. “We get the pools up and running, we have things like basketball courts and tennis courts and gyms and business centers,” Papunen says.

When Alterra bought Hidden Creek Village, it was in foreclosure. Papunen paid $1.5 million and sank $600,000 into renovation, installing new management and proper security.

“We put long-term financing on it for $3.7 million, so we were able to pay back our $2.1 million and realize a gain of $1.6 million in less than a year,” Papunen says. And there were other rewards. Last year Hidden Creek won a Community of the Year award in Montgomery, the developer notes.

Though the rehab business can be lucrative, it's not easy. “It takes a lot of hands-on work, it tends to be in neighborhoods that are a little rougher,” and it requires a lot of upfront capital to transform a neglected property, Papunen says.

For many developers, the most satisfying rewards of creating affordable housing have little to do with how lucrative it may be. Whenever Lee of Leewood Real Estate Group drives to the Bronx with his wife, he makes a detour to visit the houses he built decades ago. And many grateful buyers have kept in touch all these years.

“There are neighborhoods that I started in that were completely devastated,” recalls Lee. “They were rubble, they were burned out. Nobody lived there.”

Not so, anymore. “You go back today and you can see they're thriving neighborhoods. Little markets have opened up. Stores have opened up,” says Lee. “People plant bushes and flowers in the front of their houses, where before there was just debris. I mean it's a great thing.”

Denise Kalette is senior associate editor

Trading up to realize the American dream

Affordable housing can prove lucrative not only for developers, but for buyers as well. Just ask Arturo Nunez, a baker who emigrated from Mexico in 1989. Nunez parlayed a $178,000, two-bedroom condo that he bought from Los Angeles developer Daniel Khakshouri, CEO of CondoWest, three years ago with a down payment of $8,000 into a million-dollar deal.

Two years after buying the condo, Nunez sold it for $314,000 and used the proceeds to buy a $600,000, four-bedroom, 1,900 sq. ft. house now valued at $800,000, he says.

Nunez is refinancing the house to put a hefty down payment on the building that houses his bakery and two other businesses, a $1 million transaction.

Asked if he can afford both the house and commercial building, Nunez says yes, since the bakery has 350 regular customers for its pastries and breads. Nunez's 17-year-old son Luis translates from Spanish for his father, who does not speak English.

Khakshouri, the developer, says units like the one he sold to Nunez meet high-quality standards. “We buy apartment buildings and convert them to condos, particularly for the first-time home buyer,” he explains.

His privately held company currently owns 29 buildings and a portfolio valued at more than $112 million. The period from acquisition to sellout usually runs 18 to 24 months, says Khakshouri, who was born in Germany. “Annually, it's a return of about 60%.”

For nine projects currently under way, Khakshouri ordered cabinets from Italy and installed marble, and stainless steel appliances. “On average we probably spend between $50,000 and $60,000 per unit,” he says, but he keeps costs down by buying in bulk and using an in-house rehab crew.

Affordable housing shouldn't look inexpensive, he firmly believes. “To the extent possible, build it as though you were building market-rate or more expensive housing.”
Denise Kalette

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