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As millions of Americans struggle with the cost of housing, developers who build affordable apartments and condos are confronting such severe financial challenges that at least one major firm has stopped building subsidized projects.

To get low-cost projects built today, developers must search for ways to partner with government agencies or nonprofits to snare low-cost land, and to gain financial incentives.

The need is clear. Some 17 million American households spend at least 50% of their income on housing, and many families skimp on food and healthcare because of the cost of shelter, according to a report issued in June by Harvard University's Joint Center for Housing Studies.

From 2001 to 2005, the number of households spending more than half their income for housing jumped by nearly 3.2 million. Meanwhile, the nation's inventory of affordable units dropped by 1.2 million in the decade ending in 2003.

“One-third of all households are spending more than 30% of their income on housing. It's gotten so high, people no longer find it shocking,” says Rachel Drew, Harvard research analyst and project manager for the new report. As for the millions spending at least 50%, “We call that a severe housing cost burden.”

From Washington to San Francisco, workers, the elderly and others clamor for affordable apartments and place their names on long waiting lists for housing aid. Meanwhile, developers are fighting rising construction, energy, and land costs, as well as governmental regulations.

In Boston, more than 15,500 applicants languish on one nonprofit's housing list. So many vie for low-rent units in New York City that officials use lotteries to pick tenants. Many firemen, nurses and teachers search in vain for reasonably priced lodging in the Big Apple, where a one bedroom can fetch $6,200 on the chic Upper West Side, or $2,800 in artsy SoHo.

Responding to the problem

“Everybody knows there's a crisis,” says developer Larry Hirschfield, president of ELH Management LLC, a Brooklyn-based property development firm that has renovated scores of buildings. “In Manhattan, in a doorman building, you can start at $4,000, $5,000 or $6,000 a month and up — that's a rental price.”

Across the country, an army of developers and investors like Hirschfield have stepped in to produce low-cost housing, and found creative ways to navigate the governmental and financial obstacles.

Some of Hirschfield's rehabs were funded through New York Mayor Michael Bloomberg's 10-year, $7.5 billion program to create 165,000 affordable units throughout the city. Since 2003, about 55,000 units have been created.

Hirschfield's labors gave new life to the turreted Brooklyn gem the Imperial, which had fallen into disrepair. Built in the 1890s with 25 palatial apartments, it now offers 34 units for rent starting at $430 per month. As part of a Coney Island effort, Hirschfield is partnering with two other firms to build 152 co-ops that could cost as little as $117,000 for a two-bedroom, based on the buyer's income.

$1 Coney Island land deal

Hirschfield works with New York's Housing Development Corp., a leading issuer of bonds for multifamily affordable housing. Under the agreement with HDC to build co-ops and a community center through Coney Island Commons LLC, with partners KB Cos. and Galaxy General Contracting, the city will convey the property for $1 and contribute $5 million toward the community center.

The New York State Affordable Housing Corp. will provide a subsidy ranging from $25,000 to $40,000 per apartment. The units will be sold via lottery, with at least half the co-ops reserved for Coney Island residents.

The $56 million project, located about a mile from the historic amusement park, includes a 40,000 sq. ft. community center. “They have people banging at their door” at the sales firm, the builder says.

But spiraling costs and federal rules barring thousands of owners from raising rents to offset higher operating costs, hamper many developers. Some no longer participate in government programs.

“We're not building any more subsidized housing, which I'm sorry about,” says Ron Terwilliger, chairman and CEO of Atlanta-based Trammell Crow Residential. One of the nation's largest multifamily housing developers, the company formerly built about 1,500 affordable units a year for people earning 60% or less of an area's median income, and received federal tax credits in return. But development costs rose by 50% in the last three years. “With the increase in land costs and construction costs and the lack of rent increases, it doesn't work for us anymore,” says Terwilliger.

The company's last initiated low-income project, a $48 million rental development across from the Georgia State Capitol, is being built in cooperation with the Atlanta Housing Authority. Tenants have begun moving in after completion of the initial 269 units, and another 421 units are under construction.

Terwilliger, who donated $12 million to nonprofits for affordable housing construction, believes too much of the burden for creating the housing has fallen on developers. “The governments aren't doing enough to subsidize the housing,” he says. “This is a society-wide problem.”

Developers say solutions to creating economical housing lie in partnerships with community agencies, and persuading local and federal government to offer additional subsidy programs, particularly those that allow realistic adjustment for increased operating expenses.

They also urge local governments to rezone land to permit higher-density housing near workers' jobs. Some investors ask cities to donate land for projects so the savings can be passed on to tenants or buyers.

Frozen rents shock industry

The U.S. Department of Housing and Urban Development recently published new income limits that freeze rents in roughly 2,000 of the nation's 3,100 counties for property owners receiving tax credits through Section 42 of the IRS tax code. HUD's income limits are used to set maximum rents owners can charge.

Low income housing tax credits are the government's main incentive for creating affordable housing, spurring construction of more than 1.8 million units in the last two decades. The government offers about $5 billion in tax credits annually through state and local agencies to construct or rehabilitate rental housing.

The rent freeze is the biggest shock to hit the tax credit industry in years, says Paul Emrath, an economist at the National Association of Home Builders in Washington, D.C. “That's unlike anything we've seen before. That came as a surprise to everyone.” HUD based its current income limits on calculations from the American Community Survey conducted in 2005 by the U.S. Census Bureau.

The newer survey showed median family income figures that were substantially lower than those indicated by the 2000 Census, even adjusted for inflation, Emrath says. To resolve industry frustration, the home builders propose decoupling rents from HUD income limits and tying them to the consumer price index or another inflation measure.

Rent freezes have long posed a problem for property owners participating in other federal programs, including HUD's Section 8 program, which offers housing assistance and vouchers to tenants whose incomes fall within HUD guidelines.

“The debt-service coverage has been deteriorating for Section 8-assisted properties because the rents are frozen,” while owner costs are rising, says Wendy Dolber, managing director of Standard & Poor's public finance housing group. “Some of the owners have been taking money out of their own pockets to put back into the property. It's questionable how long they can do that.”

The contracts of about one million housing units financed 20 or 30 years ago with government assistance and subject to federal rules now are expiring. As the loans are paid off and contracts with investors expire, the units will vanish from the Section 8 portfolio, freeing private owners to raise rents. Only about two million “deeply affordable” apartments will remain, Dolber says, mainly federally subsidized or owned units.

Public, private solutions

Many developers believe the future of affordable housing lies in a new generation of structures created through partnerships with public agencies, and in creating infill projects. Some developers receive incentives for building multifamily housing in which a percentage is set aside for people whose incomes are lower than the area median income.

Here's how government and private industry are dealing with housing issues.

  • HUD blocks Brooklyn deal: HUD Secretary Alphonso Jackson recently scuttled the proposed $1.3 billion sale of Brooklyn's Starrett City rental complex, saying the sale would have displaced the 14,000 residents of the nation's largest federally subsidized rental complex. Developer David Bistricer, a partner in Clipper Equity LLC, twice tried to buy the 6,000-unit complex from Starrett City Associates. The deal requires approval by the federal government and New York State, which holds Starrett's $234 million mortgage. The state blocked Bistricer's second purchase attempt in April, saying it would be too costly to increase government subsidies to keep rents affordable.

  • Struggle in Beantown: In Boston, a rising number of city dwellers cannot afford market rental rates. About 45% of those receiving Section 8 vouchers for housing aid are workers, says Amy West, a spokeswoman for the nonprofit Metropolitan Boston Housing Partnership.

    According to the National Low Income Housing Council, the Boston area median household income in 2006 was $84,100. A family earning 30% of that, or $25,230, would be required to pay no more than $631 a month for housing. Meanwhile, the Fair Market Rent for a two-bedroom apartment in Boston is $1,366 per month, West says, and a family would have to earn $54,640 to afford it.

  • Buyers snap up Miami lofts: In Miami, where the recent condo boom sent rental and purchase prices rocketing before the market fizzled, many workers have been priced out of the market.

    “A person who made $50,000 a couple years ago could not afford to live downtown, and now a person who makes $80,000 cannot afford to live downtown,” says Oscar A. Rodriguez, senior vice president of development at The Related Group, which targets workers earning between $40,000 and $80,000 a year, and obtains government subsidies.

    When Related built the 23-story, $50 million Loft Downtown project, offering 196 units priced from $99,000, the tower sold out in three weeks, and residents began occupying the condos in 2005. The project was five times less profitable per unit than the luxury Icon Brickell, a $500 million, 50-story tower with 1,000 units opening in 2009, Rodriguez says.

  • Block Grant helps Maryland project: In Maryland, the Bozzuto Group worked with a local housing authority and a nonprofit to develop The Addison at St. Paul, offering condos from the low $200,000s, says chairman and CEO Tom Bozzuto. The nonprofit bought an apartment project near a subway station inexpensively, and secured a $500,000 grant commitment from Prince George's County under the Community Development Block Grant Program. Ninety of the workforce units have been sold.

With government funding in short supply, the number of affordable units shrinking, and remedial efforts piecemeal, prospects for a turnaround are bleak, the Harvard authors conclude. Despite this, many developers have found success.

Even with government assistance, Hirschfield says it's too early to tell what sort of return his Coney Island investment in New York will generate. After years of rehabbing units, Coney Island Commons is his first project built from scratch, and he, too, cites the daunting construction and energy costs.

“I don't know what our next move is going to be. I think we'll continue to look at affordable housing, but where the land is going to come from, how it's going to be financed, how it's going to work — that's anybody's guess.”

Denise Kalette is Senior Associate Editor.

New rules stir investor anxiety

Multifamily housing investors are bracing for new federal rules expected to be issued in late June that some fear could compound their difficulties:

  • Thousands of 15-year federal contracts to offer affordable housing in exchange for tax credits are expiring, and many of the properties are expected to be sold. Owners are waiting for the IRS to reveal new guidelines for the sales. The IRS has required that units be offered first to buyers who will keep them affordable, but many sellers want to earn market rates, and are eager to learn what constraints are placed on the sales.

  • On June 30, current IRS guidelines for utility allowances expire, and the IRS is updating rules that now limit landlords' ability to recoup utility costs for tax credit properties. Some owners have been forced to dip into operating reserves to meet expenses, and industry groups hope the new IRS proposals will permit allowances based on accurate utility costs. The proposals will be subject to public comment before they become final.

  • Another source of investor anxiety is a proposed fee increase for loan guarantees from the Federal Housing Administration. A similar plan was withdrawn months ago after stinging rebukes by the Mortgage Bankers Association and bipartisan Congressional opponents. Real estate groups claim the fee increase is a disguised tax on rental housing, and that it will lead to higher rents.
    Denise Kalette

Hispanics propel U.S. apartment market

While Congress grapples with proposals for a sweeping overhaul of U.S. immigration policy, the apartment industry is advising firms to prepare to accommodate thousands of new arrivals, primarily Hispanics. Foreign-born and minority households are the fastest-growing segments of the housing market, according to a report by the Joint Center for Housing Studies of Harvard University.

The minority share of U.S. households is expected to expand from 28% in 2005 to more than 32% in 2015 and have a major impact on multifamily housing. Over the next eight years, the number of rental households is projected to increase by at least 1.8 million. “Minorities will be responsible for the entire gain and will eventually account for the majority of renter households,” the National Multi Housing Council (NMHC) writes in a lengthy report on preparing for a rental housing boom.

“When it comes to housing demand, the immigration story is essentially a Hispanic story,” reports NMHC. Half the immigrants entering the U.S. are Hispanic, and Hispanic households rose by 58% in the 1990s. Hispanics make up 54% of immigrant renters, the report states, and the number is growing annually.

The implication for apartment firms, whether in cities or suburbs, according to NMHC's 2006 annual report, is that “to a large degree, the future of rental housing is focused on Hispanics.”

While the immigrants' impact on the rental market in coming years is expected to be substantial, the industry is monitoring the proposed legislation to reform U.S. policy, which could affect the market. One plan gathering bipartisan support in Washington would offer millions of illegal immigrants now in the U.S. a chance for legal status, but would prevent future arrivals from staying.

As the country grows more ethnically diverse, apartment firms will need to adapt to the renters, say authors of the NMHC study. At many properties, Spanish-speaking staff and bilingual leases will become the norm.

Savvy apartment owners already have taken the immigrant market into account. “I think it's critical throughout our mid-Atlantic states and particularly in the Washington, D.C. area,” to adjust to the newcomers, says Tom Bozzuto, chairman and CEO of the Maryland-based Bozzuto Group, which has built and acquired more than 28,000 apartments and for-sale homes with a combined value of nearly $3 billion.

“There is a tremendously large immigrant population in Montgomery County,” Bozzuto says. Though the county has the image of a wealthy Washington, D.C. suburb, it also has a large share of people who need affordable housing. The company built a mixed-use, mixed-income project that includes 173 apartment units at a subway stop in Wheaton, Md., setting aside 30% of the units for affordable housing. The group also built 122 condos priced from the low $200,000s, a rarity in the pricey capital area.

Bridging the language barrier

“One of the things we have at all our [rental] properties is an interpreter system,” Bozzuto says. It amounts to a telephone system with two handsets. At one property, a Cantonese-speaking prospective tenant approached the English-speaking manager. The manager picked up one phone, and the Cantonese-speaking woman picked up the other, and her words were simultaneously interpreted for the manager.

The firm surveyed its own employees and discovered they had come from 52 countries, from El Salvador to Australia, Germany and the Netherlands. All work in the region between Northern Virginia and Pennsylvania. A number of the company's managers are bilingual.

Heavy housing burden

Across ethnic lines, the need for affordable housing is clear, says Bozzuto, a member of the Harvard Joint Center advisory board. One of every three U.S. households spends more than 30% of its income on housing, and one in every seven households spends more than 50% on housing.

Bozzuto is not certain what percentage of his tenants are immigrants, since the company does not seek that information, but he says the majority are Americans.

“It takes a great deal of ambition and guts to leave a place where all your family is and where you grew up, and come to a place where you know no one,” Bozzuto says. “I have great respect for the immigrant population.”
Denise Kalette

We welcome your response. Please tell us about your experience with affordable housing, with specific examples and suggestions for developers and government participants. Email comments to [email protected].

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