By Jeff Shaw
Every affordable housing project relies on an intricate combination of funding, partnerships and know-how to reach the finish line. Fortunately, developers have a lot of different levers they can pull to make a project work financially.
Each development typically involves a mash-up of federal tax credits, support from various municipalities (state, county and/or city) and private funding. It requires immense creativity on the part of developers.
But many developers are still finding success, as evidenced by the bevy of new projects coming to market across the country.
“Many of us in the affordable housing business like it because it does tend to be a little more immune to market cycles than conventional housing,” says David Block, director of development at Evergreen Real Estate Group.
“Typically, when debt or equity markets dry up for conventional housing, there are still incentives for both debt and equity investors to participate in affordable housing. Even in a down cycle, banks still have to meet their affordable housing obligations,” adds Block.
While more affordable seniors housing projects are being built than ever, the unfortunate reality is the industry can’t keep up with the overwhelming demand of the incoming baby boomer generation, according to Mark Myers, managing director on the investment sales team at Walker & Dunlop.
“We need to develop at 3.5 times the pace we are,” says Myers. “If we don’t speed up our development of affordable seniors housing, we’ll soon have a $275 billion supply gap. If we don’t do something to meet the supply in the near term, we’re going to have a serious issue.”
How do we keep up?
Another complicating factor of affordable seniors housing is the state-by-state differences. While 46 states have Medicaid waiver programs, which allow Medicaid to pay for assisted living services in specialized environments, the funding for the program varies widely.
Even the much-lauded Illinois Supportive Living Program has maxed out its contributions, meaning no new developments can be built under the program currently, according to Myers.
“Increasing Medicaid waiver rates in most states would be a tremendous help and then broadening the programs,” says Myers. “Aside from approval of a few projects recently, the Medicaid waiver program has stopped expanding. We need that program. It’s proven to be successful. It’s great at mixing the demographics and provides good return to investors.”
Myers goes on to note that Medicaid waivers for assisted living services cost the government considerably less than paying for a nursing home via Medicaid.
Block reports that Colorado has launched a series of new programs and tax credits that has spurred investment, while Illinois is considering expanding its systems.
“We’ve all used the Low-Income Housing Tax Credit (LIHTC) program as the backbone of the affordable housing production system in this country for almost 40 years,” says Block. “The program has been fantastic. It’s produced hundreds of thousands of units of housing, but construction costs have gone up so quickly while the resources have only increased modestly. They haven’t kept up with construction costs or interest rates.”
Isaac Sassoon, senior vice president at Tryko Partners, credits assistance from the City of Pittsburgh and the Pennsylvania Housing Finance Agency (PHFA) for supporting its recently completed, 46-unit Cedarwood Homes community in Pittsburgh. The project is a redevelopment of Pittsburgh’s former Fairywood School site.
“We were able to obtain vouchers, additional funding and other resources, which underscored their true desire to help with the housing needs of the region’s low-income seniors,” says Sassoon, referring to local government and PHFA. “It comes down to not only desire to address the problem, but the ability of municipal authorities to do so.”
Hankin Group is also developing in Pennsylvania, and praised the PHFA for being “responsive to current market conditions” by increasing LIHTC funds available, according to Neal Fisher, vice president of development.
“The past several years have been a difficult time for affordable housing projects to pencil out. We are based in Chester County, Pennsylvania, and are lucky to have public partners, including Chester County and local municipalities, committed to the development of affordable housing and willing to increase funding opportunities to help offset inflation pressures.”
Noting the state’s commitment to developing more affordable seniors housing, Amy Schectman, CEO of 2Life Communities, says: “Thank goodness we live in Massachusetts.”
“Massachusetts has been aggressive, thoughtful and forward thinking about addressing affordable housing. The federal programs tend to be rather rigid, but the state is very flexible. So, when they see things like interest rates out of control, they adjust the amount of credits or the soft debt they provide.”
Even in Massachusetts, though, Schectman notes that the state has hit its cap on federal 4 percent LIHTCs, meaning no more can be issued this year.
The LIHTC gives investors a dollar-for-dollar reduction in their federal tax liability in exchange for providing financing to develop affordable rental housing, according to Novogradac, an accounting firm specializing in tax credits.
Claimed pro rata over 10 years, the tax credit can be used to construct new or renovate existing rental buildings. The LIHTC program is designed to subsidize either 30 percent or 70 percent of the low-income unit costs in a project. The 30 percent subsidy, which is known as the so-called automatic 4 percent tax credit, covers new construction that uses additional subsidies or the acquisition cost of existing buildings. The 70 percent subsidy, or 9 percent tax credit, supports new construction without any additional federal subsidies, according to Novogradac.
Headwinds worsen shortage
Two factors have combined to create a growing gap between affordable seniors housing supply and demand, notes Schectman.
First, with construction costs going up and government contributions capped, that means that fewer developments are being built for the same amount of money. If new projects cost more to complete, government funds dry up faster.
Second, the factors leading to more low-income seniors — high inflation, the pure demographic wave of baby boomers — are only getting worse.
“Last time I checked, we had nearly 9,000 households on our waiting list for units we turn over at a rate of 160 a year,” says Schectman. “What could be done to fix it? There’s no silver bullet.”
Her biggest suggestion is to bring back the HUD Section 202 program. Originally started in 1959, the program has shifted and changed over the decades, and is now a shadow of its former self and hasn’t been funded since 2012. LeadingAge, one of the major industry associations, has similarly called for HUD to “revive and strengthen” the program.
The Section 202 program helped expand the supply of affordable housing with supportive services for the elderly. It provided direct loans and capital advances from the federal government to support nonprofit entities in building housing for very-low-income elderly. Although no new funding has been available for Section 202 capital advances since 2012, affordable seniors housing developments that were built with Section 202 funds continue to provide housing and services to their residents.
“If you could restore it to the old way, you’d see a massive ability to restock affordable housing for older adults,” says Schectman.
Pilar Carvajal, CEO and founder of Innovation Senior Living, confirmed the shortage of affordable units.
“For the first 15 years of my career in senior living (2001-2016), we licensed public and subsidized housing as assisted living communities and had great success and completely occupied buildings with long waiting lists. The need is enormous.”
She suggests increased government funding, streamlined regulations, more public-private partnerships, educating the community on the need and integrating supportive services into developments as the key components of meeting the shortage.
Charlie Adams, regional vice president at developer Pennrose, says financing an affordable housing project has become more complicated in recent years due to the run-up in interest rates.
“We receive project-based subsidies, but those are limited. Many states have their own subsidy program as well, so we’re seeking subsidies from the states. On a lot of projects we’re putting in requests for federal earmarks, and many cities and towns have their own funds so we’re asking for small contributions there. In the past when a deal needed a funding gap filled, you’d go to one particular source. Now, some of those funding sources that used to be a gap filler are required to make a deal work.”
Adams also echoed Carvajal’s message about educating the local community, turning NIMBY (“not in my back yard”) opposition into supporters.
“Better zoning policies across states would be really helpful for dealing with the problem. Obviously, we need more financial resources, but the community’s willingness to accept more affordable housing would also be a real benefit.”
Adams says that affordable seniors housing development continues to march forward while market-rate and luxury seniors housing projects have largely stalled. However, he is quick to add that the affordable sector is doing “better, but not great.”
“The private market is basically stopped, for all intents and purposes. Affordable housing has kept going because you have industry folks committed to figuring out how to fill those gaps.”
Ken Linehan, managing principal at FK Architecture, notes that affordable housing developers are a different breed from market-rate and luxury builders.
“Developers adept at identifying and securing funding are significantly improving the turnaround time for affordable seniors housing projects,” he says.
“Typically, success in this area requires expertise in locating and applying for specific funds. This process is not commonly undertaken by market-rate or private-pay seniors housing developers because there is an extensive time commitment managing the bureaucratic hurdles involved.”
Creative ideas give a boost
One concept that is becoming more common is mixed-income housing projects, where
market-rate seniors housing and affordable seniors housing coexist in the same project.
Essentially, the builders are seeking the best of both worlds: higher rents in one part of the development, and tax breaks on another part.
“Mixed-income developments integrate residents from various socioeconomic backgrounds within the same community, fostering social inclusion and reducing segregation,” notes Carvajal.
2Life has multiple mixed-income projects both completed and underway. One of the projects, Golda Meir House in Newton, Massachusetts, recently expanded by 68 units. Of those, 50 are reserved for seniors earning up to 60 percent of area median income (AMI), 10 units are for those earning up to 100 percent of AMI and eight units are unrestricted. The property now features a total of 267 apartments.
“Mixed income is a way to get the density we need to provide the services and support when public funding is limited,” says Schectman. “You want enough density to afford two maintenance workers, for example. You want to have the staffing that is necessary to keep people from ever leaving us.”
2Life’s recent ground-up project Shillman House in Framingham, Massachusetts, includes Section 8, LIHTC and market-rate units and combined 14 sources of financing to complete the $42 million project in 2011. Of the 150 units, 90 have income restrictions, while 60 have none.
“Do you think any of the residents say, ‘Which unit are you in? Are you paying full rent?’ They don’t,” says Schectman. “It’s an artificial distinction to think people have different needs. When older adults get to that stage in life, it’s an equalizing environment.
“This is a reminder how big the need is for the full range of affordability. We’re going into a state where older adults will be in serious economic insecurity, and housing is a big driver of that.”
Pennrose recently completed The Pryde in Boston, which converted a closed middle school into 74 units of mixed-income seniors housing that also caters to LGBTQ residents.
“When it comes to diversity of incomes in a development, communities want to see that, developers want to see that, and the industry wants to see that,” says Adams. “Some of the affordable housing programs cap out at a certain level, but with mixed-income development, you can bring in higher rents and more debt. These are the main reasons we have been seeing an uptick in mixed-income development.”
Pennrose is also underway on a redevelopment of the historic Veterans’ Home in Chelsea, Massachusetts. The phased redevelopment will update the campus — which has been in continuous operation since the 1880s — through a combination of rehabilitation and new construction. While all the units are designated for veterans and their families, there is an intergenerational aspect as some apartments are reserved for seniors.
“It’s about making a place where everyone can live. We feel so good about our properties that we want them to be available to everyone,” says Adams.
Fisher of Hankin Group similarly praises the trend of mixed-income seniors housing. “Counties recognize the need for housing stock that is reflective of the community’s full makeup. Everyone plays a role in a robust, thriving society, and communities flourish when we have housing availability for a diversity of incomes.”
Although Evergreen has developed mixed-income projects, Block notes that it’s a highly complicated process, and calls for governments to make these developments easier to pencil out.
“The equity model for LIHTC projects doesn’t mix well with the private equity of a market-rate deal,” says Block. “Trying to structure around that — creating two projects in one — gets really complicated and quite expensive from a legal structuring perspective. It becomes a compliance headache for the affordable side.”
Volunteers of America National Services (VOANS), a division of the faith-based nonprofit Volunteers of America, is working on some innovative development ideas. Through its current initiative, Innovative Dwellings, VOANS partners with mission-aligned organizations to use repurposed buildings and materials to create environmentally sustainable housing for unhoused veterans.
The company says it can do this at double the speed and half the cost of building single-family homes, focusing instead on accessory dwelling units — smaller, independent housing separate from the main home on a property.
“The demand for affordable housing continues to outpace the development of affordable housing. As long as housing costs continue to rise and the minimum wages remain stagnant, this imbalance will remain,” says Dee Dee Beaty, senior vice president of housing for VOANS.
“In recent years, the use of innovative housing development product types — modular, tiny homes and container units — have proven to be a way to quickly develop quality housing,” she explains.
Myers of Walker & Dunlop notes that in order to meet the ballooning demand of low-income seniors, though, the industry needs to come up with fresh, new ideas from both the government and the private sector.
“We need some new trends. We need some creative structures that allow more development. Obtaining LIHTCs has become pretty onerous. We need some additional creative programs for such developments so we can have more affordable housing.”