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Affordable Housing Finance

SPECIAL FOCUS

The AHF 50

Staying Power

AFFORDABLE HOUSING FINANCE =E2=80=A2 April/May 2009

Power Developers confront tough = conditions

BY DONNA KIMURA

DEVELOPERS TALK BACK

=E2=80=A2 The Top 50 developers started = 23,428 affordable=20 housing units in 224 projects across the country in=20 2008.

=E2=80=A2 Average price received for 9 = percent lowincome=20 housing tax credits in 2008: = $0.88
Average price=20 expected for the same type of deal in 2009: =
$0.75

=E2=80=A2 Average operating cost per unit = per=20 annum
$4,789

=E2=80=A2 Approximate construction cost = per square foot for=20 a new project:
Garden-style =E2=80=94 = $106
Mid-rise =E2=80=94=20 $156
Attached townhome =E2=80=94 $111

=E2=80=A2 Developers are taking different = steps to cope=20 with the economic downturn. (Developers were responding to = an=20 open-ended question and may have listed multiple=20 answers.)

Increasing collections/cutting expenses =E2=80=94 =
23=20 percent
Meeting with partners and/or aligning projects = with=20 partners=E2=80=99 criteria =E2=80=94
16 percent
Hiring = or compensation freeze=20 =E2=80=94
12 percent
Increasing scrutiny of proposed = projects =E2=80=94=20
11 percent
Tightening underwriting/increasing due = diligence=20 =E2=80=94
7 percent
Concentrating on strong markets = or most viable=20 projects =E2=80=94
6 percent

=E2=80=A2 The lack of low-income housing = tax credit capital=20 is affecting developers in several ways. (Developers were = responding=20 to an open-ended question and may have listed multiple=20 answers.)

Reducing or slowing the pipeline of new projects = or=20 acquisitions =E2=80=94
30 percent
Concentrating on = the strong markets=20 and projects that appeal to investors =E2=80=94
21 = percent
Seeking=20 other funding sources =E2=80=94
10 percent =
Value-engineering deals=20 =E2=80=94
4 percent

About the survey
Responses = are from a=20 survey of 94 affordable housing developers conducted by = AFFORDABLE=20 HOUSING FINANCE in February 2009.

This year=E2=80=99s Top 50 developers started 23,428 = affordable housing=20 units in 2008. Each one has some extra sweat and maybe a = tear or two=20 on them.

Developers put these deals in play in a brutal year = marked by=20 melting equity prices, tightening underwriting, and growing=20 uncertainty in the economy and the real estate market.

Perhaps a sign of the difficult times, the number of = units=20 started is a notable 23 percent drop from the affordable = units=20 started in 2007 by last year=E2=80=99s group of ranked = firms.

Completions also fell by roughly 17 percent, with this = year=E2=80=99s Top=20 50 delivering 21,385 affordable homes in 2008. The overall = drop in=20 starts isn=E2=80=99t a surprise given the turmoil in the = equity markets,=20 says David O. Deutch, a partner at Pinnacle Housing Group in = Miami,=20 the No. 16 developer on this year=E2=80=99s list, with 589 = units=20 started.

=E2=80=9CIt continues to be difficult because of a lack = of capital,=E2=80=9D he=20 says.

Despite the troubles, the industry is in a better = position than=20 it was a few months ago, according to Deutch, who hopes to = start=20 several more projects this year. =E2=80=9CI=E2=80=99m = cautiously optimistic that the=20 stimulus [bill] is going to have the intended consequences = of=20 allowing deals to move forward and get built,=E2=80=9D he = says.

The recently signed American Recovery and Reinvestment = Act=20 features several provisions aimed at jump-starting stalled=20 low-income housing tax credit (LIHTC) projects and reviving = the=20 anemic tax credit market. Nearly all of the units cited in = the Top=20 50 list are financed with LIHTCs.

Other developers are also surprisingly optimistic. The = Top 50=20 firms estimate that they will start 26,131 affordable = housing units=20 this year, which, if realized, would be a nearly 12 percent = jump=20 from 2008. They also hope to complete 23,439 units, a 10 = percent=20 increase from what they completed last year.

The only list of its kind, the AHF 50 shows how many = units are=20 under development by the leading national and regional = developers=20 and provides valuable benchmarks for the industry. The = ranking is=20 based on the number of units started in 2008. Separate lists = reveal=20 the Top 50 owners and the Top 10 firms completing = acquisitions.

The results are compiled from a voluntary survey, so not = all=20 developers participate. This year, 94 firms took part. All=20 developers are encouraged to take part in next = year=E2=80=99s survey to help=20 generate the most comprehensive list possible.

Who=E2=80=99s No. 1?

For the third consecutive year, The NRP Group, Inc., was = the=20 nation=E2=80=99s most active affordable housing developer, = starting 16=20 projects with 1,437 units and completing another 15 projects = with=20 1,412 units in 2008.

The Cleveland-based firm hopes to start another 15 = developments=20 this year. =E2=80=9CThe biggest challenge in the last 12 = months has been=20 finding equity and debt to finance the pipeline of projects = in=20 development,=E2=80=9D says Alan Scott, principal. = =E2=80=9CWe have succeeded in=20 funding the bulk of our deals and have moved mountains in = the=20 process, including finding additional soft dollars and = incentives to=20 overcome more rigorous terms.=E2=80=9D

The firm has made several moves during this economic = downturn,=20 including shifting its course =E2=80=9Cto include more = affordable projects=20 and less conventional, where equity and acceptable loan = terms are=20 nearly impossible to find,=E2=80=9D Scott says.

The Top 10 was comprised of eight for-profit companies = and two=20 national nonprofit organizations, National Community = Renaissance=20 (CORE) at No. 3 and Volunteers of America at No. 5. Overall, = 35=20 for-profit companies, 13 nonprofi t developers, and two = public=20 housing authorities round out this year=E2=80=99s list.

The average number of units started by the Top 50 firms = last year=20 is 469, and the average number of completions is 428.

The largest owner remains The Michaels Development Co., = with a=20 hefty portfolio of 43,325 affordable units as of Jan. 1. The = firm is=20 a big player in HOPE VI developments across the country.

This year=E2=80=99s list of largest owners features 33 = for-profit firms=20 and 18 nonprofits. Fifty-one firms make up the list because = two tied=20 for the No. 42 spot.

Together, the group owns an impressive 419,136 affordable = units=20 across the country.

How developers are responding

The tough conditions are forcing affordable housing = developers to=20 take new action.

Looking at the nearly 100 surveys submitted, 22 = developers=20 reported cutting expenses or working harder to collect rent = and=20 other revenue. Fifteen developers said they are nurturing = the=20 relationships they have with their financing partners. = Eleven have=20 instituted hiring or compensation freezes. Developers also = said they=20 are taking a harder look at proposed projects, heightening = their due=20 diligence, and emphasizing asset management.

These responses were to an openended question about what = they are=20 doing to cope with the economic downturn.

=E2=80=9CWe, like most other firms, have had to do some = belt-tightening,=20 and we=E2=80=99ve tried to do that carefully but = actively,=E2=80=9D says Patrick=20 Clancy, president and CEO of The Community Builders, Inc., = the No.=20 26 firm on the developers list and the No. 21 owner. = =E2=80=9CWe=E2=80=99re also=20 working to keep our friends close but our bankers closer in = an=20 environment where continuing change and uncertainty in the = financial=20 sector impact daily on what we=E2=80=99re able to = accomplish.=E2=80=9D

Columbia Residential in Atlanta is putting more focus on=20 administering its property management operations and = expanding its=20 geographic focus and revenue sources, says Jim Grauley, = president=20 and COO.

Holding the No. 11 spot on the developers list and No. 34 = on the=20 owners roll, Columbia closed three major mixedincome = transactions in=20 the difficult fourth quarter of 2008.

A few developers noted that they are seeing new = opportunities to=20 acquire projects.

The decline in LIHTC equity has been the biggest industry = issue=20 during the past year. Developers received about $0.88 per = dollar of=20 tax credit on average in 2008. They project prices to be=20 significantly lower this year, estimating that the same type = of=20 deals will fetch only $0.75 in mid-2009.

When asked how the shortage in tax credit equity is = affecting=20 their business, 28 of the 94 developers submitting surveys = said they=20 have reduced or slowed their project pipelines or plan to do = so in=20 the future.

Developers also said they are focusing on the strongest = markets=20 and the deals that will appeal to investors.

Seeking other funding sources was the third most popular = response=20 to the open-ended question. Developers also said they are=20 value-engineering their developments to meet today=E2=80=99s = pricing=20 realities. A few have altered a project=E2=80=99s design to = make the deal=20 pencil out.