By Nadia Underhill
In 2007, Heartland Alliance, the Midwest’s leading anti-poverty organization, identified the lack of affordable housing as a critical issue for low-income LGBT older adults in Chicago. In 2011, Heartland Housing (the Alliance’s affordable housing development arm) partnered with Center on Halsted (Chicago’s community center for lesbian, gay, bisexual and transgender persons [LGBT]) and won approval to develop a city-owned site into one of the country’s first “LGBT-friendly” senior affordable housing buildings.
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Town Hall Apartments opened in 2014 and was fully leased in less than 30 days. It provides affordable housing to about 80 low-income elders, many of whom are LGBT. For those considering similar projects, what follows is a developer’s perspective on what made this partnership and development successful. It can be boiled down to these two tenets: find the right partner and have realistic expectations.
Finding the Right Partner
For a developer, building an apartment building that will house low-income LGBT elders is similar to any other affordable housing transaction. It is a complex, multi-year undertaking involving applications for public and private financing, coordination of design and engineering, management of public entitlement processes, oversight of the general contractor and, ultimately, leasing, property management and regulatory compliance. Unless your organization has this experience, you will need to bring in an experienced affordable housing developer to build and operate the property.
Affordable housing developers range from small, neighborhood community development organizations to national real estate corporations. If you and your board are extremely business-oriented, there may be a culture clash working with a small nonprofit developer. Conversely, if you and your board would like high levels of participation in decision-making and adaptation to local needs, it may be frustrating to work with a national company that has well-defined parameters for all of its developments. If you are entirely new to the field, having initial discussions with multiple types of developers may help you identify those who share your goals and values.
Questions to ask when seeking the right partner: How do you measure a development’s success? What are your non-negotiables? How do you make decisions?
Other keys to a successful partnership are more quantifiable. Even the most mission-based developers will be looking for you to have realistic expectations around the regulatory environment, building operations, the balance of economic risk and return and decision-making.
Affordable housing is much more highly regulated than the private market. The Low Income Housing Trust Credit is the most widely used financing tool. It encourages private equity investment into affordable housing and is regulated by the IRS. It is likely that other public financing will be needed as well. These are usually HUD block grants to localities, public housing operating vouchers, and statewide loan programs. Because of the number of funders, development budgets and operating budgets require multiple levels of government and investor approval.
There are no waivers or shortcuts for adhering to compliance regulations, and they directly affect the building’s potential residents. Minimum and maximum tenant incomes and rents are set by federal regulation. A beloved client could be over-income by just a few dollars, and she or he would be unable to rent a unit. Conversely, minimum rents could be too high for your lowest-income residents. Additionally, fair housing and anti-discrimination laws make it impossible to include sexual orientation as a factor of tenancy, or to restrict units to a particular organization’s clients. A developer will want to see that you understand these restrictions.
Questions to ask regarding regulations: How much to charge for rent? How about minimum and maximum income limits? Are operating vouchers available (to make apartments more affordable)? Can some units have no income limit (to provide housing for a wider range of tenants)?
Regardless of a property manager or developer’s commitment to its mission, any property must at least be able to pay its expenses, including debt service on a mortgage. Tenants must abide by leases and pay their rent, or the building—and its owners—will struggle. However, property managers may have different approaches to managing lease violations or late payments. As it is the most visible face of the building to tenants, the property manager’s alignment with the building’s culture and mission may be as important as that of the developer.
Questions to ask regarding building operations: Who will be the property manager? Does the property manager have experience with other buildings for older adults? How does the property manager address late payments and lease violations? What criteria (criminal history, credit score, eviction history, etc.) disqualify an applicant for housing? How will the property manager train staff around LGBT issues, particularly in buildings with potential residents who are transgender?
Economics: Risk and Return
As in any business deal, expectations of short- and–long-term economic return from an affordable housing property should relate to one’s ability to contribute to the project. Community organizations often bring a site, community support, and the ability to provide and fund ongoing supportive services for the building’s residents—not necessarily a significant amount of funds (although those would, of course, be welcome). Each of these has an economic value to the project for which you may receive compensation. Using connections to generate community support and market units would be expected, and a suitable site is the most critical and difficult to find.
Affordable housing development economics are different from those in the nonprofit world and in traditional real estate development. Unlike most nonprofit building models, we do not usually rely on private donors to build affordable housing. All financing needed to complete the project is usually obtained from government programs and banks, and has to be in hand prior to construction beginning. And, unlike many real estate development models, the developer does not usually have an equity stake in the building on which it earns a return. It is paid for the work and risk of development via a “developer fee” that is built into the development budget.
On its face, the developer fee may seem large, but it compensates the developer for the years of work that go into a development and the risk that the project, once underway, will not be completed or will not operate successfully. The fee is also paid out in pieces, beginning when construction starts and finishing when the building is fully leased and has met certain financial performance benchmarks. This can be up to a year after the building opens, which is itself many years after work on the project began. Until that point, the developer receives little or no compensation for their work.
While developers approach partnership models differently, generally you should expect a fee, if any, that is proportionate to your ability to participate in the multimillion-dollar construction completion and building operation deficit guarantees the developer will be required to provide, and your ability to provide a meaningful contribution of staff time to the development and construction processes. The tradeoff for this is that you aren’t providing significant upfront or ongoing funds (if you are, negotiate accordingly).
Questions to ask about risk and return: What would you require of a partner in the building’s ownership entity and what would they receive? What guarantees do you expect to be required of the developer? What assets will your lenders require of guarantors? Are you open to sharing the building’s cash flow?
Remember, while the potential development may be your only housing development, for the developer it is part of a wider portfolio on which their ability to obtain financing for future deals is based. And, as they are likely providing the lion’s share of guarantees for the project, they will have limited tolerance to cede control of items that could compromise the project. You should not expect, for instance, that a developer will necessarily wish to work with your preferred architect, contractor, attorney, etc., even if that consultant is willing to reduce their customary fees. Similarly, no good developer would agree to hire an inexperienced property manager.
However, if input into certain issues is critical to your organization, this can often be accomplished by discussing it up front. Participating in design meetings with the architect, for example, would allow you to be at the table when decisions about building amenities are made. Acting as a social service provider, if you are qualified, will enable you to participate in tenant selection.
Questions to ask regarding decision-making: When will issue X be decided, and by whom? How can we be sure our perspective is heard?
This list of considerations for a successful partnership is sobering by design. Developing affordable housing is a highly visible, concrete means to meet the needs of vulnerable LGBT older adults. Yet, it is tremendously time-consuming and expensive, and cannot come close to meeting the demand. Many LGBT elders, even the poorest, are housed but are not safe in that housing. I urge readers to remember that advocating for public housing authorities and other providers of affordable housing and services for seniors to become safe, supportive spaces for LGBT older adults is as critical a strategy to meeting their needs as is building new homes for them.
Nadia Underhill is director of Real Estate Development at Heartland Housing in Chicago, leading the company's affordable housing development work. She has more than twelve years of experience financing, planning and constructing publicly financed housing developments. She continues Heartland's commitment to creating developments that house vulnerable populations in thoughtfully-designed, high-performing buildings that are long-term assets to their communities.
This article was brought to you by ASA's LGBT Aging Issues Network.
Check your mailbox (and online) in early November for Aging Today’s In Focus section called “A Place to Call Home: Where Will We Live as We Age,” for more important articles on the evolution of elder housing, from low-income options to the psychology of moving to creative solutions for older adults who would rather age-in-place.
Photo courtesy of Gensler