NEW YORK, NY - At a time when projects all over New York are being canceled or postponed, a development team that plans to transform a weedy site in East Harlem into a 12-story rental apartment building had cause to celebrate last week. Despite the economic downturn, the partners were able to complete the financing for the $65 million building and schedule a groundbreaking for next Tuesday.
The building, which is to rise on a site at 124th Street and Second Avenue that is a patchwork of 10 city-owned and private lots, will be known as the Tapestry. Half of its 184 apartments will rent at the market rate, while 30 percent will be set aside for people whose household income is less than 130 percent of the New York area median income, which is currently $74,600, and 20 percent for people who earn only 50 percent of the median income.
Getting a project like this under way is usually a time-consuming exercise. The developers, Jonathan F. P. Rose and Nicholas and Gerard Lettire, had to stitch together a daunting array of tax credits, tax-exempt bonds, loans and grants. But even these days, money is available for well-structured projects, said Mr. Rose, who has been developing affordable housing around the country for 19 years. "The developer has to have a good track record, and financial strength, and the project has to be well thought-out," he said in an interview in his Fifth Avenue office.
He said he hoped to close the financing next month for two more income-restricted projects — one in Albuquerque and another in Harlem, on 140th Street and Riverside Drive, to be developed in partnership with the Fortune Society, a nonprofit organization that provides services to ex-convicts.
Affordable housing is said to do better than other real estate sectors in a bad economy because government subsidies are available, land and construction costs fall and demand for the apartments rises.
But because of the toll that the credit squeeze has taken on financial institutions, busy developers like Mr. Rose may be more the exception than the rule. Though the need for affordable housing is likely to grow as unemployment worsens, specialists in mixed-income rental housing say that many developers — especially outside of New York, Los Angeles, San Francisco and Chicago — are finding it difficult or even impossible to put their deals together.
"We think there is an enormous slowdown in the production of affordable housing that's happening right now," said Richard Paul Richman, the chairman of the Richman Group, a company based in Greenwich, Conn., that develops affordable housing nationwide. "We believe that the shortage of equity is so severe that even qualified developers won't get funded."
The Richman Group is also a leading syndicator of low-income housing tax credits, the principal engine of affordable-housing development since 1986. Tax credits usually account for half to three-quarters of the development capital in an affordable housing deal, said Charles R. Werhane, the chief operating officer of Enterprise Community Investment, a division of Enterprise Community Partners, a national nonprofit organization based in Columbia, Md., that serves as an intermediary between developers and lenders.
Allocated to the states by the United States government, the credits against federal taxable income are awarded to projects that meet the housing program's strict requirements. The developer then finds a syndicator to sell the credits so that the proceeds can be invested in the projects. In recent years, the buyers have usually been financial institutions, which use them to offset profits over a 10-year period while also fulfilling their obligations under the federal Community Reinvestment Act to invest in poorer neighborhoods. Until this year, Fannie Mae and Freddie Mac acquired about 35 percent of the tax credits. But as the government-sponsored agencies' losses mounted, they stopped buying credits, as did another key player, Citigroup.
As demand has slackened, the price of the credits has dropped. Tax credits that used to go for more than 90 cents on the dollar often command no more than 78 cents, with the result that the project gets less money, and the developer has to find other funds to close the equity gap. (To make up some of the deficit, the federal government recently expanded the number of tax credits by 10 percent and offered other incentives to investors.)
It is not known just how much the $8 billion tax credit industry business has shrunk, because developers who are awarded credits have two years to try to make a project work. "Returning credits is the last, final step," said Garth Rieman, the director of housing advocacy for the National Council of State Housing Agencies. "It's an admission of failure, an admission that they can't get the deal done."
Michael Novogradac, the managing partner of Novoco, a national accounting firm based in San Francisco that has an extensive affordable housing practice, estimated that no more than $6 billion in tax credits would be sold this year. "We're definitely seeing developers turn projects back to the state, and others with good-sized gaps trying to close them," he said. Unused credits are pooled and reallocated to states with more demand, a practice that could eventually benefit New York.
Enterprise, also a major syndicator that sells tax credits to investors, expects to close 95 projects this year, compared with 115 projects last year, Mr. Werhane said. "The industry in general is probably down about 30 percent," he said. Nationwide, about 125,000 units of income-restricted rental housing are added each year.
In New York, where the supply of affordable housing is considered unlikely ever to come close to meeting the need, the prospects for seasoned developers remain relatively good, industry specialists said. The Bloomberg administration is more than halfway toward a goal of developing 165,000 units of affordable housing by fiscal year 2013, but the program will probably require an extra year, said Seth Donlin, a spokesman for the city Department of Housing Preservation and Development.
L&M Development Partners and the Dunn Development Corporation, two New York firms, recently transformed a former garbage transfer station in the Williamsburg section of Brooklyn into Palmer's Dock, where monthly rents range from $398 to $920. Martin Dunn, the president of Dunn Development, said the city had received 13,000 applications for 113 apartments. The residents were chosen by lottery.
Investors in tax credits have become increasingly picky because credits are rescinded in the event of a foreclosure and cost overruns cannot be passed on to tenants. "The good deals are getting done, but others on the margins are not getting done," said Robert D. Taylor, the president of the Wells Fargo Community Development Corporation, which does business in the West. "You want to pick a developer who can be on time and on budget."
Investors also wonder if market rents in many areas outside New York will decline to the point where there will be little need for subsidized apartments. But that would mean no new supply would be available when the market recovered, said Todd J. Crow, an executive vice president of PNC Multifamily Capital, the tax credit investor in the Tapestry. "We are being confronted with market conditions that are unprecedented for us in the life of this program," Mr. Crow said, referring to the tax credit program. "We have just never seen market forces take such a toll on our business."
Source: NYtimes.com