These nine strategies can help housing advocates keep federally subsidized rental units affordable in the face of a housing market that’s starting to heat up.
By Elizabeth Duffrin
While the improving economy is good news, it poses a serious risk to affordable rental housing in Chicago, especially on the North Side and in other revitalized areas.
Before the recession, an alarming number of federally subsidized rental units in Chicago were lost as building owners opted out of Section 8 contracts or pre-paid federal mortgages, said Kate Walz, director of housing justice at the Sargent Shriver National Center on Poverty Law. That concern was largely dormant during the economic downturn, as demand for condo conversions plummeted and many landlords were happy to accept a secure source of income.
In the face of a rebounding market, however, the danger of losing such affordable units is resurfacing. To respond, experts at the “Preservation Strategies in Strong Markets” breakout session suggested 9 strategies. Some help buyers purchase a property with government financing while others subsidize units to make or keep them affordable. Finally, two panelists shared out-of-the-box ideas for purchase and preservation that got results.
Government Support for Buyers
1. Great terms for FHA financing. The U.S. Department of Housing and Urban Development offers very low interest loans to cover the cost of purchasing or rehabbing Section 8 properties. “I’ve been surprised at how many people don’t know about it who are active in the housing finance system,” remarked Dan Burke, director of the HUD Chicago Multifamily Hub. FHA loans have long terms – usually 35 or 40 years – and low interest rates.
“We’ve got the best loan product that exists,” promised Burke, who added that the once burdensome loan process was recently revamped so that borrowers can work with a single HUD employee rather than multiple departments. “We’re open for business and eager to work with you on preservation strategies.”
2. Donations tax credit offsets costly acquisitions. Owners who sell a property below market rate to a nonprofit can earn a state income tax credit which can be used by the buyer or be sold. “It’s not going to drive your deal,” said Cindy Holler, president of Mercy Housing Lakefront, “but if used strategically at the right moment, it can make your deal.”
In Uptown, Mercy wanted to buy a large building to create permanent supportive housing, but was having difficulty getting enough financing. To convince the seller to lower the price, they offered the donations tax credit. “It worked,” she said.
3. Tap the Multi-Family Affordable Upfront Investment program. Developers of multi-family housing for Chicago residents who earn no more than 30 percent of the area median income are eligible for this city program. It provides an interest-free, forgivable loan to reduce debt service on the developer’s private first mortgage loan in exchange for reduced rents.
4.Take advantage of the 2007 City of Chicago Affordable Housing Ordinance. The ordinance allows qualified preservation developers the right to purchase federally subsidized rental properties that come up for sale. But the ordinance falls short, according to Walz, in that it doesn’t protect the affordability of properties whose owners do not sell, but “opt-out” of their Section 8 status or pay off their federal mortgage early.
5.Use Tax Increment Financing. Tax Increment Financing (TIF) can be used for multifamily projects in designated districts around the city. Holler said Mercy Housing used TIF dollars to fill a funding gap of $3 million for a large project in Uptown. “It’s not going to be the major piece of capital in your deal, but it can be leveraged to create a slice of financing,” she noted.
Ongoing Support for Landlords
6. Apply for Project Based Vouchers. To create more affordable units in gentrified neighborhoods, the Chicago Housing Authority invites owners and developers of multi-family properties or a group of single family homes to apply for this project-based subsidy to lower rents in roughly a quarter of their units. The application process is free and takes 30-60 days. For more information see www.thecha.org/pra
7. Apply for Mark-Up To Market. Rising rents in the community often prompt landlords to opt out of their project-based Section 8 subsidies. HUD’s Mark-Up To Market program offers to pay owners the difference between their current contract rents and the going rental rate in exchange for a five-year HUD contract. (HUD offers a similar program for nonprofit owners called Mark-Up To Budget.)
8. Take advantage of the Interagency Working Group. In 2006, the Preservation Compact and the MacArthur Foundation launched a working group for IHDA, CookCounty, City of Chicago, and HUD to find ways to preserve affordable properties at risk.
The group has had a real -world impact. When several family-owned federally subsidized properties on Chicago’s South Side went into foreclosure, for example, working group members were able to negotiate a solution that prevented the termination of the Section 8 contract, Walz said. The city was able to enforce code violations on the property and appoint a nonprofit as receiver to keep the lights on and manage the repairs. The receiver then sold the property to preservation buyers who kept the building’s Section 8 status intact.
“That’s an example of [an approach] that could be used elsewhere,” she noted.
9. Launch a Real Estate Investment Trust This innovative strategy is being put to use by a team of 12 national nonprofits who were sick of losing real estate deals to more nimble, better capitalized developers. Private investors pool money in a trust that allows the nonprofits quick access to capital in purchasing affordable properties, Holler explained. With the trust, purchases can be completed in 60 days.
“One of my staff said that this is the first time he ever had leverage over the real estate broker,” Holler reported. “We get discounts because we can move quickly.”
Mercy’s first purchase through the trust was a large apartment near the MercyHospital system in Aurora, an area with no Section 8 housing. Building residents were largely seniors and hospital service staff.
Holler said the Real Estate Investment Trust was an idea that should be replicated and also applied to different types of housing projects, such as those for the homeless. “We have to get away,” she said, “from thinking about deal-by-deal financing.”