January 2008 issue

Mitigate Risk In Repositioning Projects--
Strategies And Best Practices To Better Navigate The Financing
By their very nature, repositioning projects involve considerable risk. Brian Pollard, president of Lancaster Pollard, shares some effective strategies for mitigating those risks and actionable best practices for negotiating repositioning projects.
...
Mixed Funding For Affordable Housing--
Cabrini Eldercare’s Senior Housing Project In Seattle Is A Model
Cabrini First Hill Apartments in Seattle broke new ground when it combined HUD 202 and LIHTC financing — along with eight additional funding sources. It’s not an easy task to accomplish, but mixed funding is being replicated for affordable senior housing projects nationwide based on the Seattle model.
...
Q&A With Dan Rexroth
Rexroth is president and CEO of John Knox Village, one of the largest CCRCs in the nation, and talks about challenges the industry is facing and some solutions.
...
Recent Not-For-Profit Transactions
We detail some deals that closed in the last few weeks.
....

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Mixed Funding For Affordable Housing--
Cabrini Eldercare’s Senior Housing Project In Seattle Is A Model

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In February 2006, Cabrini First Hill Apartments, an affordable housing project for seniors in downtown Seattle, had its grand opening. Why was this an important milestone? Because it was the first new project in the country to close with 100 percent of its units financed with mixed funding that combined HUD Section 202 grants and low-income housing tax credits (LIHTC). And because of that mixed financing, the Cabrini First Hill Apartments project is now considered a model for not-for-profit senior housing developers all across the country.
“This is significant nationally,” explains Sharon Lee, executive director of the Low Income Housing Institute (LIHI), “because developers of affordable housing previously had to choose either HUD 202 alone or not at all. HUD literally would not allow its funds to be combined with the LIHTC program — which also happens to be a tremendous source of funding for affordable housing.”
HUD has a per-unit maximum limit for every urban or rural community — a schedule that sets the cost per unit, or the amount of funding per unit that HUD will provide, in every community throughout the country. Often, and for a variety of reasons, the actual cost of developing a project — the land and construction costs in high-cost and urban locations such as Seattle — exceed the HUD limit. So not-for-profit sponsors (and you must be a not-for-profit organization to apply) in a lot of cities and expensive suburbs could not afford to use the HUD 202 program as their only source of funding for senior housing and would pass up the funds.
Under the traditional HUD 202 program — before a new rule was instituted — the sponsor had to be a single-asset, not-for-profit holding corporation,” according to Lee. “The project had to be incorporated as a separate not-for-profit entity,” she says, “while under the LIHTC program, the partnership set up for the project has to be a for-profit limited partnership by virtue of the fact that it involves a for-profit investor getting the tax credits. So you had two different structures that were woefully incompatible.”
Then the Secretary of HUD promulgated new regulations, which allowed HUD to consider financing projects in which HUD 202 funds could be mixed with other funds. That new rule allowed sponsors, for the first time, to combine two significant resources – HUD 202 and LIFTC — and also add additional compatible sources.
“The new rule was published in 2001,” says Robin Larkins, marketing and business development consultant for Cabrini Eldercare, “but it was very difficult to get projects that could meet all the requirements into the pipeline. We finally closed the Cabrini First Hill Apartments project in 2005.”

Precedent setting in Seattle
Cabrini Eldercare had experience developing HUD 202 senior housing in New York City, 70 one-bedroom affordable, accessible rental units that opened in 2005 and where the allocated funds covered the cost of the project as a single source. The Missionary Sisters of the Sacred Heart of Jesus (Cabrini Sisters) also owned land in Seattle that they wanted to develop for the same mission purposes.
“When we explored the options for that site, we found that we could not mirror in Seattle the project that we had done in Manhattan. It just wasn’t possible given the HUD allocations. If we hadn’t been able to apply for the mixed funding, the Seattle project could not have worked.”
The Cabrini First Hill Apartments are sponsored by the Cabrini Sisters, with LIHI serving as development consultant. It is an urban facility, with 50 affordable, accessible, one-bedroom apartments for aging and frail elderly people. It is a mixed-use facility, in that it combines five residential floors with retail space at ground level and an underground parking garage. Low-income seniors making at or below 50 percent of the area median income will pay 30 percent of their income for rent.
“Another unique aspect of this project,” notes Larkins, “is that 20 percent of the units are set aside for homeless seniors and another 20 percent are set aside for disabled seniors. In order to get the tax credits in Washington State, we had to commit to those targets. The average income of someone in a HUD 202 unit is less than $10,000 a year. And in our experience in both Manhattan and Seattle, we haven’t had any problem meeting the set asides even for the very low-income seniors. The need is so great.”
Without the involvement of LIHTC funding, the HUD 202 program would otherwise not recognize a priority for homeless or disabled seniors. HUD 202 is a first-come, first-served program. By combining the two programs, all the various senior communities, including the poorest of the poor, are served. “That’s absolutely an advantage of this model,” says Larkins, “and we had to get waivers from HUD to do it. We needed compromise between and among the programs, because a lot of those details hadn’t been ironed out. We were lucky that the regional HUD office in Seattle was willing to make it work.”
Major funding for Cabrini First Hill Apartments in Seattle came from a total of 10 sources that included a $5.4 million HUD 202 grant, combined with $3.5 million in LIHTC equity from Enterprise Community Investment Partners; initial support (pre-development costs) from the Federal Home Loan Bank Affordable Housing Program; $1 million from the Washington State Housing Trust Fund and $1.5 million from King County’s Harborview Replacement Housing Fund; and additional support from Fannie Mae, Washington Community Reinvestment Association, Washington State Housing Finance Commission, and private sources.
The Seattle project is now a model for the rest of the country, although anyone interested in a similar mixed-funding project definitely needs a supportive regional HUD office to make it work. In fact, LIHI is currently involved in a similar project — also in Seattle. The 50-unit Cascade Senior Apartments project is underway in that city’s high-priced South Lake Union neighborhood.
“Actually, there has been a wave of activity in the aftermath of the closing of the Cabrini project,” says Larkins. “It has opened a lot of doors. About 11 of these projects subsequently closed throughout the country, and HUD is moving towards making mixed funding – especially combining tax credits with the 202 financing – a more reachable goal for developers.”
So the movement began in 2001 with the rule change, but it needed some practical applications to iron out the kinks. Now mixed funding has proven itself through the Cabrini project and has become a precedent that is being used by others.

It ain’t necessarily easy
Typically, a tax credit project can be a pretty complicated process, according to Lee. “You have syndicators, investors, attorneys, accountants...and an investor who has to make a profit in order to benefit from the tax credit,” she says. The investor stays in the project for 15 years and, during that period of time, gets tax benefits. The sponsor gets the money up front for construction.
“To overlay the HUD 202 program,” she adds, “you essentially add to the complexity. The Cabrini project was the pioneer, the test case, for this effort. And it worked. It showed that it could be done. Of course, our legal fees and accounting costs also increased, and I’m sure that the HUD attorneys also had their fair share of additional fees.”
In addition, sponsors must adhere to the very aggressive LIHTC timeframes in order to maintain the financing. In the Cabrini case, the extensions that HUD was willing to grant wouldn’t have been much good if the tax-credit funding expired. So making sure everyone at the table understands the various timeframes and deadlines is crucial and requires a great deal of juggling. Cabrini met its 48-week construction timeframe, but Larkins strongly advises: “Always have a Plan B ready to reset the clock and restart the timeline!”
Hundreds and hundreds of organizations invest in low-income housing tax credits. Nevertheless, mixed funding is still a relatively new idea. So even though it has been done and may be replicated, it’s still a big job when you involve a new investor, a new law firm, and a new HUD office.
A lot of the transactional documents used for the Cabrini project were drafted specifically for this project. In the end, about 1,200 papers needed to be signed, according to Larkins. “Bringing all the entities together was a monumental task,” she recalls, “but at the end of the day, we created a mission that went way beyond what we ever envisioned.”

Mixed funding a win-win
From the sponsor’s perspective, mixed funding is a way to add to the continuum of care that not-for-profit organizations serving seniors especially can provide. “It just makes such sense to combine the HUD 202 program with LIHTC,” Larkins says. “In concert, they are a logical mix. It is an opportunity for not-for-profit organizations that have part of the mix already in place or that have an interest in considering it. Mixed funding can make an almost impossible situation possible.”
According to LIHTC data, only 24 percent of these tax credits are being used for senior housing, so there appears to be room in that program for continued development of the sector. “To match LIHTC with, arguably, the most successful program dedicated to senior housing, which is the HUD 202 program, gives you not only the capital advance to do the construction but the rental subsidies to operate the facility and support the residents. It’s a combination that is certainly a win-win,” Larkins concludes.

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Mixed Funding For Affordable Housing-- Cabrini Eldercare’s Senior Housing Project In Seattle Is A Model

Mixed Funding For Affordable Housing--
Cabrini Eldercare’s Senior Housing Project In Seattle Is A Model