As high-profile successes and failures have happened in America's urban affordable housing, much of the country's rural affordable housing developments have waged a quiet and frequently overlooked battle to survive with little federal help. Now, with an average age of 28 years old, many of the Section 515 properties from the old Farmers Home Administration portfolio are starting to face hard times.
"They are in need of some repair, some serious work, and a recapitalization," says Russ Davis, housing and community facility programs administrator for USDA Rural Development. The program provides a guaranteed loan for developers to build rural, multifamily housing for people with low, very low, and moderate incomes.
Luckily, help is finally on the way for these apartments, their owners, and their residents, thanks to a new decision from the Federal Housing Administration.
In the past, owners of Section 515 properties had few options for financing the cost of repairs or updates to these federally funded rural properties. To do so, owners often had to sell or transfer the property's ownership so that the building would be eligible for a loan from the Section 538 program, another rural multifamily housing program for people with low, very low, and moderate incomes.
Why? Because only buyers–not ongoing owners–of Section 515 properties could take advantage of a Section 538 loan.
Needless to say, that made things awfully complicated. "There are a lot of accounting and financial difficulties for a company that sells a project to accommodate this task," says Carl Wagner, vice president of Lancaster Pollard Mortgage Co., which is affiliated with Lancaster Pollard, a capital funding and financial advisory services firm headquartered in Columbus, Ohio. "The owner that's selling could have exit taxes or could have complications of getting limited partners to agree to sell."
Fortunately, things have changed. In January, FHA agreed to make all Section 515 properties eligible for the Section 538 loan program. "We really see the value of providing a lot of different flexible tools for rehabbing the Section 515 portfolio," Davis says. "It's a large portfolio of properties at an advanced age."
(A quick primer: Private lenders originate the Section 538 loans, but USDA guarantees 90 percent of the loan. Section 515 loans are made by USDA. The dollars are scarce for this program, however.)
Nowhere to Turn
Celina Gardens, a 32-unit property in Celina, Ohio, might be the epitome of what's happening with the Section 515 properties, the majority of which are located in the Midwest. Built in 1976, Celina Gardens had tile floors, baseboard heating, small units, and no air conditioning–among other ailments. "The natural light is very, very poor," says Steve Boone, president of Cleveland-based Buckeye Community Hope Foundation, which developed Celina Gardens and other USDA Rural Development low-income housing tax credit properties.
Celina Gardens isn't alone in its plight. Many of the country's 1,700 Section 515 properties (which adds up to 450,000 units) face the same challenges. "They need repair work," Wagner says. "Most of these things deal with the age of projects. A project built 25 years ago may not have grab bars, a call system, and handicap accessibilities that would be typical today."
The problem: Celina Gardens and its fellow Section 515 properties don't have enough cash. "They don't have reserves for repair work," Wagner says. "They have insufficient funds to do rehabs and repairs that they need to do, and they can't replace systems that are 15 to 20 years old."
With a market-rate property, a landlord would just rehab the building and increase the rents. But that's difficult with Section 515 apartments. "They can't raise the rents in a fashion that would generate enough reserves to do [a rehab] because they rent to very low-income families," Wagner says.
And, since many of these properties are small, it's a challenge for them to secure the necessary financing in a market that favors bigger deals. "The largest challenge is one of scale," says Adam I. Galowitz, vice president in charge of strategic asset management for Recap Advisors, a Boston-based company that provides financial services related to the recapitalization and preservation of affordable housing. "It's very difficult to bring conventional capital market sources to a 24-unit deal in a single market."
Another problem: the lack of information on comparable rents. Since Section 515 properties are in rural areas, their closest competitor is often hundreds of miles away. "That presents a huge problem in underwriting," Galowitz says. "If you have to go 200 miles to the next town to get a competitive market rent, you have a real problem convincing a syndicator or debt financing source what your underlying real estate value is."
A New Hope
The new FHA ruling is expected to ease many of these problems at Section 515 properties, which serve more than just aging farmers. While the elderly and handicapped and disabled residents represent 60 percent of Section 515 households, these properties also house minorities (30 percent of households) and women, who head about three-quarters of Section 515 households.
That's the case in Celina Gardens, where single mothers with children comprise the bulk of the residents. While these people probably aren't familiar with references to Section 515 properties, Section 538 loans, or even USDA Rural Development, they will notice the changes these programs and people from halfway across the country have made in their lives.
"We will be completely renovating the property," Boone says. "We want to increase the natural light and open it up. We want to make the units larger. We will knock down the walls and expand the size of the units. The kitchens are narrow and very, very dark. We will knock walls and cut an opening where you have bar stools around a large counter."
Without the changes from FHA, this wouldn't have been possible. "I guess the property would have still lasted a long time," Boone says. "But it would have continued to deteriorate. It could have become a slum."
Archstone-Smith has acquired two New York properties: the Marlborough House, a 270-unit, 35-story community in Manhattan, for $165 million; and 180 Montague Street, a 192-unit, 33-story community in Brooklyn Heights, for $101 million. The REIT used tax-deferred exchange proceeds from the disposition of apartment communities to fund the purchases. It's now the largest public owner of apartments in Manhattan. Including units under development, Archstone has 3,745 units in New York City.
American Property Financing in New York provided a $40 million loan transaction to underwrite the conversion of West Village Houses in New York from a rental property to a cooperative apartment residence. The 42 five-story, low-rise, walk-up apartment buildings have 420 residences. There is also a 240-space indoor parking garage on the premises.
Premier Coastal in San Diego bought Pantano Villas in Tucson, Ariz., Pantano Villas and Ausonio Family Trust in Salinas, Calif. Premier Costal bought the 136-unit apartment community was sold for $7 million and plans to convert it to condos. Hendricks & Partners' Tucson office negotiated the sale.
The Meyer Co. in Chesterfield, Mo., bought 3830-3838 Park Avenue in St. Louis from Garden Park Ranch in San Antonio. The St. Louis office of Hendricks & Partners negotiated the sale.
Archstone-Smith in Englewood, Colo., bought Paragon Luxury Apart-ments, a 185-unit multifamily residential complex being developed through a joint venture of Regis Homes in San Mateo, Calif., and TMG Partners and MacFarlane Partners in San Francisco. Archstone-Smith will oversee the development of Paragon, slated for completion in spring 2007.
Elad Group in Miami bought the three-property Gables Residential South Florida portfolio. The portfolio consists of Gables Camino Real, a nine-story mid-rise with 235 units in Boca Raton; Gables Mizner on the Green, a 246-unit, gated townhome property in Boca Raton; and Gables San Michele, a 592-unit, gated, two-phase townhome community in Weston, Fla. The Florida office of Apartment Realty Advisors brokered the deal.
Beacon Communities in Boston is using $24.1 million financing from CharterMac Capital in New York for the historic rehab of a 100-year old historic warehouse into a 146-unit multifamily housing complex in Haverhill, Mass. The complex will feature lofts, conventional apartments, and ground floor, duplex, live-work apartments aimed at small business owners.
LeCesse Development in Altamonte Springs, Fla., acquired of GrandeVille on Saxon apartments in Orange City, Fla., from Euro American Advisors of Tampa, Fla., its partner in constructing the 316-unit Class A apartment property. LeCesse received financing from Wachovia for the property, which was completed in April 2005.
The Praedium Group in New York City and Hamilton Zanze & Co. in San Francisco bought Ironwood at the Ranch in Westminster, Colo., and The Trails in Aurora, Colo., for $45.3 million, or $78,423 per unit. Ironwood, built in 1986, is a 226-unit apartment complex on nine acres. The Trails, built in 1985, is a 351-unit apartment complex on 12 acres.
Carlton Club bought Carlton Club Apartments, a 436-unit apartment property in Piscataway, N.J., from a private family. The apartment community, which is 99 percent occupied, contains 27 two-story garden-style apartment buildings. The Kislak Co. in Woodbridge, N.J., negotiated the sale.
StarPoint Properties in Los Angeles bought Sterling Apartments in Hollywood, Calif., from the Kor Group in Los Angeles for just over $15 million. Sterling Apartments, an 80-unit luxury apartment building, has an occupancy rate above 96 percent. StarPoint is planning a $1.8 million renovation on the property.
Vancouver, Wash.-based LifeStyles Senior Housing Managers received a $6 million Fannie Mae permanent mortgage loan for Flagstone Senior Living, a seniors housing community Portland, Ore. The property contains 50 assisted living and 10 Alzheimer's units. The financing was provided by Red Mortgage Capital.
–Listings compiled by Les Shaver