Case Study

Clearing Preservation Hurdles

7 min read

Vast needs and scarce resources 

Affordable housing developer/owners have something in common when it comes to preserving project affordability: a common problem. Preservation of Affordable Housing’s (POAH) Cory Fellows puts the problem this way: “Scarce resources and a lot of project needs.” In overcoming these obstacles, it helps to have a common purpose with the original developer, and a housing finance agency partner willing to be flexible to see the deal through, as POAH did with a recent acquisition/rehab deal in Rhode Island.

While a lot of preservation deals seem to have as many moving parts as a Rube Goldberg machine and a distinct metaphoric likeness to a game of Twister, POAH’s Oxford Place and Gardens development in Providence had an especially complicated gestation that included the major market disruption that followed the 2016 Presidential election.

Fellows, vice president of real estate development for Boston-based national nonprofit POAH, told a recent meeting of the National Housing & Rehabilitation Association that while Rhode Island is a small state, it is a big state for POAH. With Oxford Place and Gardens, POAH has now reached 1,000 units in the nation’s tiniest state, a significant percentage of its 11,000 total units in ten states and the District of Columbia.

He described a “two-way dynamic” of developers and funders being creative, persistent, flexible and having partners at the HFA level and others willing to reciprocate and help to troubleshoot to preserve some of these important properties.”

Oxford Place and Gardens is a two-phase development in south Providence dating back to the 1970s, consisting of 78 units of project-based Section 8 midrise senior housing built in 1978 and a later addition of 50 townhouse units done in 1989 using tax credits.

Ahead of its Time
“This was multigenerational housing before that was trendy,” he told the meeting.

POAH bought the property in 2017 and is converting it to permanent financing currently. One of the keys to the success has been a very positive partnering with the original developer, a Providence nonprofit called Peoples Redevelopment Corp. (PRC).

PRC “had a lot of great intentions and did a lot of great things, along with Rhode Island Housing (RIH), and through their management have been good stewards of the property. They have been very active stakeholders,” Fellows says.

“But it reached a point where they realized they needed to bring in a buyer/development partner with the resources to do large-scale recapitalization, refinancing, substantial rehabilitation and ensure long-term affordability.”

POAH and PRC negotiated a deal, which let the original developer retain a stake in the property and have some input on

decisions. PRC proved its mettle in the redevelopment by taking an uncooperative limited partner to court, ultimately removing the LP as an obstacle.

The $25 million financing for the POAH deal was from a familiar mix of sources. There was a four percent tax credit deal with tax-exempt bonds issued by RIH.

RIH acted as a conduit, “Doing a direct placement of bonds with a private lender, which we’ve done with RIH in a couple of deals now,” Fellows says. The deal used gap funding from a RIH effort called the Housing Preservation and Production Program. “That’s kind of a mouthful, so we just call it HP3,” he says.

The project also had a sponsor note and a couple of different seller notes that turned out to be critical to the viability of the transaction.

As a capper, Fellows discovered very late in the process that POAH had been awarded an Affordable Housing Program grant from the Federal Home Loan Bank of Boston for the project.

Some More Brain Damage
“We found out (about the grant) a couple of days before we closed on the tax credit deal. So that created a little more brain damage but brought more resources into the transaction, which are always needed,” he remembers.

How did they use the windfall? It paid for a solar array that was built on the roof of the project.

Other project partners included Stratford Capital Group and Boston Private Bank & Trust Co.

“POAH combined both properties into one ownership entity and extended the affordability of the apartments for an additional 40 years. With support from lenders and investors, POAH made renovations that include new roofs, solar panels, siding and insulation, energy efficient windows, hot water heater and furnace replacements, upgraded fire protection systems, common area improvements, handicap accessibility modifications and the modernization of many original apartment kitchens and bathrooms,” according to the company.

But happy news on the project, like unanticipated financing, was hard to come by. “There was a successor limited partner from the original tax credit transaction that was not cooperative,” Fellows recalls. “PRC had an enforceable right of refusal they were trying to execute to do the transaction with us. The successor LP basically was looking for a payoff and did not want to get out.”

Ultimately, the LP sold out to avoid incurring about $30,000 in legal fees. Other challenges included what Fellows says was a unique one.

“Some legacy soft money through RIH from the original deal had accrued a pretty hefty balance,” Fellows says. This engendered a business life lesson he summarizes as: well-intentioned programs can create impediments down the road. “This was a $1 million grant that went into the deal as a soft loan at seven percent interest and had accrued up to a balance of over $4 million. This was another hurdle that had to be surmounted.”

Also, the original syndicator on the deal had to be replaced. “This was a longtime partner of ours. They just couldn’t hold their pricing. Their investors were skittish in general. We were fortunate to find another syndicator. We didn’t get our pricing quite back up to where it had been, but we did get within striking range.” That was because just when the deal was coming together, the financial world started to fall apart.

A Small Complication
“We were moving toward closing and had things teed up as we moved into the fall of 2016, and then the presidential election happened. That threw a lot of things into turmoil, including the equity markets, the anticipation of tax reform and even questions about the future of private activity bonds,” Fellows says.

It was then that POAH’s partnership with RIH really helped prevent the deal from derailing.

“It was their willingness to be flexible,” he recalls. RIH needed to be flexible in accepting the disposition of the land, for instance. “We used what we call a POAH landowner entity, which purchased both the land and the buildings. Only the improvements were actually sold to the tax credit partnership. The land was controlled through a long-term lease.

“We had to get peoples’ heads around that, run some analyses to show it would pass the smell test. Really, we had to bring the syndicator along more than RIH. The reasons for doing that? It takes the land out of the acquisition cost, reduces bond capitalization need, and there’s added leverage at Year 15 since we actually have a POAH entity that continues to own the land.”

Also, POAH used two different seller notes on the deal. “One was a typical takeback note and another allowed us to help meet the 50 percent test for the tax-exempt bonds. Some HFAs are a little more skittish about doing that.”

Finally, RIH helped them restructure the loan that had ballooned to $4 million. “That was in excess of what the property was worth,” Fellows notes.

Story Contact:
Cory Fellows
Vice President, Real Estate Development
Preservation of Affordable Housing, Boston

Cory Fellows
Vice President, Real Estate Development
Preservation of Affordable Housing, Boston

Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.