Case Study

Sursum Corda in Washington, DC

7 min read

Condo Structures Can Make Mixed-Income Deals Work

The Sursum Corda development in Washington, DC is a huge and hugely complicated deal. One thing that is helping to bring more than 1,000 planned units of housing to the Capitol neighborhood is structuring separate condominiums for the affordable and market-rate units.

“We believe strongly mixed-income works in DC,” said Jon Cortell, managing director at L&M Development Partners Inc., citing, “the strength of the diverse fabric that city unquestionably has.” L&M bought the 6.7-acre property in 2018 and its partners are Toll Brothers Apartment Living as co-developer and Goldman Sachs Urban Investment Group as financial partner and tax credit investor.

Cortell, speaking at the Summer Institute of the National Housing & Rehabilitation Association’s panel on leveraging condo structures, said he hopes Sursum Corda will be leased up next year.

Phase 1 plans 561 units—118 of them reserved for tenants between 30 and 80 percent of area median income—a much bigger development than the current property, which is an affordable tenant-owned cooperative of 199 units on land quite close to the Capitol Building at First and North Capitol Streets NW in the District.

Under an agreement with the cooperative, all those tenants will have units reserved for them in the new project after temporary relocation as the current property is demolished, with at least 100 of those units in Phase 1. (There will be two, possibly three, phases at Sursum Corda.)

According to Julia Schmidt, panel moderator and partner at Katten Muchin Rosenman LLP, the existing project was built in the 1960s and has fallen into disrepair, making a redevelopment attractive. It consists of garden-style apartments and town-homes and was financed by the Department of Housing and Urban Development, initially.

“The cooperative engaged a development firm to assist it in up-zoning the site,” said Cortell, noting the members of the cooperative have a stake in the value of the property. “In what might be called entrepreneurialism, they pursued the up-zoning and in place of the 199 units the District permitted something in the ballpark of 1,200 to be developed on the sight in place.”

He noted, “1,200 units are a lot for anybody to digest, and I think the triventure between L&M, Goldman and Toll represented the team appropriate to take on the beast of a 1,200-unit prospect.”

Experienced on Mixed-Income
L&M and Goldman have a long track record of working together, Cortell said, and it has worked with Toll Brothers as well. “Mixed-income has been part and parcel” of the Toll partnership.

“The site is too integral to the fabric of DC not to be more positively activated,” Cortell said, giving credit to the District for the up-zoning. “With 1,200 units, we can activate this site, which has not been a magnet but rather a repellant.”

The density is “welcome and probably necessary as we try to reposition this property.” The District has aggressive housing goals and increasing density is one way to help achieve them.

One priority of Phase 1 will be to reintegrate a derelict park into a central feature of Sursum Corda. “We hope the outdoor space will be the magnet that draws, say, the employees of National Public Radio, or area residents looking for green space,” said Cortell.

Financing, Schmidt said, is being provided by Citibank (construction tax exempt and taxable), Freddie Mac (permanent tax exempt and taxable) and the District of Columbia Housing Finance Agency, which is providing the tax-exempt bonds.

There is a $23 million tax-exempt loan from Citi/DCHFA, a separate $137 million taxable loan from Citibank, and Freddie Mac will provide the permanent financing, she said.

Cortell said L&M regularly uses Goldman “on deals that smack of any complexity” as this one did, including “the brain damage mixed-income frequently provides.”

All parties in the transaction, including DCHFA, showed flexibility on this particular project, he said.

“We see both the economic and the social impact here,” said Dan Alger, Goldman managing director.

Two Buildings in Phase 1
Phase 1 will include nine- and ten-story towers of approximately 600,000 square feet in total.

“There is shared parking and there will be a ton of amenities,” said Schmidt. “This is really going to revitalize the area.”

Shared amenities include a rooftop deck, a children’s playroom, a fitness center with a rock-climbing wall, a spa with saunas, a pool and a lounge room, a media lounge, co-working space, a demonstration kitchen and a green house.

Of the 118 reserved units, 12 will be at 30 percent AMI, 64 will be at 50 percent AMI and 42 will be at 80 percent AMI, using income averaging to keep the average AMI below 60 percent.

There is no separate condominium contemplated for the parking or the retail now, said Schmidt. The two-unit condo being done will segregate the 118 affordable units and the 442 market-rate units.

Getting condo deals approved can take quite a while, said Schmidt. “So, what we did was close on a master affordable lease to segregate the 118 affordable units and have those leased by a Low Income Housing Tax Credit borrower.”

Prior to conversion, a two-unit condo will be created, after which a market-rate borrower will convey the LIHTC condo unit to the LIHTC borrower and the master leasehold will be maintained.

“More often we used this kind of structure, just because of the time it takes to get the condo in place,” said Alger.

Ikeogu Imo, senior director at DCHFA, said, “Over the last five years we have done six projects similar to this, and only one has had the condo in place prior to getting to this stage.”

Sometimes, Three Condos
Derek Weaver, senior manager at CohnReznick, said his firm is seeing both condominium structures where there are two residential units, and sometimes there is another one for retail as well. “It’s becoming more frequent over the past couple of years, certainly,” he said.

Schmidt quizzed the other panelists as to what benefits this complex structure provides.

Alger said, “There are some additional complexities,” but the tax benefit of being the fee owner of the affordable component was an important component.

“The key here for us is, despite the fact we’re on both sides, is really making sure we can look at the affordable component and our investment on the affordable side and have that truly stand on its own.”

“There is not an intention to sell, but we need to have those types of rights,” he said. Also, having the affordable component insulated from the operations of the market-rate component “was something that was important to us.”

The complexity of these structures is worth it, said Cortell, “because I believe in mixed-income as the answer to more efficiently provide for affordable housing solutions in our cities. I’ll sign up for this any day of the week. If condo regimes are a necessary prerequisite, okay. Condos aren’t fun, but the end product is a better outcome for the low-income residents and the municipality as a whole.”

Imo said the District is in favor of having affordable housing in more expensive markets, such as this one, instead of places with lower land costs. “The market-rate portion helps offset the need for subsidies or additional costs the affordable portion would have to carry.”

Strong underwriting underlies the success of projects like these, Imo said. “The deal certainly has to pencil.”

Cortell said the income averaging component was important to the deal but was made more complicated because of the returning residents. The way this deal is structured gives residents more flexibility as to which units to return to.

Sursum Corda is a four percent LIHTC deal, but Alger said Goldman has used similar structures for nine percent deals, but they are not exactly the same.

Alger said the underwriting on deals like this is the same used on any LIHTC deal. “Part of the challenge is the bifurcation of the expenses across the two units.”

Derek Weaver, senior manager at CohnReznick, the final speaker, talked about the concept of cost segregation in deals of this sort.

In a mixed-income deal, where you have a low-end piece and a market-rate piece, “we’re using cost segregation methodologies to determine development basis attributable to each of the two condo units,” he said.

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.