Leveraging the Power of Partnership

Partnerships between developers and community-based nonprofits are helping to bring more affordable housing online. Known in the industry as “joint venture” partnerships, these collaborations have picked up steam in recent years as developers and other local organizations seek creative solutions for the nation’s persistent housing crisis.

Oftentime, these joint venture partnerships arise when an organization unfamiliar with the Low Income Housing Tax Credit (LIHTC) program wants to include LIHTC’s many benefits in their project. For example, local community groups — often mission-driven nonprofits — may need the expertise and capacity of a larger LIHTC-experienced developer. Additionally, market-rate developers may consider a joint venture partnership when they are having trouble making a deal pencil out; partnering with an affordable developer can bring additional resources.

Of course, these relationships are mutually beneficial; partnerships between different types of developers can boost access to capital, add layers of critical local expertise, bring extra subsidies, enhance connection with local service providers and more.

“I’m seeing more of them,” says Milt Pratt, executive vice president of The Michaels Organization, a national developer of market-rate, student, military, attainable, and affordable housing. Though Michaels develops a broad range of their own housing stock — including their own market-rate projects — they also often work with other market-rate developers seeking a knowledgeable joint venture partner with expertise about the affordable housing industry.

“When the market-rate side of the industry gets a little slow, many of the market-rate developers see an opportunity to get in the affordable housing business,” says Pratt. “They say: ‘We’ve got sites. We’ve got buildings. Maybe they make sense as affordable housing.’”

Joint ventures may also occur in the form of public-private partnerships, which pairs governmental entities with private-sector LIHTC expertise. Lianna Petroski, senior vice president, head of acquisitions & deputy fund manager for the real estate equity division of Enterprise Community Partners, manages a preservation fund that she says is boosted by the inclusion of public-private joint venture partnerships.

“The primary purpose of our preservation funds is to keep rents affordable long term while making thoughtful improvements to existing affordable and workforce housing,” Petroski explains. “One of the best ways to do that is with public-private partnerships.” Petroski estimates that public-private joint venture partnerships comprise at least 35 percent of the investments of the preservation funds she manages.

Knowledge of Communities, Expertise in Compliance
Pratt stresses that local partners can bring a unique base of knowledge to a partnership, particularly around local politics and rules.

“We’re a national developer, and sometimes we will go into a market — whether it’s Denver, Chicago, Minneapolis — and put a partnership together,” Pratt says. “The local partner may have more local knowledge about how to get a site and get it permitted. They may better know the local politics and what you need to do to get a development done.”

Jeff Leslie, a clinical professor of law and director of the Housing Initiative Transactional Clinic at the University of Chicago Law School, says nonprofits often have a “long-standing presence” in their respective neighborhoods which build trust. “They know the community. They have the trust of the community and the residents,” he says.

That knowledge of the local community can aid in making an affordable housing project run more smoothly; if problems should arise, a local partner may know the best resources to enlist. This can be particularly potent when the local partner is a public agency. “There are times that multifamily properties have challenges in their operations,” says Petroski. “Having a public partner in the mix can potentially bring additional resources and proven solutions.”

Leslie says community nonprofit partners also can even bring design knowledge to the joint partnership. “We’ve seen it help with design decisions,” he says. “The local nonprofits have community knowledge about what residents prioritize and what their needs are in terms of bedroom sizes or bedroom configurations and layouts.”

In return, Pratt says seasoned affordable partners provide local organizations with technical expertise as well as project stability, should issues suddenly arise. “What Michaels brings to the table is our knowledge of how to finance and structure affordable housing development and our ability to be the guarantor on these types of projects.”

Seasoned affordable developers can also provide critical familiarity with program compliance, specifically tax credit rules. “Everybody needs to be focused on compliance, because that preserves the tax credits and makes the deal work,” says Leslie.

On the market-rate side, Pratt says developers are accustomed to simply leasing a unit after checking a person’s income and credit score to ensure they can afford the rent. “On the affordable side we have to do initial certification and sometimes we have to do annual or interim recertifications,” he explains. “We have to make sure only income-eligible individuals live in the unit. We have to do ongoing inspections to make sure that the unit is in compliance with federal, state and local requirements.”

“If one family moves in that’s not eligible, it could jeopardize the credit, so investors and lenders want to be certain that you have a strong compliance department,” Pratt adds. “When we have market-rate developers, we sometimes need to educate them about how affordable compliance works.”

Affordable partners can remove the burden of compliance and certification so that market-rate developers can focus on what they know best: development.

Pratt says that Michaels often enters joint venture partnerships after the market-rate partner has already done a lot of work on the project. “They’ve done the assembly of the site. They’ve done the permitting and zoning. These deals are not coming to us at the very beginning.”

Often, a market-rate developer will come to Michaels after getting “stuck,” Pratt says, coming up against financial roadblocks that mean they are “not able to go forward in this economy.” He says joint venture partnerships can offer these market-rate developers access to subsidies, such as LIHTCs, that offer a viable path forward.

“It’s a great opportunity for the two types of developers to collaborate. The joint ventures bring together the market-rate discipline and design to the table with the affordability to create a project that might not otherwise get done,” Pratt says.

Crafting the Partnerships
Crafting a joint venture partnership is a highly nuanced process where each party’s role needs to be carefully delineated.

“We work with the nonprofit on the front end to think about how the governance of the joint venture is going to work. For instance, what approval rights or inputs the nonprofit has, compared to the lead developer,” says Leslie.

Leslie’s housing clinic offers pro bono representation to nonprofit community partners looking to enter into joint venture partnerships for affordable housing. The clinic helps the nonprofits negotiate the joint venture partnership, then later craft the tax credit partnership documents. “We think about what the economic return should be for the nonprofit — both the return and the economic risk.”

Leslie stresses that nonprofits bring huge benefits to joint venture partnerships in the affordable housing space. The nonprofit can often access funding sources that otherwise would not be available, such as special local funding initiatives, and can increase a project’s chance of securing LIHTCs via nonprofit set-asides and Qualified Allocation Plan bonuses. “The local and state agencies that are allocating the resources want to see the local organizations involved,” says Leslie.

The governance structure of the partnership needs to be clearly defined early on. Decision-making authority and disposition of the project in year fifteen all need to be established, as do the economic responsibilities of each party. Tax credits and depreciation deductions generally go to the investors in LIHTC deals, while developers’ fees and cash flow are generally captured by co-developers.

“It’s really important to align on roles and responsibilities, business terms, fees, expenses,” says Petroski. “Who’s covering what in terms of expenses? How will any future economics of the project be shared? How active or passive is the public entity going to be — what decision points are important to the partners? It’s very important to align on that early, because once the public agency and other partners involved get business and financing approvals, it is very difficult to go back and unwind or change anything.”

Disposition of the property also needs to be determined. Joint venture partnerships must decide up front how they will approach the end of the LIHTC compliance period. Often, nonprofit or public joint venture partners are given first right of refusal to purchase the property or approve or decline a new owner.

In LIHTC transactions, the developer is expected to guarantee elements of the deal, such as construction completion and operating deficits.

“We have to provide long term, ongoing operating deficit guarantees,” says Pratt in regards to deals Michaels enters. “Let’s say there is a global pandemic, and all of a sudden, families are not in a position to pay rent. Our tax credit investors are going to take comfort in the fact that they have the strength of Michaels to withstand whatever temporary financial or operational setback that might be out there.”