Niche Development Opportunities Seen as a Result of Demographics, Trends, Special Needs
By Caitlin Jones & A. J. Johnson
9 min read
Tax Credit Advisor, January 2009: Just as the low-income housing tax credit (LIHTC) industry this year has recognized the importance of diversifying its investor base, diversification seems to be reasonable for LIHTC developers to consider as well.
This can mean exploring and pursuing “niche” development opportunities beyond the plain vanilla LIHTC project. These real estate products may stem from promising demographic or cultural trends or meet another specific local need.
“What we’re finding is that some typically, long-forgotten, not played with areas, are starting to come to the fore,” said Madison, WI-based Terri Preston-Koenig, of the accounting and consulting firm of Virchow, Krause & Company, LLP.
In recent interviews with the Tax Credit Advisor, developers, market analysts, and others described a few niche areas they see as ripe for affordable housing developers.
While the definition of a “niche” development area varies by individual, some likely candidates come to mind: senior housing, live/work units, transit- oriented development, student housing, adaptive reuse, historic preservation, and military housing.
Preston-Koenig offered some advice to LIHTC developers for branching out to niche deals. “Now is a really good time to look at the deals you didn’t normally look at, that have commercial components in [them] that before you thought were too hard to do, and figure out whether or not that commercial component adds value to you, because now you may be able to put your deal together in a way that you’ve never done it before,” she said. Opportune niche areas she cited include affordable housing for resort workers, live/work developments, and employer-assisted housing.
Senior Housing
Building housing for seniors, or “older adults,” is probably the largest niche opportunity for today and the future.
Columbus, OH-based market analyst Rob Vogt, of VWB Research, sees huge opportunities for developers in this area. Nationwide, the number of U.S. adults 55 and older is expected to increase by 15% over the next five years alone. By 2030, nearly one in five Americans will be 65 or older. “We really are at the tip of the iceberg in terms of the number of Baby Boomers who are entering retirement,” says Vogt.
Notes market analyst Lynne Sweet, of LDS Consulting Group, LLC, Newton, MA, “People are living longer. They’re living healthier. And there are medical advances. So there are a lot of different choices for different types of senior housing.”
Vogt suggested this niche is wide and varied, describing four distinct types of housing for seniors: independent living, which he likened to conventional apartments; congregate care, which include apartments in a facility that offer meals, organized activities, and other services; assisted-living facilities, in which meals are provided along with assistance with daily living activities; and nursing homes. Facilities that incorporate all these levels in one place are continuing care retirement communities. (For article By Vogt on senior housing opportunities, see the Tax Credit Advisor, October 2008, p. 2.)
Senior housing isn’t a new niche. And, says Vogt, senior projects have accounted for a large share of all LIHTC projects built so far. According to Vogt, LIHTC senior projects in Ohio have been “extremely successful.” They accounted for 42.8% of all tax credit units in Ohio receiving allocations in 2007.
Vogt said the different types of housing products tend to appeal to different segments of the senior population. He suggested the greatest development opportunity is targeting the largest – 65- to 75- year-olds.
Vogt said seniors of different age groups have different needs, attitudes, and lifestyle preferences, so developers must design and build appropriate product. Baby Boomers, for example, will enter retirement “with a whole different attitude than earlier generations,” he noted, “seeking a much more leisurely lifestyle” than their parents and interested in housing options providing greater flexibility, such as the ability to quickly move or travel. Accordingly, he felt these older adults will be more open to renting than owning a home, and added that some may be “sour” on homeownership as a result of current market conditions.
Senior housing has less likelihood of “NIMBY” issues, and typically lower turnover rates and maintenance costs compared to family apartment buildings.
Vogt said developers and owners should also design projects with an eye toward meeting the changing needs of residents as they “age in place.” This might, for example, mean designing an apartment building with extra common space that could accommodate a future common kitchen and dining room to facilitate a meal program, or provide space for future services.
Live/Work Units
This type of usually urban product can take different forms: apartments or condos that provide both living and work space for residents; or an apartment/condo building that also has commercial spaces where some of the residents may work.
One of the most popular types has been “artists” housing – buildings with loft apartments where artists can live and work. Often these buildings have separate art galleries.
Developing this product with housing credits is now easier since recent legislation which clarified that LIHTC buildings may have occupancy restrictions or preferences that favor tenants involved in artistic or literary activities or those with special needs.
Madison, WI area developer Tom Capp, of Gorman & Company, Inc., has developed various types of live/work projects, including artists housing. He noted some artists projects have been mixed-income, some have been 100% affordable, and some have used housing and/or historic tax credits. Capp said these developments have numerous “working amenities” such as art production rooms, darkrooms, kilns, potter wheels, multiple galleries, etc. Apartments emphasize lighting and ventilation. Projects often have “gallery nights” that Capp said usually produce lots of applications.
Gorman & Company has also developed live/work housing designed for entrepreneurs. The latest of these is Park East Enterprise Lofts in Milwaukee. The four-story building has both LIHTC and market-rate apartments, and a commercial exterior appearance. All units have a residential entrance. However, some apartments are two-level ground floor units that have a second, commercial entrance on the street and business shingle. The lower-level front area of the unit can be cordoned off for space to work or meet with clients. In addition, Capp said the building has a business center with the usual amenities; equipment that individuals usually can’t afford (e.g., architectural plotter); multiple conference rooms; presentation theater; and lounge for networking events. Residents don’t pay extra for use of these facilities, and on-site employees coordinate their use. Capp said the property is targeted toward one-person business owners without employees, such as graphic artists, consultants, etc.
Capp said occupancy in his firm’s live/work developments isn’t restricted to artists, entrepreneurs, etc; anyone can apply to live there. But he noted they tend to attract applicants from the targeted group because of their special design, amenities, and location.
Gorman & Company has also developed other niche projects. (See p. 17 for article on historic adaptive reuse development.)
Employer-Assisted Housing
Another promising area is development of housing targeted to employees of specific local employers.
This often involves local programs where employers provide funds for down payment or closing cost assistance to help their employees purchase a home – either any home in the community, or homes built by specific builder. Some employers, though, have funded rent subsidies or provided support for development of multifamily housing.
One organization that has been at the center of numerous employer-assisted housing transactions is Renaissance Rock Island (RRI), a nonprofit umbrella group for three development organizations in Rock Island, IL (pop. 40,000).
According to Brian Hollenback, RRI’s president, 70 area employers currently participate in the local employer-assisted housing program, contributing funds primarily used for down payment and closing cost assistance for home purchases by their employees. He said employees of the city, local school district, a medical center, and local university have accounted for half of transactions done so far.
There have also been development transactions. For instance, Hollenback said his group negotiated a forbearance agreement with Wells Fargo to take over a failed duplex project. Utilizing the Illinois state affordable housing donation tax credit, his group completed an historic renovation of the 6,000-square-foot structure, converting it into four owner-occupied units that were sold to employees of a particular employer and who received assistance.
The pioneer Illinois state tax credit can be claimed by employers who make a contribution to be used for affordable housing. The tax credits are transferable and can be syndicated to thereby generate equity to help fund development.
Hollenback also mentioned two other projects under development. One is McKesson Lofts, a $6.6 million warehouse conversion to live/work housing that will have 22 condos and 17,000 square feet of ground-floor commercial space with various green and sustainable features.
[Editor’s note: The LIHTC can’t be used for housing units reserved for employees of a particular employer.]
Transit-Oriented Development
Another niche is transit-oriented development. Typically these are urban, mixed-use projects (e.g., residential/commercial) with apartments/condos built atop or near subway stations or bus lines. Often, the local government or transit authority will provide incentives or funds to help subsidize development. (See p. 19 for article describing project by a Los Angeles subway station.)
“One of the niches that we’re getting a lot of inquiries about and seeing a lot of activity [in Pennsylvania and New Jersey] is in the transit-oriented area – smart growth projects and projects around transit stations,” says market analyst/consultant Elizabeth Beckett, of Real Estate Strategies, Inc., Paoli, PA. She said some strategic-minded developers she works with are trying to get infill development and transit-oriented projects off the ground to be positioned when the market rebounds.
Beckett noted one spur in Pennsylvania has been a 2005 state law that authorizes the creation of new revitalization investment (“TRID”) districts around transit stations. These can generate funds – akin to tax-increment financing – to subsidize improvements within the district and to transit facilities.
Other Niches
Various other niches present opportunities as well.
Dover, OH CPA Daniel Smith, of the accounting and consulting firm of Novogradac & Company, LLP, said one client developer, who has completed numerous LIHTC projects, is building a large upscale single-family housing subdivision that will contain an inner gated section of 10-15 “lock and go” homes. The grounds around these homes will be “almost condo-maintained,” he noted, freeing residents from maintenance worries and give them flexibility.
Vogt said development of apartments near college or university campus is another ripe opportunity as well, citing lucrative private apartment projects near Ohio State University.
