ITHACA, N.Y. — At first read, this article might be confusing. Non-profit housing landlord and developer Ithaca Neighborhood Housing Services (INHS) is refinancing its properties in order to pay for long-needed renovations. How it plans on doing that, is a little complicated.
First, the easy part. INHS owns 98 units in 44 buildings spread throughout the city of Ithaca, mostly small apartment buildings and multi-unit houses – collectively called “scattered-site housing”, or SSH.
These properties are all rentals, and most of these units are rented to individuals making 60% or less of the area’s median income, about or less than $32,000/yr. Although these apartments are owned by INHS, they were purchased years ago, and they’re not locked in as affordable housing – no one gave it a whole lot of thought in the days when much of the city was run-down.
Many of these houses are over a century old, and are in need of some repairs and upgrades. INHS has plans to remedy that with renovated interiors, new appliances, new siding, flooring, windows, roofs, and so on. Some units need more attention than others. The renovations would increase the units’ energy efficiency and decrease renters’ utility bills, and they’d be an aesthetic improvement. To do this work, INHS staff would temporarily shift renters into empty units while theirs are being renovated.
INHS also plans to lock the units into a 50-year contract that would guarantee the homes’ affordability. This keeps the units from being sold to someone else who might be tempted to jack up the rent because they know the market would pay more. It’s the same logic that goes the Community Housing Trust that INHS maintains with people it sells homes to – a homebuyer purchases the house below market value, but if they resell a few years later, they can only make a certain percentage of profit based on how long they own it, thus keeping the house affordable for the next lower-middle income owner.
That was the easy part. Now we get to the question of just how they are going to pay for this. This is where it starts to get a bit complicated.
The initial source of the financing is from New York State’s share a $3.2 billion settlement reached with Morgan Stanley over misconduct that led to “zombie homes” (homes that are abandoned by owners during the bank foreclosure process) and the financial crisis of 2008. New York was awarded $550 million, some of which the state is doling out through a housing fund. Municipalities apply for specific projects – the city of Ithaca on behalf of INHS’s SSH renovations – and the state signs off on the application if it looks good.
In this case, the state would award $4 million to Ithaca, which awards the money to INHS. Then INHS plans to leverage that into $19.2 million.
The lofty $19.2 million goal
Leveraging can be a powerful financial tool. An example of it is when you buy a car. Say you’re buying a $25,000 Subaru Forester (as it seems many Ithacans do). You put down $5,000 for a down payment, and you take out a $20,000 auto loan to cover the rest of the payment. That $20,000 is leveraged money. In this case, it’s levered 5:1.
Now let’s say later that day, you sold that Subaru to your neighbor for $30,000. You pocket $5,000 on a $5,000 investment (we’re ignoring interest expense for ease of math). 100% ROI (return-on-investment) is really impressive.
If you had paid all cash for the Subaru, it’d be a $5,000 return on $25,000, a 17% ROI. Leverage generates a greater return on investment. Of course, it also works the other way too – cars depreciate, houses can lose value, and so on. If you sell that $25,000 Subaru for $20,000, that’s a negative 100% ROI, versus negative 17% for the all-cash example.
Back to INHS. As mentioned before, paying for affordable housing is something of a financial jigsaw puzzle, with different sources that have to fit together in a certain way for maximum leverage. In this case, the state is the initial money loaner, with tax-exempt bonds and Low-Income Housing Tax Credits (LIHTCs). The county is also giving INHS $300,000 from the joint city/county/Cornell affordable housing fund.
Explaining the LLCs
Now here’s where it gets really tricky. LIHTCs are used as leverage, and they’re given to Limited Liability Companies (LLCs) to reduce financial risk. INHS is a non-profit, not an LLC.
INHS creates an LLC to sell the LIHTCs, and a Housing Development Fund Corporation to represent themselves as property owner. The LLC sells the LIHTCs to the bank so that they have the money to build, and the bank gets tax credits. The bank that buys the LIHTCs becomes part of the LLC. It may sound odd, but it’s actually the standard approach nationwide.
Here’s how Joe Bowes, INHS’s Director of Real Estate Development, described it:
“As a not-for-profit, we can’t take advantage of the LIHTCs, so we sell them to a corporation under an LLC. We’re one member of the LLC, and the investor buying the tax credits is the other. INHS is in control of the LLC, and we will run the day-to-day operations. We’re still the property manager and still do all the maintenance, and after 15 years (in the LLC) we can buy the properties back. But in order to take advantage of the tax credits, we still need to form an LLC. We don’t know who will buy the tax credit. We find an investor through a syndicator, (which is) an organization that puts us together with an investor who wants the tax credits. This is how Breckenridge, Stone Quarry, and 210 Hancock have been done. There’s an LLC created, we have an interest, the investor has an interest, but we manage and operate the property and have the right to purchase the property back at the end of 15 years.”
And that, ladies and gentlemen, is one reason why getting affordable housing built can be so gosh-darned difficult.
The 210 Hancock example
To illustrate Bowes’ point, 210 Hancock is actually owned by “Hancock & First LLC” and the “Hancock & First Housing Development Fund Corporation“, with the money coming from another LLC associated with JPMorgan Chase’s affordable housing fund. The JPMorgan Chase LLC bought the LIHTCs awarded to INHS, therefore giving INHS the money they needed to build 210 Hancock. INHS and JPMorgan Chase are partners in ownership, but only INHS is the property manager for 210 Hancock.
Now, it should be pointed out that INHS will build up its cash equity by selling the SSH portfolio into the co-ownership of the LLC. So they are effectively selling part of their ownership, and the money that they will receive in return can be put towards the renovations, and potentially new affordable housing proposals in the future.
Keeping costs down and rent affordable
INHS also plans to pursue a Payment In Lieu of Taxes (PILOT) agreement with the county to help keep the costs down while keeping the rents affordable. “This PILOT is part of the overall plan,” said city councilman Seph Murtagh (D-2nd).
“They’re not paying the full property tax value, the formula is the same as used at 210 Hancock. If you walk around the city, some of these properties are in bad shape, INHS will admit that they could use some care and attention. INHS is an affordable housing developer, they’re not super-wealthy, and paying full property taxes makes it difficult to reinvest. That’s always been a struggle for them.”
As part of the PILOT agreement, “INHS has committed to seeking bids from local subcontractors and local suppliers of materials throughout this renovation project,” said city councilman George McGonigal (D-1st).
Okay, take a deep breath, you made it through the tough part. The process is complex and tough to digest at first glance; a lot of folks just gloss it over with a shrug and an, “It’s complicated.” But we felt it was worth the effort.
Rochester-based SWBR will be in charge of renovation design plans, and 2+4 Construction will be the general contractor. The Morgan Stanley settlement money has been accepted by the city, financing is planned by April 2017, and renovations will start this summer, with completion by the end of 2018.