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Uptown in the News  

April 2005
Illinois Real Estate Journal
Affordable housing revitalization in Chicago hits major roadblocks
By Eric Trucksess, Contributing writer

As an enormous demand for affordable housing goes unmet, the preservation of existing affordable housing stock has now become more critical.

Chicago is no exception. The Windy City has many affordable housing units in need of revitalization, but the city also has often insurmountable obstacles that prevent most of those properties from ever being renovated --high property acquisition costs and above average rehabilitation costs combined with a shortfall in tax credits and "soft" dollars necessary to help mitigate those costs.

The result is that while, on average, about half of all "new" affordable units each year throughout the nation are the result of preservation, that number within the city limits of Chicago is not as high.

Adding to the shortfall of rehabilitated affordable units is a lack of new rental apartment properties being built in the city as condominiums begin to proliferate instead.

If the trend continues, finding affordable rental residences in Chicago will become an even more daunting task than it already is today.

Soft dollars, i.e. subsidies from federal, city, housing agencies and others interested in preserving affordable housing, may prove to be a key to many deals getting done, but creative financing can also help solve financing shortfalls.

However, there's a startling difference in Chicago from other national markets. We see few preservation deals that stand on their own financially; the costs are often too high, even with tax credits, to make deals pencil out. Enormous competition for available tax credits only exacerbates the problem.

Low Income Housing Tax Credits

In 1986, the U.S. legislature created a program aimed at spurring affordable housing by giving each state tax credits that could be used as an incentive to build such housing, with those tax credits allocated based on a state's population.

In short, developers bid for the right to receive the tax credits, which are then resold to finance companies. The finance firms then syndicate the tax credits to institutional investors, who use the tax credits as a direct reduction in their federal tax liability.

Competition for these Low Income Housing Tax Credits is fierce, so developers must often turn to other financing alternatives, such as tax-exempt bonds.

However, issuing authorities are not fully utilized. Tax-exempt bond financings alone are not usually sufficient to make deals work, otherwise there would be more demand. Remaining solutions include soft dollars, mortgage restructuring, tax abatements or some combination thereof.

Making a deal pencil out

A recent transaction completed by Related Capital Co. illustrates how one of those solutions helped an affordable housing preservation come to fruition. Near year-end 2004, the company provided equity for the $17.5 million acquisition/rehab of Universal City, a 160-unit affordable family and senior housing complex on the South Side that was originally built in the early '80s and was in dire need of modernization.

In that transaction, our equity infusion was only the start, as the project needed supplemental financing to pencil out. Enter the U.S. Department of Housing and Urban Development, which through its Mark-To-Market program restructured the existing mortgage debt, providing mortgage insurance for an Illinois Housing Development Authority first loan and a "soft" second loan that will be services exclusively from available cash flow. The two loans totaled almost $12.5 million in proceeds.

That mortgage restructuring was a very large piece of the total preservation costs for Universal City and helped make the deal work.

The property is being rehabilitated by a development team that is a joint venture partnership between New York-based Related Apartment Preservation (not affiliated with Related Capital) and Chicago-based LR Development Co.

The majority of the units at the complex are targeted toward residents earning 60 percent or less of the area median income,with almost half of the units targeting seniors. Universal City is 100 percent occupied with a waiting list of more than 140 prospective tenants, just one small example of the strong need for quality affordable housing in Chicago.

These are our teachers, police officers, etc.

There are approximately 4.9 million households in the United States in need of affordable housing, according to HUD, but only about 100,000 new units are developed each year and another 100,000 become obsolete for a yearly net gain of zero.

Exacerbating that zero net gain are hundreds of existing affordable properties throughout the nation, including many in Chicago, now nearing the end of their required 15-year affordable compliance period. Those properties are at risk of being turned into market-rate properties, causing the affordable housing chasm to grow ever wider.

The Chicago Housing Authority has embarked on an ambitious plan to rebuild or rehabilitate 25,000 public housing units, but that only addresses one component of affordability. Low-income residents, defined as residents earning 60 percent or less than the average median income, are just as much in need of housing rehabilitation programs as their public housing counterparts.

In fact, low-income residents are often times the teachers that help mold future generations, the police officers and firemen who offer protection and the medical employees that help ensure our well being.

If Chicago is to offer safe, quality affordable housing options to those and other area residents in need, preservation, and the creative financing that helps make it possible, has never been more critical.

Trucksess is an executive vice president of Related Capital Co., a subsidiary of CharterMac. He oversees the firm's origination of Low Income Housing Tax Credit transactions throughout the Midwest.

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