Cost, financing and competition: Here are the challenges Charlotte faces in affordable housing

Charlotte Business Journal, Ashley Fahey, December 7, 2018Affordable housing

he Charlotte-Mecklenburg Housing Partnership’s latest mixed-income development on Freedom Drive illustrates what it takes to build affordable housing today in Charlotte.

The city’s Housing Trust Fund is contributing $4.5 million to the 185-unit project. Covenant Presbyterian Church is investing $2 million. Charlotte real estate firm Marsh Properties donated 8.1 acres of land. The Movement Foundation, the nonprofit arm of Movement Mortgage, contributed an additional 4.9 acres through a long-term ground lease. The housing partnership received low-income housing tax credits purchased by RBC Tax Credit Equity Group, which generated nearly $7.2 million in equity. BB&T and Bank OZK were also fund investors. Permanent financing was provided by Barings Multifamily Capital and construction financing by Bank OZK.

Despite a long, complicated string of lending and equity sources that totaled tens of millions of dollars, the project barely made it to closing and groundbreaking on Tuesday afternoon.

“We deferred half of our developer fee,” said Julie Porter, president of The Housing Partnership. “We lent money to the deal in order to make it close.”

The Housing Partnership’s situation is not a unique one in Charlotte, a city where housing affordability has become a crippling problem and, subsequently, a major focus for City Council. With construction and land costs skyrocketing, financing a development with any number of below-market-rate units is challenging, to put it mildly. Without government or other subsidy, it is essentially impossible, developers say.

That’s why residential developers who build affordable units as part of their mix hope the city’s bolstered Housing Trust Fund, approved to increase from $15 million to $50 million following last month’s vote, as well as the amount raised by the private sector in the Foundation For The Carolinas’ $50 million Housing Opportunity Investment Fund, will provide much-sought-after gap financing to make a greater number of affordable housing deals work.

“My sense is there’s some pent-up demand or opportunities to do work that’s difficult to move forward with (when) there was no subsidy support left,” said Dionne Nelson, president and chief executive of Laurel Street, a for-profit, mixed-income developer based in Charlotte. She predicted both the Housing Trust Fund and the foundation’s fund will be oversubscribed “very quickly.”

Nelson said her company, though based here, didn’t do many projects in Charlotte before the city’s recent ramped-up commitment to affordable housing. Today, Laurel Street has multiple projects here under construction or in the works.

She said that shift occurred in large part when the city began allotting Housing Trust Fund dollars for 4% low-income housing tax-credit projects, a federal allocation to subsidize a percentage of the cost to build affordable units, instead of exclusively 9% deals, which are more favorable but highly competitive. Porter also said The Housing Partnership has recently gotten more aggressive about pursuing 4% projects.

Laurel Street and other affordable housing groups have pivoted their focus to include preservation of affordable units instead of exclusively building new. The city has frequently lamented the loss of what’s called naturally occurring affordable housing, or NOAH, as older, outdated properties are bought and upgraded to command market rents or demolished to make way for new, expensive housing.

In both scenarios, residents accustomed to paying lower-than-average rents, oftentimes in well-located neighborhoods, are displaced.

“Charlotte is perceived by institutional money as an attractive market, and they are aggressively competing and bidding for (the city’s) NOAH properties,” Nelson said.

The Housing Partnership has — so far unsuccessfully — bid on properties in which rents could be kept below market rate. Porter said in order for groups like hers to successfully acquire NOAH, there needs to be a source of funding that doesn’t need to be paid back or has more lenient returns than typical deals. NOAH apartments typically need between $5,000 and $15,000 in work done per unit just to get them up to basic safety and health standards, she said.

“We’re having to overbid because those equity companies coming in from New York and other places — their money is good; people know they’re going to close,” Porter said. “If this is going to be a strategy the city invests in, we’re going to have to play the game that needs to be played.”

The hope is that capital from the city’s Housing Trust Fund and the Foundation For The Carolinas fund — which could total $100 million to $125 million if the private-sector goal is met — can also be diverted into acquiring and preserving long term the existing supply of affordable housing, a method that’s costly but not as expensive or time-consuming as building new units.

“Acquiring naturally occurring affordable housing, potentially, has the most leverage,” said Todd Mansfield, CEO of Crescent Communities, which recently donated land at the planned River District development near Charlotte Douglas International Airport to Laurel Street for income-restricted units.