At a panel discussion on mixed-income housing at the recent ULI Housing Opportunity 2015 conference, ULI trustee Colleen Carey shared a recent experience of trying to raise capital for a mixed-income multifamily project that her firm, the Cornerstone Group, hopes to build as part of Lyndale Gardens, a new town center in Richfield, Minnesota. The deal she presented to investors was an “80/20” deal—namely, 80 percent market-rate units and 20 percent affordable units.
“The market-rate investors didn’t want to participate in this deal if it had affordable housing, and the affordable housing investors didn’t feel qualified to underwrite the market-rate apartments,” she said. “We’ve figured out how to do development that is 100 percent affordable, and we’ve figured out how to develop 100 percent market rate, but we’ve very much siloed those tools.”
She added: “I thought I’d be able to convince investors to cross that line, but it turns out that line is more like a cement wall.”
Carey expressed the frustration that many forward-thinking developers feel as they attempt to build the kinds of places and projects cities say they want: mixed-income, mixed-use developments that offer a range of rents for people across the income spectrum and the workforce. Institutional investors are reluctant to invest in these projects, which take on the social equity and mobility questions that cities increasingly cannot solve without private capital.
“Here’s a dirty little secret and the bummer about this: we think that maybe we as developers and architects shape what our world looks like,” she said. “The truth is the capital markets shape what our world looks like. . . . We don’t get any real innovation in this industry because the capital markets don’t want it. They want to deploy the biggest amount of money with the least risk as fast as they can.”
With this candid assessment, Carey called for the creation of what she called an innovation fund that would support mixed-income residential deals that typically rely on complicated, multisource financing—usually through a combination of loans, equity, and tax credits—to get done. In the end, Carey will pursue her apartment project, but only with market-rate units.
“We need to figure out how we’re going to support innovation in our industry to create the new things that cities say they’re dying to have, that people want to live in, and that would build stronger, better communities that aren’t being provided for because the capital markets say no,” she urged.
Part of what makes convincing investors so difficult is the degree of variation and the lack of a single template for what makes mixed-income communities work. In fact, mixed income is defined more by what it is not than what it is, said Michelle McDonough Winters, panelist and ULI senior visiting fellow for housing.
They don’t lead to higher concentrations of poverty; they don’t exclude people based on income. But as to what they are: “Every single situation is different, every developer is different, every income mix is different,” Winters added, since some developers pursue projects because they are compelled by law to do so—like those governed by inclusionary zoning—while others, like Carey, pursue them out of choice. And just because mixed-income projects are difficult to pull off does not mean they don’t get done. To wit: the list of finalists and winners of the ULI Jack Kemp Excellence in Affordable and Workforce Housing, which Winters shared with the audience. These developments range from serving households earning below 60 percent of area median income (AM) to those earning 120 percent of AMI.
Political will seems to be a necessary precondition for the creation of mixed-income projects and neighborhoods since market forces alone are not strong enough to create demand. In Seattle, new affordable and workforce projects are coming online as Mayor Ed Murray has made a bold commitment to producing or preserving 50,000 new housing units—20,000 of them affordable—over the next decade.
Seattle recently instituted a host of measures to stimulate the production of affordable housing including inclusionary housing requirements coupled with an option to up-zone for new residential development.
Even before inclusionary zoning became law, the private sector had responded with innovative developments that serve people with a range of incomes.
Panelist Hal Ferris, founding principal of Spectrum Development Solutions who also sits on a Seattle city taskforce studying affordability, is a successful mixed-income housing developer, but he is working in a city that has clearly prioritized such development. At 8 percent per year, rent increases in Seattle are among the fastest in the nation. “That’s created a lot of concern about how we keep affordability and not let it get away from us more than it already has,” he said.
His company specializes in student and workforce housing developments, including Anthem on 12th, a 120-unit rental building with 40 units that serve households earning between 65 to 85 percent AMI, which is roughly $77,000 per year in Seattle. The project is being built on the former site of Yesler Terrace, a public housing complex on land that Ferris purchased from the Seattle Housing Authority.
Ferris received no tax credits, but is instead relying on a 12-year property tax exemption and a U.S. Department of Housing and Urban Development fully amortizing 40-year loan to fund the deal. But other than these so-called soft subsidies, Ferris described it as a private market deal where he raised 25 to 30 percent equity from private investors. To Carey’s point, clearly more of these profit-motivated yet socially minded investors will be needed.
“We didn’t go to institutional capital for our equity, but to private investors [who] were motivated by community development and improving our community,” Ferris said. “We offered them a return that was competitive with the market.”
