Innovation Keeps NY Housing
March 24, 2017
Financial innovation is as basic to preserving affordable housing today as wiring, plumbing and bricks. This is especially true when one of the few affordable apartments left in pricey Westchester County, New York needs $50.5 million in improvements but the partnership has a limited amount of capital ($20,000) and capacity to take on additional liabilities.
The project is the 454-unit Buena Vista apartments in Yonkers, New York, just north of New York City. It was built 42 years ago under the state’s Mitchell-Lama program, which financed moderate-income apartments with tax abatements and low-interest bond funds. Working people moved in, raised families and generally stayed put as rents in the surrounding area outpaced those at Buena Vista.
Ultimately, more and more working renters aged into seniors on fixed incomes. Project income fell behind maintenance needs, despite the addition of a low-interest Section 236 loan and a Rent Supplement contract from the U.S. Department of Housing and Urban Development (HUD).
Fast forward to 2016 and Buena Vista is facing an existential crisis. After decades of deferred maintenance, it would cost an estimated $100,000 per unit to rehabilitate the building and update the apartments. (That’s almost three times the average cost of rehabilitation we finance.)
Another challenge – assuming financing could be obtained – was to perform the work without displacing the residents who would be hard pressed to find temporary replacement housing in Westchester they could afford. That was a tall order given the scope of the rehabilitation would include replacing the façade, repairs to the building envelope, elevators and building power plant, as well as interior apartment renovations.
Linking Innovative Escrows, Bond Enhancements and RAD
Here’s where the innovation kicks in.
After six months of negotiation, Freddie Mac’s Targeted Affordable Housing team, the lender –RICHMAC of St. Paul – the New York State Housing Finance Agency (NYS HFA) and Buena Vista’s owners entered an agreement that addressed every challenge.
First, to accommodate the borrower’s limited capital, the agreement sets up a series of escrows that are unprecedented for a Freddie Mac transaction. Totaling almost $15 million, the escrows include release provisions that were acceptable to Freddie Mac and the NYS HFA and tied to construction and property stabilization milestones. RICHMAC, the NYS HFA and the borrower are establishing the escrows.
Next, to finance the work, Freddie Mac agreed to provide a $50.5 million, 30-year enhancement to bonds issued by the NYS HFA. Over the years, New York state has invested $40 million in below-market debt and was willing to invest more to preserve affordable housing.
The owners and contractors were also able to figure out a way to do the work without displacing the residents.
Finally, to keep Buena Vista affordable to its existing tenants, HUD has approved a 20-year project-based Section 8 contract under the Rental Assistance Demonstration (RAD), which HUD developed to recapitalize aging subsidized affordable housing. Specifically, the Section 8 contract will keep approximately 366 units affordable to low- and very low-income tenants.
David Leopold, Freddie Mac vice president of affordable sales and investments, says Freddie Mac has financed about 40 RAD projects in six states, keeping an estimated 8,357 hundred units affordable to low-income renters. “Because the RAD contract is expected to be renewed in perpetuity, it has the potential to provide the tenants, owners and community with long-term stability,” Leopold said.
"Buena Vista Apartments has always served as one of the primary anchors within this community,” says a spokesman from Buena Vista Associates. “So we feel deep pride in being able to invest close to $50 million in renovations. The work we're doing today will not only result in significant upgrades to the property, but it will preserve Buena Vista as an invaluable affordable housing asset for the foreseeable future–an important accomplishment, given the intense need for quality affordable housing within Yonkers.”