This story was originally published in Affordable Housing Finance.
Out of the 2017 Tax Cuts and Jobs Act came a new community development tool aimed at spurring investment in low-income neighborhoods.
With high hopes, many in the affordable housing and community development industry are exploring how to turn an idea into reality by utilizing this resource to benefit the communities where they already work and the people who live there.
With high hopes, many in the affordable housing and community development industry are exploring how to turn an idea into reality by utilizing this resource to benefit the communities where they already work and the people who live there.
“We see it as a critically important new tool that can have significant impact for affordable housing and community development, especially for economic development in communities that haven’t seen capital investment in a long time,” says Lori Chatman, senior vice president of Enterprise Community Investment and president of Enterprise Community Loan Fund.
For Local Initiatives Support Corp. (LISC) and its affiliates National Equity Fund (NEF) and New Markets Support Co. (NMSC), 924 of the 8,761 OZs that have been designated across the nation are in communities where they have made prior investments, so they know the area and have developer partners who work there.
“It makes sense for us to be a leader in OZs, given we know these communities, and we can try to increase development by utilizing this new source of capital. It’s pretty exciting to tap these capital gains and see if we can use them for social impact investing,” says Karen Przypyszny, managing director of special initiatives at NEF.
Przypyszny says LISC and its affiliates will focus on the social impact piece to enhance communities, provide jobs and housing, and help create more economic development.
“We’re really seeing OZs as another tool in our tool kit. On the deal side, it’s to achieve more volume and more impact in the communities,” adds Kevin Boes, president and CEO of NMSC. “On the investor side, it has great potential to broaden our investor base beyond Community Reinvestment Act–motivated banks.”
Affordable Housing Boost
BRIDGE Housing, a leading nonprofit developer, owner, and manager of affordable housing, jumped out early in 2018 on OZs. “We’re always looking for new tools to finance affordable housing,” says president and CEO Cynthia Parker.
She says BRIDGE spent time following the OZ designations in the three states where it works—California, Oregon, and Washington—and decided to create a $500 million OZ fund. “We spent time tracking what was in our footprint and realized we had a pipeline of over $1 billion of projects. We jumped in early, worked to build a financial model, and eagerly have read the regulations as they’ve been released.”
BRIDGE is in negotiations to close its first deal—an 80-unit affordable housing development serving residents at or below 50% and 60% of the area median income (AMI) in Watts, a neighborhood in South Los Angeles—in the second quarter of 2019, with two or three more deals expected to close later this year.
“The projects will all be residential, with some retail as a component,” says Parker. “But for sure, it’s a subsidy source we can use, and I think it will be very helpful for developers to further affordable housing.”
Parker adds that negotiating the first couple of deals will help BRIDGE understand the yield expectations. Depending on the yield, $1 billion of developments should result in a couple million dollars’ worth of subsidy for these projects.
“As we work through the program and begin to use it, more things will emerge. I think there’s plenty of guidance for us to get started. It’s not unlike the early days of the LIHTC program, frankly,” Parker says.
Statewide Approach
Public and private partners launched the first statewide consortium to champion the transformation of the 156 OZ neighborhoods in Indiana. The Opportunity Investment Consortium of Indiana released an online portal to match potential investors with projects in need of funding.
Samantha Spergel, director of real estate production at the Indiana Housing and Community Development Authority (IHCDA), says the consortium does two things: (1) provides the portal of projects—affordable, commercial, industrial, or small business—where investors can review preliminary information and have conversations with project sponsors; and (2) serves as a conduit for education, technical assistance, and discussion to leverage the new funds.
“It’s going to provide people within OZs that might not be in Indianapolis or Fort Wayne a way to market their communities,” says Keith Broadnax, senior vice president at Cinnaire, a leading nonprofit Community Development Financial Institution (CDFI) and partner in the consortium.
LISC will house the online deal portal, with Fifth Third Foundation contributing $100,000 to host the portal and help build out and support the consortium. Commitments to help staff the pilot include the state, LISC, Cinnaire, Indy Chamber, Indiana Bond Bank, Indiana Economic Development Corp., Indiana Office of Community and Rural Affairs, and IHCDA.
“When Fifth Third Foundation heard about the opportunity, it sounded like a wonderful chance to leverage what we do—improving lives, strengthening families, and building communities in which we serve,” says Kevin Hipskind, president of Fifth Third Bank’s Greater Indiana region. “We’re a statewide bank represented in almost the entire state. To be able to fund this portal that brings investors together with these projects that reach areas that might not have visibility, we felt like giving in to the front end would be important for the communities and the state in general.”
Spergel says an OZ investment is allowing a 9% LIHTC project to move forward in Brookville, a community of about 2,600 people. Project sponsor Batesville Senior Café is creating a mixed-income, mixed-use development downtown for seniors 55 and older. Valley House Flats will entail the adaptive-reuse of one of the oldest hotels in the state as well as new construction.
Between $1.7 million and $2.2 million in opportunity funds will be invested in the $11.5 million development. Construction started last July and will take approximately a year to complete. In addition to 27 affordable and 20 market-rate apartments, the project will include a pharmacy and a movie theater.
“It demonstrates that this tool can be incredibly critical and resourceful in smaller OZs,” Spergel says. “It’s a great example of a comprehensive affordable housing development that can greatly change the landscape of the downtown.”
Broadnax is excited about the possibility of what the OZ incentive might provide. “I was involved with the LIHTC when it was new, but there’s a cap. With OZs, we’re not restricted to a cap. It’s unlimited what impact it could have on our communities.”
Next-Step Housing
With the Indiana consortium being the brainchild of Indianapolis LISC, Boes says he sees this as a model for other local LISC programs, adding that the Duluth, Minn., office also developed a portal for local projects, in November.
LISC and its affiliates also will be looking to opportunity funds to help address housing for residents whose incomes have gone up and can now access workforce housing and for families whose incomes are just over 60% of the AMI and can't qualify for new LIHTC housing.
“We do think it can be used well if we can craft a workforce housing or middle-income initiative that’s the next-step housing [for those earning 80% to 120% of the AMI],” says Przypyszny. “That’s how we’re developing our approach.”
She says her group will initially look at single-asset funds. “Can we find projects that are attractive to OZ investors, and how should they be structured? A small pipeline will allow us to talk to potential OZ investors,” she says. “They’re going to want preferred returns, a higher return than we’re used to seeing on the LIHTC side. The single-asset fund will get us started and help us work on ways to create a larger fund that can help us do these deals.”
Boes adds that the organizations also will lean into the rural OZs where there’s not going to be a natural market created. “We’re looking to develop products and make sure the rural markets can take advantage.”
Market-Rate Approach
Dominium, a leading housing developer, is taking a close look at utilizing the OZ program to help develop a 135-unit, market-rate housing project in Minneapolis.
Firm officials had sketched out a plan for the project but had been waiting for the right time in the market to develop the site, which is next to a historic rehabilitation project that Dominium completed about five years ago. When the property was included in a designated OZ in 2018, the possibility of using the program opened up, says Chris Barnes, vice president and senior project partner at Dominium.
The project would bring new housing as well as economic development into the neighborhood. “The program is designed to trigger investments that might not otherwise happen,” Barnes says, noting that without the OZ, the project would likely be unable to move forward at this time.
Dominium is exploring creating its own OZ fund to raise the needed financing for the project. The firm is experienced in developing LIHTC projects and working with LIHTC investors, but OZ funds would likely involve a different set of investors.
The biggest challenge may be timing and meeting the various program deadlines to put a deal together, according to Barnes. For example, from the date of sale of an appreciated asset, an investor has 180 days to invest in a qualified fund.
Main-Street Model
For its part, Enterprise Community Investment plans to have a family of OZ funds and is partnering on another fund.
“We have the national experience to be really thoughtful about how to invest in affordable housing and have the desired impact. We do that through what we call three buckets—capital, policy, and boots-on-the-ground work—in 11 regions across the country,” says Chatman. “In our 35-year history, Enterprise has helped finance over half a million housing units. Our goal is to really focus on how we can support, through all of these pieces, an end to housing insecurity. And that, quite frankly, is why we’re excited about OZs.
“We want to ensure we can demonstrate a model with compelling investment returns but that includes equitable and inclusive growth for the communities,” she adds.
To start, Enterprise is partnering with Rivermont Capital, a master developer and investor, and Beekman Advisors, a skilled fund manager, on the Rivermont Enterprise Emergent Communities Fund to revive Main Streets across the Southeast that have suffered disinvestment.
The fund, which will target towns and cities beginning in North Carolina and Virginia, aims to initially raise $250 million, with the first close to have occurred at the end of 2018.
Rivermont, based in Durham, N.C., and Beekman had started looking at ways to revitalize these Main Streets prior to the OZ incentive being introduced. Bringing Enterprise into the mix enabled the partners to talk about this as a regional project. Narasimhan says the legislation and the emphasis on 10-year-plus investing suits the rejuvenation of Main Streets dynamically.
“If you don’t create a valuable and viable new-built environment in the Main Streets of decaying communities, you can’t bring life back,” says Narasimhan. “You have to redo an entire community. The strategy is to work with local governments, community leaders, business leaders and agree on a vision of what it could look like five to 10 years from now. You’re going to need the support of the community. You’re going to have to create opportunities for local employers to benefit. You have to bring educational institutions in to make sure the workforce of the future is being trained. Demand drives value and creates a community. We’re well underway, and we have a few deals ready to fund and go to ground.”
The partners will be looking at OZs where they see growth and sparks of life already occurring, as well as in communities that are thinking about a vision for the future and the resources to help make that happen. “This is going to have to be a public–private partnership. OZ tax benefits are insufficient to create affordable housing and viable communities,” Narasimhan says. “It’s not about one real estate deal in one place; it’s much more comprehensive.”
Chatman agrees. “It’s a long-term commitment to community and building from the inside out. I think that’s what OZs bring to the table that we didn’t have previously. This approach suits that level of investment,” she says.
Narasimhan says the partnership already has $500 million of potentially investable deals and is now building out the next $500 million pipeline, which will take another two to three years.
The first deals were expected to go to ground at the end of December or early January, beginning with mixed-use projects with residential in towns and cities where large public investments are already being made.
“There’s investment happening in some of these places, and this tool will help move those things along,” adds Narasimhan.
The first deals were expected to go to ground at the end of December or early January, beginning with mixed-use projects with residential in towns and cities where large public investments are already being made.
Educational Facility Enhancement
The Low Income Investment Fund (LIIF), a CDFI that provides capital solutions to support affordable housing and other high-impact projects, is also taking a deep look at OZs.
“We’re looking at what the program can offer and what it can do and then look across our investment areas and find investments that we think make sense,” says Amy Laughlin, vice president of structured products and capital markets at LIIF. “We want to make sure we’re looking for investments that are aligned with our mission and bring true community assets to these OZs.”
As LIIF officials explore different options, they’ve identified educational facilities as a potential focus. The organization, which has a history of investing in charter schools, is looking at creating a fund to build these schools or other educational facilities in OZs.
“Our focus is to encourage this money to go to projects that will benefit the community,” says Laughlin, noting that it will be important to make sure the money brings positive, effective development to neighborhoods and not just the investor community.
As LIIF looks at getting into OZs, it will likely start with a small-scale pilot fund to test how the investments will work.
Like many others, Laughlin is waiting for additional guidance about the new program, including rules regarding reinvestment and whether funds can be “recycled” in a manner that encourages broader investment in community projects.
Deputy editor Donna Kimura contributed to this article.
This story was originally published in Affordable Housing Finance.
