By Donna Kimura
Residents of two properties near California’s Central Coast will benefit from the new income-averaging option in the federal low-income housing tax credit (LIHTC) program.
Eden Housing, a veteran affordable housing developer and owner, and U.S. Bancorp Community Development Corp. (USBCDC), an experienced LIHTC investor, recently closed a deal to finance the rehabilitation of the properties, making it one of the earliest deals to use income averaging.
The move allows the apartments of 33 existing residents at the Charles Apartments and Cypress Gardens whose incomes exceed 60% of the area median income (AMI) income to qualify as tax credit–generating units at 70% or 80% of the AMI.
The income-averaging option is one of the most significant changes to the LIHTC program in years.
The Consolidated Appropriations Act of 2018 established income averaging as a new set-aside election, allowing LIHTC-qualified units to serve households earning as much as 80% of the AMI as long as the average income limit at the property is no more than 60% of the AMI. A project using the income-averaging option must make at least 40% of its units affordable to eligible households. Previously, housing credit units were restricted to households earning no more than 60% of the AMI.
Eden Housing acquired the Charles Apartments and Cypress Gardens in 2015 and 2016 as part of its acquisition of the South County Housing portfolio. Built in the early 1970s, the properties are next to each other in the city of Marina, near Monterey, providing 201 total units.
The properties were and continue to be regulated under the Department of Housing and Urban Development (HUD) Sec. 236 Low Income Housing Preservation and Resident Homeownership Act (LIHPRHA) program to preserve low- and moderate-income housing, and a number of families have incomes at 70% and 80% of the AMI. In other words, families met the HUD regulatory requirements but were over the typical 60% AMI limit of the LIHTC program.
That put Eden Housing in a tough situation because those apartments would not have generated housing credits under the long-standing LIHTC income restrictions. Furthermore, although the properties are still under the Sec. 236 LIHPRHA use agreements, they do not receive Sec. 236 rental assistance. As a result, the nonprofit would not have been able to raise enough financing to complete a much-needed, comprehensive rehabilitation of the properties.
Fortunately, the housing organization was able to utilize the new income-averaging option to allow the apartments occupied by residents earning up to 80% of the AMI to qualify for housing credits. The move allowed nearly $6 million in additional equity to come into the deal, including providing coverage for construction cost increases that have hit the industry over the past year and allowing for an increased scope of work.
USBCDC is providing about $32.6 million in LIHTC equity to help finance the acquisition and rehabilitation of the properties. The California Tax Credit Allocation Committee (CTCAC) awarded 4% federal housing credits to Eden Housing this year. JPMorgan Chase is providing the construction and permanent loan for the project, and the Housing Authority of the County of Monterey is providing new project-based Sec. 8 vouchers.
“Since income averaging is so new to the industry, it took time to structure this project in a way that Eden and USBCDC were both comfortable with,” says Elizabeth Kuwada, senior project developer at Eden Housing. “Ultimately, we are very happy that we were able to work together and use income averaging to better preserve these affordable housing resources.”
One of the steps taken was to make sure there was a buffer in the project’s average affordability percentage, so it’s not right up against 59%. To create the desired buffer for its first income-averaging project, Eden moved a number of units to lower-income levels, according to Kuwada.
CTCAC calls for 4% LIHTC projects that use the new option to not exceed an average of 59% instead of the 60% required by the IRS.
“We shifted a large number of units from the 60% AMI level to 50% AMI level,” Kuwada says. “We were able to do this because the existing households qualified at the lower-income level.”
Because the project is so large, it took shifting 50 units from 60% to 50% of the AMI to move the average affordability several percentage points, which Eden Housing saw as a positive risk mitigant. This created a sufficient margin below 59% that all parties were comfortable with to move forward.
The overall project, including the acquisition of the developments, is estimated to cost approximately $97 million, with the rehab work estimated at about $26 million.
“This will help preserve affordable housing that has existed in the community for almost 50 years,” says Sarah Buchheit, assistant vice president at USBCDC. “It’s a close-knit community. There are a lot of families that have been there a long time.”
It was especially important to preserve the affordability of the Charles and Cypress Gardens apartments. Not only do they provide a significant number of affordable homes in a high-cost housing market in the Monterey Bay region, they have a wide range of unit sizes from one to five bedrooms that serve a broad spectrum of residents, including seniors and single-person households to large families.
The developments will undergo extensive improvements, including the replacement of all windows and roofs, siding repairs, seismic retrofits, and upgrades to HVAC, mechanical, plumbing, and electrical systems. Site amenities, including the community buildings, tot lots, and laundry rooms, will also be upgraded.
In addition, the properties will be more energy efficient with the addition of solar photovoltaic and solar thermal systems, LED lighting, Energy Star appliances, and low-flow plumbing fixtures. Apartment interiors will be upgraded including lighting, flooring, kitchens, and baths as needed.
The deal is USBCDC’s first equity investment where it underwrote income averaging. It has closed on another income-averaging deal as a construction lender, according to Buchheit.
Utilizing a new program is challenging, but Eden was able to create a path forward by working with CTCAC, addressing how the compliance will be monitored, and understanding the market conditions, Buchheit says.
