Affordable housing subsidies drive apartment development

In the post-Great Recession economic landscape, financing for real estate development is still so limited that almost every developer that is working on an apartment project is seeking a government subsidy that requires at least some of the units to be set aside for residents whose household income is below the county’s median income.

Condominium development has almost stopped completely since the collapse of the housing market a few years ago. Multi-family housing development has shifted to apartments, but nearly all of the deals include a government subsidy to include an affordable housing component in the project.

The subsidies are criticized by some who say developers should only build projects that are 100-percent privately financed. But many developers say are unable to do a market-rate project that is completely privately financed because banks are under additional government scrutiny and are reluctant to lend money for real estate development.

“Given the fact that the banks are under so much regulatory pressure (from the federal government), which discourages them from making real estate loans, it is virtually impossible for any developer, particularly in a tertiary market like Milwaukee, to get a conventional bank loan to build market rate-apartments,” said Robert Monnat, chief operating officer of Milwaukee-based Mandel Group Inc.

Mandel Group plans to use affordable housing tax credits for the second phase of its North End project, along the Milwaukee River at Water and Pleasant streets in downtown Milwaukee. The Wisconsin Housing and Economic Development Authority (WHEDA) announced that it is issuing $24.1 million in tax exempt bonds for the project. The bonds will be purchased by individual investors. The tax exempt status results in a lower interest rate for Mandel to pay them back, which makes the project more feasible, Monnat said. The company is also seeking a loan from the city of Milwaukee for the project.

Investors purchase the tax credits because they cost less than their dollar value and can be used by buyers to cover their tax obligation. By purchasing the tax credits to fund a development the buyer, “in essence pays less in taxes,” Monnat said. “They don’t pay dollar for dollar (for the tax credits). They get a return on their investment. They get no return on their investment if they just pay their taxes.”

The tax credits are attractive to developers because, “you can finance 75 to 80 percent of the cost of the project just by selling these tax credits,” Monnat said.

The tax credit financing through WHEDA for the North End’s second phase will be WHEDA’s first use of funds under the federal Midwest Disaster Area Bond program, which is issued through the Heartland Disaster Tax Relief Act of 2008 to aid in recovery of severe storms and flooding. Mandel Group noticed that few developers were taking advantage of this program and executives decided to approach WHEDA about a deal for the North End using the program, Monnat said.

“It was just silly that no one was using (the Midwest Disaster Area Bond Program),” Monnat said. “We said, ‘We’re going to go after this.'”

The $38 million second phase of the North End project would consist of two, five-story buildings with a total of 155 apartment units and 2,300 square feet of retail space. By using the tax exempt bonds, Mandel is required to have 20 percent of the units (31 units) set aside for households at or below 60 percent of Milwaukee County’s median income.

The first phase of the North End was an 83-unit apartment building with 12,000 square feet of retail space.

Mandel is just one of several developers in the last year that have turned to affordable housing tax credits to put together financing for their projects. Others include:

  • The 140-unit Beerline B Apartment development by Fox Point-based General Capital Group that is under construction north of East Pleasant Street between North Commerce Street and the Milwaukee River. The project received affordable housing tax credits through WHEDA and most of the units will be at below-market rents.
  • Chicago-based Mercy Housing Lakefront, which plans to construct a five-story building with 54 apartments on a vacant lot north of North and Farwell avenues on Milwaukee’s east side. The developer is seeking affordable housing tax credits for the apartments from WHEDA.
  • Milwaukee developer Tim Dixon and Almena, Wis.-based Impact Seven, which are building a three-story, 72-unit apartment building at the northeast corner of 1st Street and National Avenue in Milwaukee’s Walker’s Point neighborhood. The project is getting federal affordable housing tax credits, Dixon said. Rents will be adjusted based on the household income of the tenants.
  • Wangard Partners Inc. plans to build a 352-unit apartment development southwest of County Highway P and County Highway Z in Oconomowoc. Wangard plans to borrow up to $25 million in tax exempt bonds issued by the city under the federal government’s disaster relief program, which is the same program that Mandel is using for the North End financing. To receive the funding, Wangard would set aside 20 percent of the apartments to be rented by residents earning no more than 60 percent of the area’s median income.

However, some communities have rejected affordable housing developments.

New Berlin officials rejected a proposal by MSP Real Estate, which wanted to build a development with 80 units of affordable housing in the City Center area south of National Avenue and east of Moorland Road. WHEDA had awarded $1.2 million in tax credits to MSP for the affordable housing project.

Kenosha officials rejected a proposed by Bear Development, a division of Kenosha-based Bear Realty, proposed a 70-unit, 3-building apartment complex called Uptown Gardens for a vacant 2.7-acre site southeast of 63rd Street and 18th Avenue in Kenosha. The property is part of the former Uptown Brass site that the city of Kenosha has been working for years to redevelop. The company proposed an affordable housing project seeking low income housing tax credits through section 42 of the IRS tax code. The tax credits would have been administered by WHEDA.

Both the Kenosha and New Berlin projects were opposed by several residents who said they feared that affordable housing units would attract a bad element to the area. Some critics question if a project such as Mandel’s will be able to convince renters to pay market rates in a building that also has subsidized, affordable units.

Monnat says the criticism of the affordable housing units is, “prejudicial, ridiculous, ’60s-style thinking.”

“This is affordable housing,” he said. “This is for people that work as bartenders, waitresses, nurses, etc. It’s not for physicians, attorneys or highly paid professionals.”

The affordable housing tax credits are a better way to provide affordable housing than the government housing projects of the past, Monnat said.

“(The tax credits) encourage the financing of affordable housing without the government being involved in building affordable housing, as it used to be,” he said. “It was designed to get the government out of the housing business.”

Sign up for BizTimes Daily Alerts

Stay up-to-date on the people, companies and issues that impact business in Milwaukee and Southeast Wisconsin

No posts to display