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4/24/04 - South Florida Business Journal

Affordable housing's economics turn poor

By Susan Stabley

Affordable housing in South Florida has become too expensive to build.That's the message coming from developers, some of whom are getting out of the sector.

Cornerstone Group of Coral Gables, the nation's eighth-largest multifamily developer, won't start any new affordable housing projects.

Miami's Pinnacle Housing Group has started moving into market-rate housing and commercial development.

Carlisle Development Group, a longtime player in low-income rental complexes, has expanded into market-rate apartments with its redevelopment of the Lake Mirror Hotel in Lakeland.The trend means three of South Florida's busiest builders of affordable housing are shifting focus. The timing couldn't be worse. With housing prices rising and rental inventory falling due to profit-seeking condo converters, the need for low-income rentals could be greater than ever.

The trend is alarming business groups, who worry about where employees can find decent housing at a reasonable price.

Jaimie Ross, president of the Florida Housing Coalition, termed the gulf between the costs of real property, construction and what people can actually afford as "very serious."

"If there isn't a profit, we can't expect the for-profits to stay in this field," Ross said. "We won't be able to produce the product that we need."
Affordable with a capital A

Most people don't understand what it means when developers or politicians refer to affordable housing, Carlisle COO Matthew Greer said.

The governmentally defined affordable housing, the kind Carlisle develops, are homes financed with government money, primarily through Section 42 Low-Income Housing Tax Credit program (LIHTC). Profits on a project have a ceiling of 16 percent when using this tax credit program. As many as eight layers of subsidy or more may be necessary for a building.)

The tax credit program takes housing management out of the government's hands. The change was brought about in large part due to debacles like Chicago's Cabrini-Green, a high-rise project plagued by drug gang violence and squalid conditions.

The for-profit developers of affordable housing complexes are accountable to the Florida Housing Finance Corp., which has guidelines to prevent slumlords. A drop in quality can bar developers from new deals or even force them out as property managers.

Greer said the best weapon against opponents of low-income housing in their backyards is a portfolio of high-quality products.

Carlisle built, owns and operates more than 6,000 rentals. It has plans to build 1,000 more units across Florida.

Recent projects include Santa Clara and Allapattah Gardens near Miami's Civic Center, west of I-95. Developments are inexpensive compared to many of the luxury towers under way. The first phase of Santa Clara cost about $22 million and the second phase cost $28 million.

The housing benefits those who make 60 percent or less than Miami-Dade County's median income - $30,300 a year for an individual and $43,300 for a family of four.

The Department of Housing and Urban Development formula is that no more than one-third of people's income should be allocated to housing. That means rents are fixed as low as $304 for an individual to $932 for a family of four.

"If insurance fees spike, we can't pass that on." Greer said. "It's a very small margin."

Carlisle and other affordable housing builders can't convert apartment units to condos nor can they raise rates unless incomes go up across the board. Federal tax credits require that the units stay affordable for 15 years. State requirements can bump those commitments up to 50 years.

"A lot of competitors are looking to leave the industry," Greer said. "Cornerstone has grown out of the business, graduated from affordable housing. We have to look at doing that."

With a shortage of affordable housing, many low-income families are struggling.

"Have you driven through Hialeah lately?" asked A. "Buster" Castiglia, president and CEO of Continental National Bank of Miami. "Have you seen all the illegal additions on houses?"

Castiglia was a founder and chairman of a consortium that now has 38 local banks offering funding for affordable housing across South Florida. Participation in the consortium helps the banks meet requirements of the Community Reinvestment Act, which mandates that banks offer loans to low and moderate-income people.

Builders use the bank loans in concert with tax credits, which typically fund the bulk of any project.Since forming in April 2002, the consortium, Neighborhood Lending Partners of South Florida, has doled out more than $47 million in loans and has an additional $10 million in commitments

In Miami-Dade County, 93,032 households have incomes falling 60 percent or more below the median income, according to the Shimberg Center for Affordable Housing 2004 Rental Market Study. That number is expected to increase to 96,997 by 2007.

More than one out of five low-income households statewide are in Miami-Dade. More than one out of 10 is in Broward County, according to the study. An estimated 12,472 units are now needed to meet demand in Miami-Dade, according to the Housing Finance Authority of Miami-Dade County.

"I have to control myself when I talk about these issues. Government has a real place here to fulfill these needs," Castiglia said. "Government can change this if they make it a priority. We have to have leadership from the county mayor and the County Commission."

The city of Miami has already acted by committing to a minimum of 500 new units annually and waiving impact fees for affordable housing projects.

The city has pledged $6.8 million for 1,141 rental units since January 2002. In 2003, 832 units were completed with a city contribution of $1.94 million. The current city subsidy averages $5,963 a unit.

"I don't know of one project for affordable housing brought before this Commission that we turned down," Miami City Commissioner Johnny Winton said. "We never said 'not in our backyard.' We said 'yes and yes and yes.'"

Winton, a private developer, argues that there are still properties ripe for affordable housing in neighborhoods such as west Little Havana, Allapattah, Liberty City and Little Haiti."There is an awful lot of land in the city of Miami that is radically underdeveloped and still very affordable," he said. "Most parts may not be very desirable, but desirability can change very quickly."
'Something's gotta give'

Rising land prices are at the heart of the affordable housing crisis.

"Frankly, we can't find sites that are appropriate and fit the numbers that make it feasible," Cornerstone CEO Stuart Meyers said. "We're in business to make a dollar."

Meyers said that Cornerstone "wouldn't have left if it still made sense."

Carlisle's Greer said companies like his never competed with high-end builders for land in the past. But now, everyone thinks his or her property is worth a lot of money and that market-rate builders will pay more for it, he said.

"I hate to say it. I don't see many positive signs out there for the industry at all," said former Carlisle CFO Luis Gonzalez, who quit the business in 2002.

Acquiring sites has become difficult for affordable housing builders who depend on layers of government subsidy that can take years to secure.

Imagine asking a landowner to hold a property's value for three years, Gonzalez said. These days, developers must "bite the bullet and buy the site, even if you don't know for certain if you can build on it."

The shortage of land has for-profit developers turning to denser vertical towers from more traditional low-rise garden apartments, he said. But at the same time, the cost of labor, concrete and rebar increased as much as 30 percent to 40 percent.

"At a certain point, with rents flat, something's gotta give. There must be much more subsidy or we have to charge more rent," Gonzalez said. "We used to make a ton of money. They don't anymore. If they did, I'd still be in it."

Since leaving Carlisle, Gonzalez has bought and resold land. In 12 months, he said his one-man Centrust Development Group grossed more than $10 million.

For-profit affordable housing builders can make more money flipping land.

Continental's Castiglia said he worked with one community development corporation, generally called a CDC, which bought land in Miami's Allapattah neighborhood for $250,000, but spent three years trying to pull together the financing. The project fell apart and the land sold for $1.9 million.

"Why take the risk and make 20 percent when you can make 100 percent or more?" Castiglia said.

In February, Pinnacle Housing Group returned tax credits for three projects, Pinnacle VP and principal David Deutch said.

"There was not enough profit to move forward. It's such a competitive process, like winning a marathon," he said. "When you win tax credits, you should be home free. I don't know what's more telling than that."

This year, Pinnacle submitted six applications for financing, compared with 12 the year before.

In the past two years, the company started planning market-rate projects, including retail and housing.

"I hope we don't exit [affordable housing] entirely," said Deutch, whose company built 4,000 affordable units in seven years. "But the financial model has flaws. We can't price to reflect current market conditions."
No new supply seen

Then there's the condo boom.

Some say the overbuilding of condos will create new rental inventory, but that won't benefit low-income households, Gonzalez said.

"It's absolutely not true that this will be future housing stock," he said at the April 4 meeting of the Housing Finance Authority of Miami-Dade County.

Authority director Patricia Jennings Braynon said developers have asked if income restrictions could be lifted from affordable units so they could then be bought and converted to condos.

The new condos are too pricey to fill affordable housing needs, especially when mortgage, taxes, insurance, maintenance and other fees could push monthly bills to $2,000 or more.

Gonzalez said he fears that many of Miami's low-income families will be forced into substandard housing or stressed housing, where multiple families live under one roof. That's the case at a home near his in-laws.

"They have been there 35 years and nearby are three or four families living like gypsies. Garages are turned into little apartments where people can pay 500 bucks," Gonzalez said.

Some say Miami-Dade's Urban Development Boundary line should be moved to allow for less expensive homes. Carlisle's Greer said that won't help the crisis either.

"Three hundred thousand dollar homes are not affordable housing. Not by any stretch of the imagination," Greer said.

He predicts that Miami-Dade will suffer the same fate as the Florida Keys, where the cost of living is so high that workers are bused in.

Greer supports creating a land trust, where developers are reimbursed for land cost. The program works in Key West, where Carlisle is building two projects.

Greer said people were waiting in long lines for the new units.

"It was like a rock concert," he said. "We had to give out armbands and hire security."