Affordable Housing Institute : US

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9. Urban revitalization requires soft debt and soft equity

Further to the preceding points, the transaction obviously faced an enormous cost-value gap (with value defined as that supportable by economic debt/ economic equity). Indeed, when we reclassify the sources into the four kinds of money, we have the following more comprehensible chart:

Table 2

Dartmouth Hotel

Total external sources of funds, categorized by kind of money

Amount

Amt/apt

Percent

(The property contains 65 apartments and 10,000 square feet of commercial space. For simplicity of presentation, we have converted the commercial space square footage into an equivalent number of apartments and pro-rated appropriately. This is the fairest means of looking at the true per-apartment development cost.)

The very large role played by soft debt reveals how, in the US affordable housing ecosystem, soft debt is typically the cement that fills in between the large blocks. The sources assembly works in three distinct steps:

1. Hard debt is sized first. It derives from (a) pro-forma NOI, and (b) market interest rates/ terms.
2. Soft equity is sized next. It derives from (a) total development cost, and (b) market price for tax credits.
3. Soft debt must fill the gap.

The size of that gap, and the challenges facing the developer, lead to the next insight:

 

10. Non-profit community development corporations (CDCs) are often the best buyer

Who else would have the commitment to the neighborhood? Who else would work so hard and so long on a property that, I am sure, many said couldn’t be done?

Who else would be able to summon the strong neighborhood support?

Who else would do it for such deferred fees?

Who else would coax so many soft debt sources to open their wallets?

 

11. More sources means more time means more cost

This is self-evident from the preceding. I shudder to think how much the total uses of funds expanded, fitting together fourteen-plus sources, together with their:

• Application fees
• Professional services fees
• Developer administrative staff time
• Carrying costs

The Byzantine process itself added buckets of cost. How much? Quien sabe?

 

12. It costs a bloody fortune!

Even with a supportable debt of $60,000 per apartment, the total development cost was above $240,000 per apartment.

You read that right. $240,000 a flat. About $300 a square foot. (For you Euros, that’s $3,000 per square meter.)

You may resume breathing now.

Such a vast cost invites the presumption, couldn’t there be a more efficient way to do this? To which there is a three-part answer:

1. Sure, in a perfect world, we would consolidate soft debt sources and get there quicker.
2. Be very careful how you manage the resources. Since land value is a residual, more efficiency could easily have translated into a higher price to buy the building. (Indeed, runaway price inflation of derelict shells is a major problem in any large-scale urban revitalization, a still further reason for eminent domain.)
3. Efficient compared to what, doing nothing?

13. Success is worth it

For thirty years, the Dartmouth Hotel sat residentially vacant, dragging down a key Boston neighborhood. Though its revitalization may be insufficient by itself will not tip Dudley Square to success, it was and is necessary to have revitalized the property.

If we believe that an urban neighborhood is worth saving, rather than bulldozing, then we also believe that its revitalization will generate substantial additional benefits for the city: more jobs, more tax revenue, happier and more productive citizens. What do we pay for municipal infrastructure? What do we pay for educational infrastructure? What then should we pay for civic infrastructure?

Yes, the Dartmouth Hotel cost a fortune. But it’s on its way to succeeding, with a positive economic-development leverage impossible to measure but immediately apparent to anyone in Dudley Square:

Elva Abdal-Khallaq, 90, of Roxbury, said the restoration has given her optimism about the future of her family store, A Nubian Notion Inc., the building’s anchor tenant.

“It is a beautiful corner,” said Abdal-Khallaq. “My husband had dreams and fulfilled these dreams. It’s also my children’s hard work; my oldest son started [the store] off, and now the fourth son is managing it. I think this is the time for our store and the whole Dudley Square community.”

After a year-and-a-half under wraps, the historic Dartmouth Hotel has emerged from its cocoon of scaffolding and tarps to reveal its elegant 19th-century marble facade for the first time in decades.

“It’s kind of overwhelming,” said Friedman. “The building is so beautiful.”

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