Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

So far we’ve seen, via a lengthy exposition in the Fort Worth Star-Telegram, that some property’s are legally obligated to remain as LIHTC affordable, yet are in a zombie interval where there is no penalty for failing to comply.  That makes them prime candidates to be sold from the more experienced to the inexperienced. 

“Like a virgin, buyin’ for the very first time …”

 

In most states, the state allocating agency can approve successor owners.  Not in Texas, and that’s a weakness, because some people who buy won’t be up to the job, and that can be discovered beforehand.

 

“We invested our own money on the property. We want a nice property,” said Greg Malone, owner of an Arlington complex that could be subject to fines by the state.

 

“Why would we want a run-down place where it’s dangerous?  We don’t want that. City and state inspectors need to work with the apartment owners if they want the apartments cleaned up.”

 

From the Star-Telegram’s description, Mr. Malone got a much tougher property than he was anticipating:

 

Greg Malone said police advised him to evict tenants causing the most problems. When he did, occupancy plummeted from 85% to 50%, he said.

 

That’s bad for the cash flow, all right

 

Meaning no offense to Mr. Malone, he shouldn’t have needed the police to tell him that.  A review of the resident files would have revealed it.  A strong owner has a complete resident profile before closing, plans on and swiftly executes a fast wave of evictions – and Texas has about the nation’s most owner-friendly eviction laws there are, five days from service to furniture-on-the-street – and builds in an operating reserve to cover the resulting vacancies and the cost of turnaround.

 

“When you’re evicting a bunch of people, your property suffers for a while,” said Malone, who lives in California.

 

That’s something you should know before you start.

 

His wife, Monika, moved to Arlington to monitor the property more closely. “Your income drops significantly. You have less rent and less money to work with.”

 

Mr. and Mrs. Malone are clearly trying hard.  Unfortunately, they were naive to think they could run the property from California, and their naivete almost certainly means they overpaid.  Had the regulator been able to review their purchase, and to approve their transfer, a good regulator would have counseled them to rethink their acquisition underwriting.  They might have resented such interference at the time, but I’ll bet they would not have resented it if they had known what they were in for.

 

“Wish I didn’t know now what I didn’t know then.“

 

But the Malones are hopeful. Forest Hills now has a stable tenant base, they said.

 

Good for them.

 

McAlan Duncan, current owner of Spanish Park in Arlington, bought the complex in May just as the city said it was preparing to sue the previous owner, Maple Avenue Economic Development Corp. The complex, previously known as Cooper Crossing and Hunt’s View, has had several owners over the years.

 

Maple Avenue is a local community development corporation (CDC).  But just as for-profits can be naive, non-profits can too.  Zeal and altruism are as blinding as distance.  Evidently Maple Avenue jumped in bravely, seeking to save the property, only to find that it started drowning too.

 

Be careful you’re not dragged under too

 

Duncan pledges to turn the complex around within nine months, something the previous owners say they were counting on.

 

“We sold the property to somebody who would have the money to make necessary repairs,” said Robert Russell, who represented Maple Avenue.

 

Inadequate capitalization.  Over and over again, we find this is a problem.  The chief underwriter who rejects a transaction for inadequate property reserves is seemingly no one’s friend.

 

Three buildings have been damaged by fire or water and are unsafe for residents. The complex had more than six violent crimes — including murder, rape and assault — in a recent 12-month period, said Arlington Assistant City Attorney Asem Eltiar.

 

Morgan Channing, a 59-year-old disabled nurse who lives at Spanish Park, had a cracked ceiling this summer that leaked. She called management. It took three weeks to fix the ceiling, she said.

“In the meantime, I’m holding my breath for fear the ceiling is going to fall on me,” she said.

 

Ketura Pena said her three children have no safe place to play; there are no patches of grass, only thick slabs of mud and dirt.

 

A failing property fails faster.  The downward spiral can be shockingly quick.

 

What’s the lowest occupancy down here?

 

Owners can profit, of course, even when properties are in distress, particularly if they invest in an attractive piece of real estate and building systems are adequate.

 

Only if they have enough money in their sources of funds!

 

“Tax-credit properties are not designed to throw out oceans of cash,” said John Lee, a Dallas consultant who works with tax-credit-property owners to correct problems.

 

Even though a building may look run-down, its structure may be solid.

 

But the road to ruin can be swift if owners only pocket profits.  If they don’t make repairs, the number of vacant units grows.  “If somebody had changed the oil in the motorcycle on the living-room floor, you’ve got to change the carpet or you can’t rent the unit,” Lee said.

 

Then owners begin cannibalizing equipment from other units; more units stand empty and elements of crime begin taking hold, Lee said.

 

Chopping up units for spare parts, are we?

 

Yes, the term in the apartment business is cannibalizing, and it’s invisible from the outside.  But each ‘down unit’ as they are called represents $10-15,000 of capital backlog, and all that lost monthly rent, and a new security headache.  It’s an absolute flare-lit tip-off of a failing property.  Absolute.

 

Once it goes down, “the way to fix that is to throw bunches of money at it,” Lee said. “It’s hard to save.”

 

Which is why, he said wearily, you shouldn’t overpay when you buy them.

 

“You shouldn’t overpay.”

“Contrariwise, you shouldn’t under-spend.”

 

Mitchell said another problem with rehab projects is that it can be difficult to determine how much has actually been spent on improvements.

 

“In a rehab, how do you know they replaced the wiring in the walls or the Sheetrock?” he said. “A rehab project just kind of looks the same before and after, except you could put a little bit of paint on the outside.”

 

Just paint the outside?

 

The issue’s not so much rehab as second-owner.  A good physical needs inspection, also called a Capital Need Assessment (CNA), is critical – which is why many state agencies mandate them every three years.

 

Facing an undead property and a zombie owner, what can government do?  Head back to the government factory and manufacture a new law.

 

Cranking out quality housing legislation since 1937!

 

Texas only recently gained the power to take action itself. Last year, the Legislature authorized the Department of Housing and Community Affairs to fine owners $1,000 a day per violation.

 

Good if they’re collectible and motivated.  Bad if they’re uncollectible.  Also bad if the effect is simply to divert their money into legal defense rather than property improvements.

 

The Star-Telegram used city inspection reports to identify the county’s most deteriorated properties that have received federal credits under the housing program and asked the state housing department for compliance records.

 

Around the same time, Michael Gerber, executive director for the state housing department, sent a wake-up call to owners of nine of Tarrant County’s 80 tax-credit complexes.

 

His message: Clean up or you’re gone.

 

“We want these bad actors out,” Gerber said.

 

And I know a lot about bad actors

 

Brave words – but just words.

 

Some owners say the penalties the state is threatening would further erode their ability to repair complexes that are already expensive to maintain. Some properties were rehabilitations of older complexes; others suffer from low occupancy rates. Cash flow is a problem because the program requires that rent and utilities be capped for most units.

 

I can’t decide whether to be sympathetic to such bleats.

 

We have the finest bleating equipment

 

On the one hand, when a property sinks, the community and state suffer too, so it’s in their interest to help turn the property around and return it to health.  They should be willing to contribute money to a comprehensive and fair solution.

 

On the other hand, owners got into this mess all by themselves.  Naivete isn’t much of a defense.

 

Naivete?  Talk to the hand

 

Walter Moreau, [executive director] of an Austin nonprofit group that provides affordable housing, says the ultimate test of whether an affordable-housing project is successful is to look at the quality over the long run.

 

“Those people who treat this strictly as a financial investment,” he said, “don’t realize this is people’s home.”

 

Walter’s a great guy but I disagree with him here.  Such owners do realize it’s someone’s home, and exploit that fact to collect rent without providing adequate housing.  The thing is, those who are supposed to be assuring quality – state regulators – lack power to cause pain to undead properties and undead owners, who look at them and say, ‘Do your worst.’

 

“If you do not comply, I shall say ‘Ni!’ again!”

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