Philadelphia Has A Plan To Add 30,000 New Affordable Units. Funding Them Will Take Some Creativity
Philadelphia Mayor Cherelle Parker ran on a platform of building 30,000 affordable housing units, and local nonprofit Pathways to Housing estimates the true need is about double that number.
What the since-watered-down plan doesn't address is how those units should be funded. That has left developers on their own to see what sticks — and they’re throwing a lot at the wall right now.
The need has never been greater, and Philly's building community wants to create more affordable units. But it has been tough sledding, given rising labor costs, red tape creating longer timelines to start and build projects, and an unfavorable financing environment, panelists said at Bisnow's Multifamily Annual Conference held Wednesday at Live Casino.
That has forced them to get creative and test out new tactics, from soliciting seed funding from venture capitalists to taking out several loans on a project to get an overall lower interest rate and qualify for extra incentives.
Lindsey Samsi, a senior developer at Pennrose, said her firm is taking advantage of the latter option.
“The way the allocations of tax credits … and soft subsidies are capped, it doesn't allow the projects to pencil, based on where the construction costs are and the interest rates are,” she said.
Samsi said splitting up transactions and loans can help lower project costs and maximize incentives, which often have a cap on how expensive a project can be to still qualify for tax breaks.
“It’s very complicated,” she said.
Taking advantage of federal opportunity zones is also a good way for alternative investors to get in on projects, said Anthony Rinaldi, managing partner at Saxum Real Estate, a national firm.
Saxum has a 297-unit multifamily project underway in Kensington at 1929-1945 E. York St., due in part to the economic development tool aimed at improving community outcomes, especially in areas that have suffered from disinvestment.
“We broke on the project with a very large fund manager in the opportunity zone space,” Rinaldi said, adding that opportunity zones “can grow a lot of capital in those areas that I think otherwise probably wouldn’t have seen it.”
Some critics have charged that Pennsylvania's program only benefits builders.
Left-leaning organization Next City released a review late last year saying that Keystone Opportunity Zone's own data fails to prove its effectiveness.
It also charged that the incentives for state and local tax breaks to owners of designated parcels and businesses in the zones are easily misused, citing the example of top-shelf law firm Dechert LLP seeking out two KOZ tax breaks. The firm got one break when it moved its offices to the Cira Centre and another after it moved into Schuylkill Yards in University City when Cira Center's opportunity zone status expired.
But in addition to advocating for opportunity zones, panelists at Bisnow's event recommended that developers of affordable housing pair up with nonprofit organizations to create mixed-use plans that can be easier to get financed and built.
David Waxman, founder of MM Partners, said his next project in East Falls, Philadelphia, is a joint venture with a nonprofit owner that will offer a mix of housing types.
“It'll be an interesting experiment to see how senior, affordable and market really kind of blends together,” Waxman said.
He didn't disclose the address or the nonprofit partner on the plan.
Panelists also urged looking beyond traditional banks for loans, with some suggesting that seeking out seed funding could be an option. The mechanism is more typically reserved for tech startups and the like, but a few venture capitalists are getting into the affordable housing game, Rinaldi said.
“We've still seen some hesitation for balance sheet lenders on seed-based [plans],” he said. “But I think they're going to become more comfortable with the adoption of those programs. It’s slow right now, to start.”
