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Buy, rehab existing units

MY VIEW • Solutions needed for affordable housing crisis
by: JIM CLARK, Michelle Showalter watches her children on the playground at Leander Court, a year-old affordable housing facility in outer Southeast Portland. Although new construction is favored by lenders and investors, rehabilitation of existing properties is more cost-effective and can meet the housing needs of more people.

The Oregon Housing Alliance reports more than half of Oregon renters pay more than they can afford for housing, leaving diminished funds for other essentials like food, transportation and health care.

The Oregon Center for Public Policy reported the number of working-poor families increased from 2.7 percent in 1979-81 to 6.3 percent in 2005-06.

Meanwhile, Portland's affordable housing inventory remains in flux. Thousands of affordable housing units may become market-rate housing over the next five years as the properties' obligations to operate as subsidized housing are set to expire.

The Oregon Housing Alliance recently announced the success of public and private entities to raise $7 million to save 7,300 affordable housing units from being sold over the next five years.

According to the Portland-based Neighborhood Partnership Fund, 1,735 of those apartments are in the tricounty Portland metro area, potentially saving a large number of the city's low-income housing inventory. The preservation goals for this effort, however, have been adversely effected by problems of the capital markets.

While new funding bought some time, it is clear that a long-term solution is required for the region's growing need for affordable housing.

The development of affordable housing is often made possible and profitable due to the Low-Income Housing Tax Credit program. Federal tax credits are distributed to states on a per capita basis. State allocating agencies further disperse the credits to developers, who then can sell them to investors to raise funds. The resulting projects must remain affordable for a set period of time.

Recent disruptions in the capital markets, however, have dramatically lowered the value of the LIHTC equity offered for sale. Simultaneously, the availability of debt to match the LIHTC equity sale has decreased while there have been marked increases in the cost of debt. This combination has increased the need for additional resources to deploy in the preservation effort.

Cost-effective approaches involving the local government, business and nonprofit sectors are needed.

Between 1995 and 2002, new construction accounted for nearly two-thirds of LIHTC projects in service throughout most of the country, according to the U.S. Department of Housing and Urban Development.

Allocating agencies, lenders and equity investors generally prefer new construction for various reasons: greater financial outcomes, perceived lower risk, and greater community excitement.

Certainly there are economic factors at play as well, but this bias toward new construction results in meeting very well the housing needs of a small portion of our work force instead of adequately meeting the housing needs of a larger population.

The purchase and rehabilitation of existing real estate is the most cost-effective approach.

Acquisition and rehabilitation has generated increased interest as a strategy to preserve the low-income housing inventory. More rehabilitated apartments can be provided to working families with this approach.

Our Portland-based real estate management company has found that the 'all-in' cost of rehabilitated units can be one-half to one-third the cost of new units.

Recently, Guardian Management has acquired and rehabilitated 1,800 units in three states, including Oregon, at an average 'all-in' cost of $65,000 per unit. In comparison, the higher end of the average per-unit cost for new construction in recent LIHTC awards in one Western state was $200,000.

Rehabilitation projects can be highly leveraged in order to provide the developer a return on the investment of time and money over the longer term.

In addition, the preservation of properties with rent subsidies can insulate developers somewhat from the vagaries of the marketplace. At the same time, households can use their limited income for other basic needs.

The U.S. lacks a well-defined mission when it comes to housing our work force. By emphasizing new construction, public resources may not be used in the most efficient manner. A more balanced approach could adequately serve the housing needs of a larger number of eligible households.

J. Daniel Steffey is the vice president of development for Guardian Management LLC, a Portland-based real estate investment and management firm. He lives in Southwest Portland.