Seniors Housing Business

JUL 2018

Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.

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Page 35 of 40 35 July 2018 n Seniors Housing Business Manning: We looked at the broad base of affordable housing and our largest desire was to focus more on the senior citizens. We generally are the equity part- ners of a contractor or developer who needed the money to build these sorts of properties. In rare cases, we are also the developer, but that's not even 3 percent of the deals we've done. SHB: Tell me about the partnerships. Manning: We take responsibil- ity for providing the financing, including the mortgage. In some cases we're even the mortgage lender, but in most cases we get financial institution to do the debt side. But it won't be heavily lev- eraged. Mortgage financing typi- cally ranges from 20 to 50 with our equity investment, along with city or state subsidies, making up the balance. The motivating factor is the affordable housing tax credit program. It's a 10-year tax credit where you get one-tenth of the tax break every year for 10 years. That's the incentive. The tax credit is a very valuable asset in the overall transaction. It means less pressure is put on charging rents. SHB: Who are your investors? Manning: For the most part, 80 to 90 percent are banks because they have to fulfill the Community Reinvestment Act requirements. They have to reinvest some of their capital into the community, so the banks are a major player. Insurance companies are second. SHB: What are the significant hurdles you face when it comes to seniors housing? Manning: The most challeng- ing hurdles these days in devel- oping seniors housing is the cost of construction. Although all new construction housing in gen- eral has experienced significant cost increases, in many instances seniors housing is more expensive per apartment square foot. This is because seniors housing usually will include various forms services for seniors. For example, recreational areas, elevator ser- vice, special security systems, and sometimes even minimal health service area will add more to the average construction cost per apartment unit. The affordability riddle SHB: Affordability is one of the biggest problems facing seniors housing right now, and it only promises to get worse as the demographic wave of Baby Boom- ers arrives. Since you specialize in affordable housing, what are some ways the seniors housing industry should be tackling this issue? Manning: This is an area of housing for which there is enor- mous demand, but we're limited by the amount of credit that is allocated by the federal govern- ment. There's no lack of desire by the capital sources. They totally understand what's happening with seniors and the fact that it's getting worse and worse. The limitation is the incentives the government can provide. It's not providing an adequate amount to deal with the housing needs of seniors. That's basically the House and the Senate control valve. On the Senate side, Orrin Hatch (R-Utah) and Maria Cantwell (D-Wash.) amended the tax law and allowed for a 12.5 percent increase in the tax credit for the next four years. So there was a bonus tax credit that will expire, but at least it was an added incentive. So that was a good thing. That incentive will be spread between affordable housing for families and seniors. I can't tell you what the ratio will be. It will be purely a matter of the states taking that credit and deciding how they wish to allocate it. SHB: In your opinion, does that mean the federal government needs to turn the valve on and let the tax incentives flow? Manning: Yes, it does. We need to get the House and the Senate together to increase the amount of tax credits available to finance these properties and keep the rents as low as possible. That's the objective. The amount of credits that can be allocated to the states comes completely from the House and Senate. They have to come to a conclusion as to how much they're willing to expand this program. We had to do a tremendous amount of work when tax reform came through just to make sure these tax credits weren't elimi- nated entirely. It's complicated tax legislation, frankly, but it's critically important to senior citizens. There's an ever- increasing population of senior cit- izens coming at breakneck speed. A careful growth strategy SHB: Are you looking to grow your seniors housing presence fur- ther? If so, what's your preferred growth method in terms of acqui- sitions versus development, and geographic concentration? Manning: Yes, and our growth includes a variety of developments and acquisitions. For example, last year we did a couple projects that were unusual. In addition to having low- income seniors, we also have homeless seniors in this country. There's a deal we did in San Diego last year, the New Palace Hotel. We're trying to serve both the ten- ants that have enough money to at least make their rent payments, and the homeless that don't even have that. Another project was an old waterworks building just outside downtown Boston in Somerville. It was abandoned, but had great architectural features and qualified for historic tax credits for improve- ments. It's undergoing renovations that will generate a historic tax credit and LIHTCs. The Somerville project is about 30 units. It's not a big property, but it's an example of an attrac- tive property that has been derelict for a long time. Clearly the costs are low. It's a unique property and we're really proud of it. Another example, and the polar opposite, is a property we did in Saratoga, California. It's a higher- income area where home prices are $3 million on average. That's a brand new building with all the amenities you'd expect in Saratoga. The seniors there aren't wealthy but will live in a safe, attractive, high-end property. That will be a more expensive property to do. These are three good examples of what we have to deal with and what we look at. Do we want to do this transaction? What do we think the dynamics will be? Can the property operate at the low- est rents for tenants, while staying well preserved, well maintained and appropriately managed? SHB: What operators do you work with? Manning: We will look at all the submissions that go into the state tax credit allocation agencies. We'll look at the proposals and decide which we'd most like to do. What factors into our decision to start a project is location, then cost, and a very close third is the management makeup of the developer/general partner. You have to look at how a prop- erty is going to operate. Some have facilities that involve minor medi- cal care; some don't have that at all. Some have meal services; oth- ers may not. Does the financing all work? What does the market look like? Can residents afford the rent? Is the state or town willing to add some subsidies? The last thing we want to do is invest in a property with serious problems, and then we have to take care of seniors at a property that isn't functioning well or man- agement is incompetent. That's a rare occasion, but it's a possi- bility. We have to review the his- tory of the management company, which is usually a third party. It's a very thorough, detailed analysis before we put down money and go forward. Let's face it, each property is a business. SHB: Besides the age restric- tions, what separates your seniors properties from your general mul- tifamily offerings? Manning: If it's a family prop- erty, you don't have to have ele- vators, and you don't necessarily need common areas. We like to have both, but you don't have to have them. On the seniors property, you have to be certain there are eleva- tors and some common areas. You also don't need two- and three- bedroom properties, so you can put in more units. Boston Capital invested in the historic Mystic Waterworks in Somerville, Mass., with plans to convert the long-vacant property to affordable seniors housing. Boston Capital has invested in the New Palace Hotel in San Diego and converted it into housing for both low-income seniors and homeless seniors with no income at all.

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