By Laura Kusisto
Related Cos., best known as a developer of luxury condo towers
and landmark properties such as New York's Time Warner Center, will
announce a deal this week that highlights a less flashy side: its
huge and growing portfolio of affordable housing.
Related has agreed to buy more than 3,000 affordable apartments
for nearly $270 million from groups led by Sheldon Baskin, a
Chicago-based investor in affordable housing. Mr. Baskin, who is 78
years old, said in an interview that he was ready to wind down his
business.
The price works out to about $87,750 per unit, which some
analysts said is a price that will allow Related to keep the units
affordable over time. What's more, Related plans to invest $262
million to renovate the units, half of which are located in Chicago
and the rest scattered in 10 other cities across the U.S., from
Iowa to Florida.
Analysts said there are several reasons why the portfolio makes
sense for Related: The buildings provide a steady cash flow,
especially given strong demand for affordable housing in cities
where rents are rising. The firm also has an experienced internal
management team that can run buildings more efficiently than
smaller operators and thus generate better returns.
"A company like Related, they're super managers, they have large
portfolios, they have economies of scale," said Julie Hertzog,
executive director of the nonprofit Affordable Housing Investors
Council.
Stephen Ross, Related's Chairman, founded the company in the
1970s largely as a developer of affordable housing. Although the
company expanded into more lucrative areas of real estate, it
continued to grow its affordable and workforce housing portfolio.
The company now owns more than 45,000 such units, up from 15,000 in
the early 1980s.
While the affordable-housing business isn't especially
fashionable, Related executives say it provides a stable
underpinning to its more volatile ventures in the high-end
residential market and its work on complicated and time-consuming
projects, such as Hudson Yards, a $20 billion mega development in
Manhattan that could eventually include 16 skyscrapers when
completed in 2024.
"During 2008 and 2009 when you couldn't get a construction loan
to save your life and development ground to a halt, those were some
of the busiest years that I had because affordable housing
preservation continues to march on," said Matthew Finkle, president
of Related's affordable housing division.
In many cases, affordable housing developers receive a
combination of tax credits, as well as management and other fees
from federal and state agencies for the properties they own. In
some cases, they may receive rent subsidies for low-income renters
directly from the Department of Housing and Urban Development.
The largest piece of the portfolio that Related is acquiring
from Mr. Baskin's group is the 628-unit Marshall Field Garden
Apartments, in Chicago's affluent Old Town neighborhood. Even
though the complex's affordable housing designation expires in
2017, after which it can be converted to a market-rate complex,
Related said it plans to keep the Marshall Field complex
affordable. In fact, Related says that it has never converted an
affordable apartment to market-rate. As part of the Chicago
renovations, Related will agree to keep the complex affordable for
30 years.
'I'm pleased that Related has made this commitment to Chicago
and that our working families will continue to be able afford to
live here," Chicago Mayor Rahm Emanuel said in a statement. He
added that the deal will "bring us closer to our goal to create,
improve and preserve more than 41,000 units of housing in the city
by 2018."
The Marshall Field apartments are part of the federal subsidy
program known as Section 8, which means that HUD makes up the
difference between what tenants can afford--a figure pegged at 30%
of their incomes--and market rents. Related plans to invest $70
million in renovating the 6-acre complex, including the
construction of a new fitness center and laundry rooms, and the
addition of after-school programming.
The renovations may mean that the rents for the buildings are
higher, as appraised by HUD, which will increase the amount the
company receives from the federal government for subsidized
renters. Currently, average total rents in the complex are $1,435 a
month. By undertaking renovations, Related also receives a
development fee from the federal government and is able to issue
tax credits.
"These guys have just a deep and abiding understanding of how
you do affordable housing and mix and match different subsidies,"
said Alan Wiener, group head of multifamily at Wells Fargo, which
provided equity and financing for the deal. The Illinois Housing
Development Authority also provided tax-exempt bonds.
The Marshall Field Garden Apartments, developed by the estate of
Marshall Field under the direction of his grandson, was at the time
of construction in 1929 and 1930 the largest moderate-income
housing development in the country, according to the book, "The
Poorhouse: Subsidized Housing in Chicago."
The 10-building complex, where amenities back then included a
newspaper, theater group and school, was a magnet for young
professional couples. Over time, it changed hands a number of times
and now is an island of poor residents as the neighborhood around
it has gentrified.
Mr. Finkle said Related plans to invest in restoring historic
features such as the ornate archways and installing 4,500
custom-designed windows.
He said that many people have asked why they didn't decide to
convert the property in a prime area to market-rate. "That's not
what's right for the 1,500 people who live there, who've called it
home for 25, 30 years," he said.
Write to Laura Kusisto at laura.kusisto@wsj.com
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