Workforce Housing Fund Hopes To Be Smart Growth Catalyst

What is Phoenix Realty Group's business plan and what resources does it have to carry it out?

The Phoenix Realty Group is the fund manager for the Genesis Workforce Housing Fund, which is the first workforce housing fund in the nation to bridge institutional capital with community development in urban areas. The fund provides community developers with access to institutional capital to finance the production of workforce housing, which is defined as both for-sale and rental housing serving the market segment of wage earners at 80% - 200% of median income (about $50,000 to $110,000 a year). Geographically, the Genesis Fund is focused on targeted urban areas - low and moderate income census tracts and redevelopment areas - that have seen a lack of housing supply affordable to moderate income families who want to be close to family, friends and work in urban areas.

In March of this year, the Genesis Fund closed on $57 million with mostly large nationally recognized financial institutions – Northwestern Mutual Insurance, Citigroup, Washington Mutual, and local banks that are serving the Los Angeles area. These institutions understand that there's a tremendous need in Los Angeles for this type of housing, and firmly believe that they can provide investment capital that will address this need while achieving competitive market rate returns on their investments.

Why is institutional equity now needed for financing workforce housing?

There are a lot of developers with excellent experience in urban development who have good projects, but typically rely on what we call "friends and family" money. On the other hand, most institutional capital sources are looking at placing upwards of $10 million or more of equity in a project-they're looking for more substantial redevelopment opportunities. The fact is however that most urban housing projects are smaller in size and require smaller amounts of equity, in the range of $5 million up to $10 million. Given this scenario, we see an opportunity to incentivize an army of experienced developers, who require smaller amounts of equity, while allowing institutional investors the ability to access and invest in a large number of urban development projects. And, if one takes a look at the investment landscape, there's really no one who's focusing on this "middle market" of institutional investment.

But isn't the institutional money now being invested in your fund the same dollars that are available already for housing development?

Under normal circumstances, institutional investors will provide the securitized debt on the project, typically the 80% loan to cost construction loan, but only if the developer can go out and find that 20% at-risk equity piece. So, the banks and other institutional investors understand the debt component of housing, but they don't necessarily have an ability to reach down into the market and provide that critical equity component to developers.

Another important aspect of the middle market urban equity business is tax-credit developers. An integral part of our business plan is to look at the 20-year history of tax-credit development in the country, and to utilize this very sophisticated group of developers, both for-profit and nonprofit, who have been very successful in developing housing in urban areas throughout the country. These developers know where the land is, have the political connections to get the entitlements in place, and know how to serve their community, but have solely relied on tax credit funding as their equity source. However, as has become painfully clear, that financing source is drying up in today's difficult economic environment. Today, only 20% of the projects that apply for tax credits are funded. That means that there are numerous projects where a developer has site control, some form of entitlement, and is simply waiting for an equity source to move forward with the project. We hope to bridge this gap and reposition a number of these projects by providing the equity. The typical example of this strategy includes a developer who might have a 75-unit tax credit project, but has not been awarded the tax credit, and we can thus help to redirect that project into a 45-unit townhouse project.

We're working with several large tax-credit developers right now who understand that they can't sit around for a year on a piece of land, and don't need to solely rely on tax credits to make an urban housing project work. In addition, they're getting political pressure from local jurisdictions who want more that just tax credit housing for their constituents.

Quantify for our readers the current demand for workforce housing in metro Los Angeles?

We think that there is very deep demand for workforce housing, particularly in areas that have experienced low levels of housing production and continuing population growth.

If the demand is so deep, what explains the investment community's hesitiation in contributing more capital to your fund?

Despite the fact that the demand is so strong in this market, there is an incredibly steep learning curve that institutional investors need to climb in order to understanding for-sale housing and the exit strategy involved in getting their capital back with these investments. In addition, because of the heavy focus on the tax credit world and other forms of urban real estate, there has never been an urgency to focus on this niche and this marketplace. Nevertheless, the tax credit market taught them that this was not public housing, and they can make a safe investment in tax credit vehicles in urban areas and profit from it. We now hope to bring institutional investors that have been successful in the tax credit world, and persuade them of the opportunity to pursue that same parallel track for moderate income housing, whether it be for-sale or rental housing. You see institutional capital involved in commercial and entertainment retail in urban area, and we now are helping to create the market for workforce housing.

Before joining Phoenix Realty Group, you worked with a very successful local developer, The Lee Group, on developing urban infill housing. The Lee Group was doing projects without institutional funding. Wasn't their success enough of a track record to encourage institutional investors to come into this workforce housing market in a bigger way?

Companies doing this type of housing, like The Lee Group, the Olsen Company and others, have not traditionally used a lot of institutional capital. They've been using it on a one-off basis but primarily have relied on a lot of "friends and family money." We're trying to be a consistent source of capital for a variety of developers, providing an institutional platform to provide capital and development expertise that is focused on a particular urban geography as well as product type.

With the housing crisis in Southern California, developers and cities are being forced to look at higher densities in urban areas as entitlements become more difficult to procure in more suburban markets. That it is forcing people into urban areas. When you factor in the success of the Los Angeles downtown renaissance, and you see how thousands of rental units are being built disproportionately to the number of for-sale units, the strength and promise of the market begins to take shape. As a result, we believe that the risk involved with this type of housing is not prohibitive and that the access to the capital markets has been the piece of the puzzle precluding other developers from focusing on more middle market urban housing projects.

What distinguishes Phoenix Realty Group's workforce housing initiative from others?

Workforce housing in the traditional affordable housing world is focused on people and families at 80-120% of median income and below. Our definition of workforce housing is a little different in that we're focusing on moderate income wage earners, between 80-200% of median income-fire fighters, middle management, government employees. These folks tend to have more disposable income for housing but are still tremendously underserved. The urban market for the working middle class is shriveling up at a fast pace, forcing these people, the engine of our local economy, to the suburbs where they are two hours or more from where they work.

Another element of this market is what we classify as "pre-family housing." In California over the last ten to twelve years, there has been a lack of housing in the $200,000 - $400,000 range, particularly attached product. That is the classic entry-level for sale housing and is a critical component for allowing people at a much younger age – in late 20s, early 30s – to start wealth generation before they've even started a family. Without having housing available at this price range, this market segment may rent for another ten years, search outside of the proximate urban areas for housing and the financial benefits of home ownership may be more elusive.

Give us some examples of development projects that are presently being supported by this housing fund.

One of the first projects in which we are looking to provide a joint venture investment is called Avenue 26 Condominiums. It's immediately adjacent to the Avenue 26 Gold Line station in Lincoln Heights in the eastern part of Los Angeles, just a couple of miles outside of downtown. This first project is proving our model and business plan right away. It's with a very successful company called AmCal Housing, a for-profit tax-credit developer, and they are master planning a six-acre site with 225 tax-credit units, a child care center and related amenities. We'll be financing the 165 for sale condominiums. Starting prices are going to be in the high $100,000s and low $200,000s. The average price will be under $300,000 and the units will range between 700 - 1600 square feet. This is a great starter community for people who already live and work in Lincoln Heights and, save for this project, would have no opportunity to buy a unit or continue to live in the community. And not only that, this project will be taking part in transforming a neighborhood from what was strictly an industrial/commercial area into a residential, transit-oriented, pedestrian friendly community.

We also have two large mixed-use projects in downtown Pomona. One project is a four-story, 100-unit residential development over ground floor retail. The other project is a city parking garage that we are wrapping with 100 for sale units as part of an urban revitalization strategy for downtown Pomona. Pomona is an example of the many suburban cities that are looking to reposition their downtown to be a catalyst for residential development. Once again, these projects are very close to transit services and provide a housing alternative to people who live in Pomona and the greater area, where single family homes might start in the low-to-mid $400,000s.

Jay, Phoenix Realty Group is collaborating with the Genesis Workforce Housing Fund. Elaborate on that relationship and their double-bottom line private equity real estate fund. What exactly is a double-bottom line?

The term "double-bottom line" recognizes that there are both economic and social returns to investments in underserved communities. In the case of the Genesis Workforce Housing Fund, the investments are not just in low- and moderate-income census tracts. We are developing workforce housing for the people who serve these communities, so that they become an integral part of the growth and have a better quality of life.

The fund was conceived by the Genesis LA Economic Development Corporation, which continues to serve as our advisor, assisting with deal flow and project development. As you know, Genesis LA was started under Mayor Riordan and is now a private, not-for-profit organization. They also advises to Shamrock Holding's Genesis Real Estate Fund, which focuses on equity investments in low- and moderate-income census tracts for commercial, retail, industrial and mixed use projects.

In addition, Genesis LA serves as a private sector redevelopment consultant, working with cities, non-profits, developers and other stakeholders to make difficult projects financially feasible and to look at larger regional strategies for economic growth.

As fund advisor to the Genesis Workforce Housing Fund, they help to enhance our pipeline of deals by working on projects that might not be ready for an equity investment, as well as monitoring and quantifying the social benefits of the projects in which we are investing. Genesis LA has a long-term vision to not only bring private capital to urban areas but also serve as a catalyst for getting projects built and measuring both the economic and social returns to communities.

It would seem by the nature of your example and your mission that you would favor city inclusionary zoning ordinances. Is that the case?

It is our position that inclusionary housing policies in California have not been successful. In other communities and cities across the state, such policies have been adopted as a politically expedient way for elected officials to not have to deal with affordable housing issues that come before them. At the same time, it has provided a mechanism for a developer to pay a fee to not do the inclusionary housing. If you look at inclusionary housing from a housing production standpoint, it simply has not succeeded. In addition, inclusionary zoning has resulted in making new housing more expensive.

Obviously there are proposals before the city of L.A. right now for inclusionary housing, and the proposals are probably changing day by day. For any proposal to be successful, it will have to include significant incentives to the development community in terms of parking requirements, height bonuses, variances and related issues. The housing community is willing to build it, but taxing them is not an effective method. Providing proper incentives is the right way to do it. And if you don't want to give them those incentives on a project-by-project basis, then they shouldn't have to provide the inclusionary housing.

There are going to be a lot of very thoughtful proposals coming before both the City Council and the development community. But if we agree that the production of housing is the issue, and if we can incentivize production while still providing some flexibility to local communities and local electeds, then a positive result is achievable.

One last question, Jay. If the Los Angeles region is going to grow in population by two Chicagos in the next two to three decades, can demand be met project-by-project, even if they're smart projects? What else needs to happen to both meet demand and not undermine livabiity?

I've been spending a lot of time with our investors, and these are investors who are coming to Los Angeles from all over the country, and they ask me a variation of that same question. I tell them that on a project-by-project basis, we are making a private equity investment in a community, not just a project. And, what we look for is the public story-what is the public investment? What is the public participation? At Avenue 26, the public story is the billions of dollars that have been spent to put in a light rail station and change what was a hostile industrial zone into what will be a flourishing neighborhood and community.

You have to look at how the public sector is setting the table. We have an adaptive reuse rental project in downtown L.A. The public story is the adaptive reuse ordinance. There would not be the renaissance in downtown L.A. without it. It's the most successful urban planning tool in Los Angeles in the last 20 years. So, to the extent that there's leadership in the public sector to create opportunities and incentives for developers and investors to come in and change neighborhoods and make a difference, then you can change cities in a very short time. The impact of the adaptive reuse ordinance is proof of that, as is the amount of transit oriented development cropping up around our newly built metro lines.