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When Disaster Strikes – Developers Can Fill Acute Housing Needs


Key Takeaways

  • Disaster recovery funds are often used to develop affordable housing through existing housing programs such as the low-income housing tax credit and Community Development Block Grants.
  • Since there is no way to know where or when the next storm will strike, it is important that developers react quickly to a state’s rebuilding efforts in response to meeting natural disaster-caused housing needs.
  • To provide housing quickly, state disaster recovery efforts often support housing developments that are already underway.
  • Developers should be aware of opportunities to adaptively re-use or re-purpose existing buildings.

Fall 2013

Natural disasters such as floods, hurricanes, or tornadoes can instantly damage or destroy literally thousands of homes, creating an immediate and widespread need for new, affordable housing. In the aftermath of such disasters, affordable housing developers are often at the forefront of these urgent redevelopment efforts, having both the experience and specialized expertise in accessing federal disaster funding.

Case in point

This past August, as part of the multibillion-dollar effort to build new affordable housing to replace homes destroyed by the floodwaters and high winds of Hurricane Sandy in October 2012, New Jersey state officials reserved funding for 64 new affordable townhouses and apartments at the Glennview Townhouses in Jersey City, N.J. This was accomplished by accessing and deploying millions of dollars in Federal disaster recovery funds.

“These funding awards will enable us to build communities that also spur economic activity and create jobs for these important urban areas,” said Joel Silver, Regional Vice President for Michaels Development Company.

In the race to replace damaged or destroyed housing, federal funding often goes to development plans begun long before disaster strikes. Glennview, for example, is the final stage of the redevelopment of the Lafayette Gardens public housing community, which had been in the works for more than a decade prior to Hurricane Sandy. Since the planning and construction of a new affordable housing development project can take three or more years, allocating funds to speed up existing projects like Glennview very often turns out to be the fastest tried and proven method for state officials to replace some of the housing destroyed by a natural disaster.

Federal money flows through state agencies

After a natural disaster strikes, the federal government funnels much of its redevelopment funding through state agencies and local programs. After Hurricane Sandy, Congress approved a total of $16 billion in Community Development Block Grant (CDBG) Disaster Recovery Funding for fiscal year 2013, though this amount was immediately reduced to $15.18 billion by mandatory “sequestered” federal budget cuts. These CDBG funds are just part of the $50 billion Disaster Relief Appropriations Act of 2013 signed into law by President Obama on January 29, 2013. This legislation also addressed numerous immediate post-disaster recovery needs such as emergency housing and transit repairs.

New Jersey is distributing $180 million of its CDBG money through its Fund for Restoration of Multifamily Housing. Affordable housing developers can apply for extra funding for projects in the nine New Jersey counties hardest hit by the Hurricane: Atlantic, Bergen, Cape May, Essex, Hudson, Middlesex, Monmouth, Ocean, and Union. The hurricane destroyed or damaged 72,000 homes and businesses in the state, according to New Jersey officials.

Officials have announced awards for 34 developments through this program, including apartment buildings in Atlantic City, Pleasantville, Cape May Court House, and the Rio Grande section of Middle Township. Nearly 2,550 apartments in the nine counties most affected by Sandy will be created if all projects are constructed and the fund will reserve $20 million to repair damaged public housing. New Jersey will also distribute $25 million through its Sandy Special Needs Housing Fund, supporting rental housing development for people with special needs.

The New Jersey Housing Mortgage Finance Agency (HMFA) also dedicated a significant portion of the low-income housing tax credits (LIHTCs) earmarked for distribution in 2013 to finance affordable housing developments like Glennview that are located in the nine counties most hurt by Sandy.

In addition, Congress often allocates additional LIHTCs to the disaster areas struck by hurricanes or tornados, although that hasn’t happened yet in the case of Hurricane Sandy. In spring 2013, a bipartisan coalition of Congressmen led by Rep. Bill Pascrell (D-N.J.) also proposed an increase in LIHTC authority plus extra New Markets Tax Credit authority in the Sandy disaster area. However, the Hurricane Sandy Tax Relief Act of 2013 has been stalled in committee since May — a victim of the same budget battles that shut down the government in October.

Affordable housing can be a true “knight in shining armor” – especially when disaster strikes

Congressionally allocated funds have made it possible to create new affordable housing in places where new development seemed almost impossible. By February 2014, workers are expected to start construction on a plan to transform the Clarion Hotel and Convention Center from a 200-room hotel and a 15,000 square-foot convention center into 83 new apartments affordable to low-income residents.

Long before Hurricane Sandy struck the New Jersey coast, the mayor of Egg Harbor Township, N.J., contacted Renewable Jersey, an affordable housing developer, to potentially build a supportive housing property for homeless veterans on a wooded, six-acre site in one of Egg Harbor’s residential neighborhoods. Renewable Jersey worked for eight months to re-zone the site for development until the deal fell apart because of local opposition in the fall of 2012. Two thousand people signed a petition opposing the zoning change.

The Clarion Hotel and Convention Center offered a new and less controversial option in providing affordable housing. Towns have an obligation under New Jersey’s constitution to allow the construction of a certain amount of affordable housing. This obligation is sometimes litigated in court. “Fortunately, working with the town, we were successful in reaching a resolution to provide the first new affordable housing project in Egg Harbor Township,” says Ron Rukenstein, a developer with Renewable Jersey and CohnReznick client.

Then, Hurricane Sandy struck in October 2012. The storm tore stone from the flat roof of the Clarion, along with heating, ventilation and air conditioning systems, resulting in heavy water damage to rooms on the sixth floor. Like Atlantic City five miles away, the Clarion had already been hurt by the Great Recession and competition from new gambling and vacation destinations in nearby Pennsylvania and Delaware. “It’s fair to say it was a languishing hotel. However, it is a large building in a prime location. The availability of state funding gave the building a new, useful purpose and provided us a chance to adaptively reuse the space so that we could offer replacement housing for those displaced by the storm,” says Rukenstein.

Soon after the hurricane, however, Renewable Jersey saw an opportunity when it became clear that New Jersey officials had numerous counties that needed help and would dedicate a significant amount of the state’s LIHTCs to those areas most damaged by the storm. Demand was high in the area for housing affordable to low-income people and the hurricane only served to compound the high demand. That’s when local public opinion began to shift. Residents who had previously opposed Renewable Jersey’s proposal to build a new supportive housing community seemed much less upset by their new proposal to reuse the existing building to lessen the burden and fill the growing need for housing.

Since the hotel’s site did not flood during the storm, the property had no significant problems with its property insurance rates, nor was damage to the hotel significant enough to shut it down. In fact, the property will continue to operate as a hotel until the construction process forces it to close.

After the Egg Harbor Hotel Conversion was announced, people with a desire to live at the property immediately began to contact the developer. A market study for the Renewable Jersey project demonstrated that the property had a very strong capture rate of 1.5 percent. This meant that the property would reach maximum occupancy if just 1.5 percent of the eligible families in the nearby vicinity elected to move in. Market experts state that demand for a housing property is strong if it has a capture rate of 5 percent or lower.

Egg Harbor Hotel Conversion will likely receive $16 million in equity from the sale of 9 percent LIHTCs. The state also awarded the planned development a $5 million grant under the Fund for Restoration of Multifamily Housing. That funding would have been unavailable if not for the hurricane. However, the grant came with a cost. The Fund for Restoration of Multifamily Housing receives its capital from the Federal CDBG funds Federal CDBG requires developments using the grants to pay construction workers the prevailing wage for the local area, as set by the U.S. Department of Labor. The prevailing wage is generally close to the wages paid to union workers. By the end of 2014, the project should be finished, providing much needed housing and helping its community heal from disaster.

Contact:

For more information, please contact Beth Mullen, Partner and Affordable Housing Industry Practice Leader, at beth.mullen@cohnreznick.com or at 916-930-5750.

For more information on CohnReznick’s Affordable Housing Industry Practice, please visit our webpage.


This article was distributed as part of the Fall 2013 Affordable Housing News and Views newsletter.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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