Nonprofit firm sells shares to finance housing project
Nonprofit organizations trying to develop housing that is affordable to low-income families have almost always had a tough time raising funds, particularly in the last few years.
Now, however, more community groups are solving some of their money problems with a technique that has long been common with for-profit developers - equity syndication, or the selling of ownership shares in a project.
One nonprofit organization now using this creative financing method is Neighborhood Housing Inc., a New Haven, Conn., community organization that has renovated residences for low- and moderate-income people since the early 1970s.
Several years ago NHI secured a preliminary commitment of assistance from the Department of Housing and Urban Development (HUD) to restore more than 200 apartment units, twice the total number of dwellings it had done up to that time.
The group found, however, that it didn't have the financial clout to swing the project on its own.
Neighborhood Housing considered a variety of alternatives, but, according to the director, Stephen F. Darley, ''We looked at equity syndication and said, 'We'd be crazy not to do it this way.' ''
Selling ownership shares in the project to outside investors will bring in the cash needed to finish renovation work as well as provide the group with funds for future activities. ''It was an opportunity to make ourselves self-sufficient for a long period of time,'' Mr. Darley says.
After deciding to go the route of equity syndication, his group settled on the National Housing Partnership of Washington, D.C., to handle the complicated financial arrangements involved in the project.
Chartered by Congress in 1968, NHP is the nation's largest syndicator-developer of government-assisted new and restored housing. Up to now, only about 10 to 15 percent of its work has been done in cooperation with nonprofit groups, according to James Peerson, its director for the New Haven project.
NHP will sell ownership shares to well-to-do individuals, known as ''limited partners,'' who want to invest their money and shelter it from taxes without getting involved in a development's planning and day-to-day operations. Those responsibilities will be left to NHP and Neighborhood Housing as ''co-general partners.''
With the $2.2 million from the equity syndication, as well as $5.7 million in loan funds from the sale of tax-exempt bonds, the latter group will rehab 120 apartment units in 21 buildings. It expects to complete the work by November. It's now arranging a firm commitment of HUD assistance for the second phase of the project, which involves 96 units in 19 structures.
Some of the buildings were built during the early and mid-19th-century boom in New Haven's carriage-building industry; others date from the city's industrial heyday around the turn of the century.
The Connecticut Trust for Historic Preservation is seeking the listing of the neighborhood on the National Register of Historic Places, a step essential to NHI's plans for raising funds for the project.
After beginning to restore the first houses last August, NHI and NHP learned of the Connecticut trust's efforts to secure historic-district status for the neigh-borhood.
Since the tax incentives for renovating certified historic structures are even more valuable and attractive to investors, than those normally available for government-assisted housing renovation, the two general partners decided to redo their designs. That meant spending a large chunk of cash, not only on the new plans and specifications, but to hire a consultant to prepare paper work for historic certification of the properties and their renovation.
''Obviously we wouldn't do it if it didn't make economic sense,'' Mr. Peerson says. ''It makes sense to spend $100,000 if you're going to get back $200,000 to
The amount raised will depend on how many of the properties meet the certification standards. The project must be approved by the Connecticut State Historic Preservation Office and then by the US Department of the Interior.
Particularly difficult have been the requirements of the Connecticut Preservation Office for restoring the buildings' interiors, Mr. Peerson says.
''We were already under construction when we decided to seek historic certification,'' he adds. ''Our only regret is that we didn't start earlier on that process.''
If NHI and NHP obtain approval of 17 of the 21 properties in the first phase, the equity syndication will generate about $700,000 more than the total required for all the developmental costs and fees on the project. That amount is about $ 250,000 higher than what the two groups had expected when they began planning their joint undertaking. Forty percent of the net will go to Neighborhood Housing to help the group develop more units that are affordable to low-income families.
A number of other community organizations around the country are considering this creative-finance mechanism, according to Mark Weinheimer, director of the Inner-City Ventures Fund of the National Trust for Historic Preservation. More than half of the 18 groups that have received grants and loans from his fund plan to use equity syndication, Mr. Weinheimer says.
This new approach is less than a panacea for nonprofit groups, however. Equity syndicators have offered to raise large sums of money for community organizations, but in some cases those amounts were far less than what could have been generated, according to Michael Smith, an attorney with the California-based National Housing Law Project.
This organization held a series of seminars last summer to show neighborhood groups how to reap the benefits of equity syndication without compromising basic goals. ''The nonprofits must protect their interests,'' Smith says, ''while allowing investors to get what they want.''
As difficult as equity syndications may be to put together, the opportunity for nonprofit housing developers to raise funds to continue their activities can justify all the efforts required. Mr. Darley, the NHI director, asserts: ''When it's all over, we'll end up with $700,000 in syndication proceeds at a time when other, similar groups are getting cut back.''