Affordable Housing Institute : US

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4. Historic designation has negative value

If a building is a certified historic structure, any renovation requires approval by the state historic commission or state historic preservation officers. These folks have a charming ignorance of finance, a willful lacuna concerning the Law of Economic Gravity, a zealous commitment to historical accuracy regardless of cost … and they are unavoidable and unaccountable. There is no appeal, so one goes, hat in hand, to tussle with the historic purists who would rather nothing be done than that anything a-historical be done.

Meanwhile, of course, the Hotel Dartmouth sits vacant, dying of slow urban atrophy, as its renovation costs mount.

 

5. Historic renovation requires special incentives.

Fortunately, the situation is not completely unbalanced — here in the US, we have a federal historic tax credit (equal to 20% of certified historic costs), which provides a soft equity source typically worth 5-15% of total development cost.

Pause for brief Transatlantic rant: In Britain, they’re not so lucky — listed historic properties cannot be touched except with permission, and there is no counterbalancing tax credit or other soft equity source. Is it any wonder so many of them sit clogging up downtowns and thwarting mixed-use redevelopment schemes? Maybe they should have a tax credit of their own?

Nevertheless, despite the federal historic tax credit, the imposition of historic requirements plus the costs of engaging the mandarins of authenticity normally adds well more than that to the total.

Being historic costs money, as we will see when I show you the sources of funds.

 

6. Urban redevelopment implies mixed use

Though developed as a hotel, the Dartmouth is no longer suited to that purpose. Further, its location smack-dab in one of Roxbury’s busiest intersections means it requires retail and high-daily-traffic uses on the ground floor.

The upper floors, however, are inappropriate for retail (people will not walk up to stores, and it’s the devil’s own time getting them even to take escalators!). So they need to be residential.

The last major change in the building occurred in the 1970s, when its then-owner converted it into single-occupancy apartments.

For those of you not tuned into the lingo, ’single-occupancy apartment’ is a euphemism for flophouse,

a dwelling where poor single men (usually) lived in the minimally acceptable housing, all their worldly goods crammed into one small room.

More modern building codes and minimum property standards have driven the flophouse out of business, with the unintended consequence that homelessness has directly risen, and the government is now spending vast sums to create benign single-room-occupancy (SRO) facilities. (But that perverse outcome is a post for another day.)

Imagine, therefore, the challenges of scouring the rabbit-warren interior, putting in modern plumbing (and enough of it!), and generally restoring the upper floors to twenty-first century functionality:

The building, now restored to its 1871 design, had been coated in gray paint since the 1970s [Somebody painted gray over the marble! — Ed.], when it was converted to apartments, according to Evelyn Friedman, executive director at Nuestra Comunidad Development Corp., which owns and renovated it to accommodate first-floor retail space and upper-level affordable housing.

 

7. Affordability costs government money

Almost everybody agreed that the revived Dartmouth’s housing component needed to be predominantly affordable. Urban pioneers demand a continuing bargain element as the price of luring them back to grotty downtown, and that means there is a very large cost-value gap.

Affordability costs government money, lots of it.

Table 1 shows just how much:

Table 1

Dartmouth Hotel, Roxbury

Total external sources of funds, by funder

Amount in

It is customary, after delivering a massive shock, to provide a monolog of soothing words, to give the disoriented individual a chance to regain his bearings. So while the agog reader grapples with fourteen different external sources, herewith some soothing technical observations:

1. The transaction was wholly unsustainable without massive dollops of soft debt and soft equity. (More about this below).
2. Funding sources came from the private sector (foundations), public sector (City of Boston), and parastatals (e.g. MassHousing).
3. Several of the streams represent redirection of Federal block-granted funds (e.g. HOME, CDBG).
4. Several others (e.g. Affordable Housing Trust Fund, Neighborhood Reinvestment Fund) represent state-level ring-fenced pots of money established by the legislature as a kind of economic-prosperity linkage back into the neighborhoods.

And in general, cities must lead urban regeneration.

 

8. Use all the tools

From its beginning, the transaction had three core sources:

1. Hard debt, sustainable by financing Net Operating Income.
2. Soft equity from sale of Low Income Housing Tax Credits.
3. Soft equity from sale of historic tax credits.

Among them these three accounted for 63% of the costs.

But only 63%. A full 37% remain unfilled.

A developer is a scrounger with a financial dowsing rod –

“The affordable housing trust fund should be right under here.“

– if money can be found, the developer will find it. And since each of these minor pots was used to being the famous ‘last money in,’ the ‘but-for’ money as it is sometimes called, no one of them was very much money. So each was willing to put up maybe 5% of the cost, and it took a long time to pile up enough of these nickels to make the deal viable.

It will be no surprise, therefore, that even after optioning the building in 2001, the financing took almost three years to assemble:

Flame from lamp (A) catches on curtain (B) and fire department sends stream of water (C) through window. Dwarf (D) thinks it is raining and reaches for umbrella (E), pulling string (F) and lifting end of platform (G). Iron ball (H) falls and pulls string (I), causing hammer (J) to hit plate of glass (K). Crash of glass wakes up pup (L) and mother dog (M) rocks him to sleep in cradle (N), causing attached wooden hand (O) to move up and down along your back.

Continue reading in Part 3

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