By Jerd Smith
When Boulder’s Element Properties went shopping for a banker in the summer of 2014, it found instead a non-banker: Google.
Eighteen months later, in a deal that would involve dozens of attorneys, accountants, appraisers, a city official or two and a handful from a state-charted agency, Element closed on one of the largest public-private affordable housing deals in Boulder’s history.
The project, announced in December, allows Element to buy 238 apartments in three complexes: The Nest, in north Boulder, and Osage and Thunderbird, in south Boulder. Each unit will be extensively rehabbed and made permanently affordable.
It was financed largely by a low-interest, 40-year mortgage that Google funded through its investment partner Red Stone Tax Exempt Funding. The Colorado Housing and Financing Authority issued $41.7 million in tax-exempt bonds. It also allocated federal tax credits that were then sold to private institutional investors, raising nearly $20 million for the project. The city of Boulder threw in $11 million in cash.
If the deal proves easy to replicate, it will mean Boulder and other Boulder County communities may be able to preserve hundreds more apartments.
Element Properties said it is already in talks with the Red Stone/Google team about additional projects. Google spokeswoman Angie Welling declined to comment on any future plans her company may be considering.
For the moment, though, the project has eased Jeff Yegian’s mind. Yegian is director of finance at the city’s housing office.
Boulder loses hundreds of older apartments to the lucrative, for-profit housing sector every year, where they are redeveloped and rented for breathtaking amounts. The Element deal will save 238 apartments from that fate, ensuring forever that they will remain available to the city’s moderate and low-income residents.
“It is the largest acquisition of units in Boulder that were at risk of becoming unaffordable,” Yegian said. “That won’t happen here. That is notable and that will not change.”
When he heard that the apartments were up for sale and that Element was putting together a project team to acquire and renovate them, Yegian suggested that Element reach out to Red Stone. Red Stone, which handles millions of dollars Google dedicates to affordable housing, was allowed to bid on Element’s finance package.
Several commercial banks were interested, but when the dust settled, Red Stone won the bid, offering a 40-year, $30.5 million mortgage at 4.5 percent interest. Other lenders were willing to offer only a 30-year mortgage.
“We ran a competitive process,” said Kevin Knapp, Element’s director of development. “And Google and Red Stone had the best terms. If we had been able to identify a lender that could have provided better terms, we would have used them.”
In addition to the public relations bonanza the deal has generated, Google also will be paid $1.8 million annually in interest and principal payments on the mortgage and will receive tax benefits as well, Knapp said.
Red Stone and Google have done similar deals elsewhere, investing in 48 properties in 44 cities.
Across Boulder, residents are watching warily as the tech giant expands. Its new corporate center, at Pearl and 30th streets, set to be complete next year, will eventually employ up to 1,500 people. To mitigate some of that impact, it is seeking a more active role in the city’s housing arena.
Brian Renzi was Red Stone’s lead in Boulder. He said his firm is continually shopping for places to do affordable housing deals.
“If another one comes along,” he said, “we would love to do it.”
The Red Stone/Google mortgage and construction loan was only one piece of the puzzle. It was Boulder’s decision to provide $11 million in cash — a down payment other financial institutions considered critical to the deal — that allowed the project to move forward. Funded from the affordable housing fees the city charges developers, the grant came with significant strings:
• A requirement that the properties remain affordable and rent-restricted “in perpetuity.”
• A requirement that the grant be structured as a loan, so that the city can foreclose on the project, should it fail.
• A stipulation that Element wait to receive most of its $1.8 million development fee until the project is finished.
Chris Johns is an expert on tax-exempt bonds and managing director and senior vice president at Kirkpatrick Pettis Capital Management in Denver.
Johns said this project likely came together in part because interest rates are low and the stock market is volatile, leaving institutional investors with few options for generating solid returns.
With dozens of cities facing an affordable housing crisis and voters disinclined to raise taxes, such deals, especially in Colorado, are gaining traction, he said.
“The concept of the public-private partnership is one that will become more popular as we move forward, especially in a state like Colorado, where it is difficult to get traditional public financing.”
When lights in the renovated apartments turn on sometime next year, 238 one- and two-bedroom apartments will be available to families earning $44,700 to $53,700 a year.
Whether the rents will be too high is a concern among residents and policy makers.
The newly rehabbed units will cost a maximum of $1,119 for a one-bedroom unit, and $1,342 for a two-bedroom, including a utility allowance. But Knapp said the project assumes Element will charge just 90 percent of that.
Rents can change annually, based on changes in the area median income (AMI), a benchmark set by the federal government.
Cris White, executive director of the Colorado Housing and Finance Authority, which issued the bonds and allocated the tax credits, said he expects the interest among private investors in such deals to continue, ensuring liquidity in a market that has often struggled to find financing.
Just five years ago, similar federal tax credits, for instance, were selling for 60 cents to 85 cents on the dollar, Knapp said. When the credits issued on this project were sold, due to high demand, they commanded a premium, selling for a $1.10.
“It allowed the project to come together,” Knapp said. “If the pricing had been at 70 cents, the project would not have worked or we would have had to get more financing from someplace else.”
Across the county, less affluent cities than Boulder also are searching for ways to create more affordable housing. In Longmont, for example, affordable units have to rent for less than they do in Boulder because people there earn less.
“It’s hopeful that the private sector is participating,” said Kathy Fedler, Longmont’s housing and community investment manager. “Typically it’s banks doing this kind of financing, so to see the ranks of those who are willing to do this expanding, is also important.”
Fedler said she hopes Google is willing to expand its efforts countywide, in cities that have less cash to contribute but an equal need to that of Boulder’s.
“We can’t lose sight of the fact that we’re in a regional market,” Fedler said. “What Boulder does helps us, and what we do helps Boulder. Google could invest in Longmont. We will definitely see some of their folks living here.”
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