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July 24, 2023 Deal Watch

Prolific affordable housing builder tools up to buy older stock

PHOTO | COSTAR The Hollander apartments building at 410 Asylum St., in downtown Hartford.

Hundreds of thousands of apartments built across the country decades ago with federal assistance will exit affordable housing restrictions over the next five years, raising concerns among housing advocates.

But Philadelphia-based affordable housing developer Pennrose sees the trend as an opportunity, and has created a new business arm to scoop up a share of the units falling out of restrictions.

The new company, Contour Housing Partners, could get its first test in downtown Hartford. It’s under contract to buy the 70-unit “Hollander” apartment building on Asylum Street, with plans to significantly renovate the property and maintain its affordable units by leveraging government grants, loans and a tax abatement.

Launched in 1971, Pennrose has built 350 developments with more than 27,000 apartment units. Most of these have been affordable, developed with subsidies from local and state grants and the critically important federal Low Income Housing Tax Credit (LIHTC) program.

The LIHTC program was created in 1986 and has, since 1990, required that all sponsored projects retain their affordable units for at least 30 years. Three decades later, a growing roster of apartment buildings and complexes are falling out of restrictions.

Other buildings, like the Hollander, are approaching the 15-year “initial compliance period,” opening them up to grant-funded updates and changes in operations even as affordability requirements remain in force.

Pennrose launched Contour 18 months ago to buy, retool and run properties exiting both the initial 15-year restrictions and the more stringent 30-year affordable housing period.

Dylan Salmons

“During the last five-plus years we have been very much aware of the aging portfolio of affordable housing nationally,” said Dylan Salmons, a regional vice president and partner at Pennrose. “There will be hundreds of thousands of units coming out of affordable housing restrictions in the coming years. There is an emerging market of people working in that space, raising private debt and equity to acquire and invest in these properties.”

Pennrose, a for-profit company, wanted a new entity spearheading its efforts to acquire and revamp existing buildings, which is a substantially different task than building new, said Salmons, who is Contour’s president.

Contour currently has agreements to buy four affordable housing properties, Salmons said. The Hollander, located at 410 Asylum St., is slated to be the first.

The former office building was converted to apartments in 2009 by New York nonprofit Common Ground, which has since changed its name to Breaking Ground.

Salmons said Contour expects to close on its $1.5 million purchase of the property in August, then immediately dive into $350,000 in repairs.

The Hollander will be eligible for government grants and loans for more dramatic improvements in another three years, he said.

At that time, Contour will seek to renovate or replace major systems, the roof, windows and other big-ticket items.

This is contingent on the city of Hartford approving a 10-year tax abatement with the current property owner.

Mayor Luke Bronin has submitted a tax abatement proposal to the City Council. If it gains approval, Contour would commit to the purchase, renovations and maintain the property as affordable housing.

Molehills, not mountains

According to the National Housing Preservation Database, 327,565 publicly supported rental units nationally will see affordability restrictions expire in the coming five years.

During that same time period, 42 Connecticut properties with 1,183 rental units will see their affordability restrictions disappear as they age out of federal tax credit and Connecticut Housing Finance Authority financing restrictions, according to Pasquale Guliano, CHFA’s managing director of multifamily.

But that doesn’t mean all those units will lose their affordable status, Guliano said.

That’s because about a decade ago, Connecticut imposed a 40-year lock on affordability restrictions on all new projects supported by tax credits. Also, most affordable housing developments will have tapped into government support for renovations and “recapitalization” before hitting the 30-year mark, at which point affordability restrictions would have been extended, Guliano said.

Guliano said Pennrose has an extensive history as a quality affordable housing developer in Connecticut.

The company recently completed a 60-unit “workforce housing” complex on the Naugatuck River in Torrington. It’s also rebuilding an affordable housing development in Hartford’s North End, called the “Village at Park River,” which is expected to yield 412 residential units.

“They do good work,” Guliano said.

Salmons said the affordable housing space has seen an influx of interest from developers and investors because it offers a stable option, typically with lower vacancy rates and predictable expenses.

Contour is using its own capital to acquire and upgrade the Hollander apartments, but the company plans to raise investor funds for future deals, he said.

“We are offering the opportunity to work with a sponsor who knows the product inside and out by virtue of our ownership of 300-plus communities of this composition,” Salmons said.

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