What's Happening at Clarendon Hill?
Update 1: Letter to the Board of Aldermen Regarding the Home Rule Petition
CONTEXT
Public housing is not something that for-profit developers want to build because it is not profitable. However, the Clarendon Hill units need to be rebuilt. So it is common today for Housing Authorities to partner with a for-profit developer to get these things done. It usually results in a complicated arrangement where there are market-rate units (so the developer can make a profit) and a range of kinds of affordable units.
ABOUT THE DEVELOPER
There is a development team that is collectively the developer. The three players on the developer team are Gate Residential (a for-profit entity that isa subsidiary of the firm called Redgate), the non-profit Preservation of Affordable Housing (POAH), and non-profit Somerville Community Corporation (SCC). Somerville Housing Authority (SHA) selected this developer team’s proposal after releasing a request for proposals in April 2016.
The developer team has outlined their roles as follows:
- POAH will be the primary point of contact for SHA and residents, lead of securing resources for affordable housing component
- Gate Residential will be the lead on securing resources for market-rate housing
- SCC will be lead on resident and community engagement
BUILDING/FINANCING
There are 4 "blocks" of housing being built.
Blocks A + B built first - 300 units (254 market rate, 46 replacement public housing) are being built by Gate Residential. They are funding the project through private equity (the private equity is being put forward through Redgate partners and employees and an institutional equity investor CrossHarbor). The private equity will be 35% and construction debt will be 65%.
Blocks C + D built second - 226 units (170 units of replacement public housing, 56 units of moderate/workforce housing) are being built by POAH. They are funding this portion of the project through: low-income housing tax credits (LIHTC), an estimated ~$15m that Redgate will generate from the market-rate units in Blocks A + B, MassHousing Workforce Funds, $10m from City of Somerville, $17 million from federal government in form of Project Based Vouchers, etc.
*these unit breakdowns are from the original proposal draft and have likely changed somewhat.
- Tenants rights--worried about relocation, right of return, transportation. The tenants organization (CRU) needs to sign off before the project will move forward. Expected to happen before the end of the month.
- Immigrant rights- $17m from federal government in form of Project Based Vouchers will mean that any of the units that has a project-based voucher will not be eligible for undocumented immigrants. Some people are saying we shouldn't take the federal money so that more units will be available to undocumented immigrants.
- Workers rights - want the prevailing wage rates to apply to this project, so that union contractors will be able to compete for the bid to be a contractor on the project.
- on all publicly funded projects prevailing wage rates apply
- prevailing wage requirements are outlined in MA Law Ch. 149
- Red Gate was the developer for the Maxwell Green/Max Pac site and had a poor track record for workers' rights at the site
- Privatization - POAH will now own the vast majority of the formerly public housing units. Uncertain what that means in the very long term. Approximately 15 units will also be in a building owned by a for-profit developer.
- Precedent - in Somerville for how to deal with aging public housing. Run down public housing is providing a huge profit for a private developer.
THE HOME RULE PETITION
The developer team is seeking to pass a home rule petition as the next phase of this project. It will be introduced at the Feb. 22 Board of Alderman meeting. The main points of significance to us in the petition are the following.
· It would support the developer’s assertion that Redgate’s portion of the project is not subject to prevailing wage. The reasoning for this is presumably that Redgate believes they are not receiving any federal or state monies to build their portion of the project.
· Redgate and POAH are asking for an exemption from the Ch 121B law that says state subsidies for public housing flows to the housing authority. They are asking to receive the state subsidies for the public housing units even though they are private entities.
SUMMARY
The parts of the project that are considered applicable (Blocks C + D, which are POAH’s portion) would follow the prevailing wage requirements (workers are paid along same rate of what union workers are paid). Blocks A + B, Redgate’s portion, would not be considered applicable to sections 26 through 27H of chapter 149.
Redgate’s portion, Blocks A + B, would not be subject to section 39M of Ch. 30. This law states that public construction projects have to follow open bidding guidelines (i.e. can’t just give contract to the contractor they have a relationship with and/or are required to give contract to “lowest eligible responsible bidder”).
Both Redgate and POAH would get an exemption from ch121B that says that state subsidies for public housing units will flow between the state and the housing authority. Redgate and POAH would receive the state subsidies for the public housing units they’re operating. POAH and Redgate would enter into a binding contract and land use restriction with the SHA and DHCD that requires them to preserve the state-funded public housing units and operate them in compliance with the tenant regulations of Ch121B (waive rent if there is financial hardship, house people with mental disabilities, make it hard to evict people, etc).
PETITION LANGUAGE
Be it enacted by the Senate and House of Representatives in General Court assembled, and by the authority of the same, as follows:
SECTION 1. Construction and development activity related to redevelopment by the Somerville Housing Authority of the state-funded Clarendon Hills public housing project at 34 North Street in the City of Somerville, or any part thereof, shall not be subject to any general or special law related to the procurement and award of contracts for the planning, design, construction management, construction, reconstruction, installation, demolition, maintenance or repair of buildings by a public agency, but shall be subject to Section 26 to 27H, inclusive, of chapter 149 of the General Laws to the extent applicable. Contracts for the construction, reconstruction, alteration, remodeling, or repair of any publicly-owned public works that service this project and that would otherwise be subject to section 39M of chapter 30 of the General Laws shall be subject to said section 39M of said chapter 30 if the redevelopment of the project is funded, in part, by a state or federal low-income housing tax credit, grant, or loan, or pursuant to the issuance of tax-exempt bonds authorized by law. The redevelopment of the project may be conducted through one or more phases through one or more entities. All phases taken together shall preserve or construct state-funded public housing units equal in number to the state-funded public housing units located at Clarendon Hills Apartments on the date hereof. Each individual phase will include such portion of the total state-funded public housing units as required by the Somerville Housing Authority and the department of housing and community development. Any conveyance of the project and/or any phase thereof by the Somerville Housing Authority shall be subject to chapter 30B of the General Laws to the extent that the project, or any phase thereof, is conveyed to an entity that is not owned, controlled or managed by the Somerville Housing Authority on the date of the conveyance. Subject to compliance with the requirements of chapter 30B, the project and/or any phase thereof, may be conveyed to and may be owned, maintained and operated by an entity that is not owned, controlled or managed by the Somerville Housing Authority provided that such entity enters into a binding legal contract and land use restriction with the Somerville Housing Authority and with the department of housing and community development that requires such entity to preserve and/or construct the required portion of state-funded public housing units for that phase, or those phases, and operate such units subject to compliance with chapter 121B of the General Laws and 760 CMR §§ 4.00 et seq., 5.00 et seq. and 6.00 et seq. in the same manner and to the same effect as if such entity were a housing authority, subject to such regulatory waivers given by the department of housing and community development as may be necessary to secure financing.
SECTION 2. This act shall take effect upon its passage.
OUR ESTIMATES OF REDGATE'S POTENTIAL PROFIT
ORS members worked in collaboration with representatives from the Carpenters Union to come up with an estimate of Redgate's potential profit.
To calculate these estimates we used the documents entitled "Clarendon Hill - Summary Budget" and a draft of POAH's operating budget. We do not claim that these estimates are precise, but that they point to the need for more research to be done.
We estimate that once buildings A & B are fully occupied, Redgate will have the opportunity to sell them for $125 million. In other words, one or two years after earning $2.9 million at the closing, Redgate is likely to sell the two buildings for well over triple Redgate’s total investment of $33.2 million.
I. Gross Revenue … for 300 units (not 278)
- studios … 30 units X $2016/month = $60,480
- one bedrooms … 180 X $2471/month = $444,780
- two bedrooms … 75 X $3092/month = $231,900
- three bedrooms … 15 X $3226/month = 48,390
Total = $785,550/month
Assumptions: We rely here upon the underwriting assumptions & unit breakdown of POAH's operating budget (attached) recognizing that the current “scheme” – which is not available to us -- may utilize 278 units with a different apartment mix. Similarly, without a pro forma, we rely upon Google-derived data for rents, assuming that all the units are market-rate.
II. Revenue Less 5% Vacancy ($39,277.50) = $746,272.50/month
III. Total Annual Income = 12 X $746,272.50 = $8,955,270
IV. Expenses (300 units X $9,000/unit – POAH Building C: $8700/unit) = $2,700,000
Assumptions: POAH estimates total expenses in Building C at $8755/unit. We do not believe that expenses in Buildings A & B will be greater but will use $9,000/unit.
V. Net Operating Income (Total Annual Income Less Expenses) = $6,255,270
VI. Market or Trading Value with a 5% cap rate = $6.8 million / .05 = $125 million
Assumptions: Multi-family buildings in the greater Boston area are trading now with cap rates in the high 3’s. It is very reasonable to attribute a cap rate in the .0475 to .05 range to the market-rate buildings.