Nonprofit groups that team up with profit-motivated investors in joint ownership of low-income housing increasingly are mastering the arcane world of real estate syndication.
Although nonprofit groups often were passive syndication partners and were losing control of this housing just five years ago, nonprofits now usually attain their own goals for financial return and at least partial management control, often as co-general partners, according to experts at a conference this week sponsored by the National Housing Law Project.
In the Washington area, nonprofit groups such as Arlington Housing Corp., Columbia Interfaith Housing Corp. and Jubilee Housing have used, or will use, syndication to raise more than $4.2 million to subsidize their housing programs, while investors reap tax benefits from their participation.
"For a nonprofit that needs additional capital and as alternative subsidy dries up, this can be the way to go," said Michael G. Smith, chief tax counsel with the Law Project, which is based in Berkeley, Calif. The Law Project helps nonprofit groups to avoid the pitfalls of syndication and warns that syndication isn't workable for every project.
In all three local cases, careful negotiations were held with the investors to ensure some continuing control by the nonprofit sponsor and to maintain the housing indefinitely for low-income residents.
Now, however, while the single-family-housing market is booming, a big slowdown has hit low-income-housing syndication. The reason is the ongoing bickering in Congress over tax-revision legislation. The House already has passed a bill that effectively would eliminate the use of housing tax shelters by most wealthy investors.
The uncertainty has killed many prospective syndications. Arlington Housing Corp. tried unsuccessfully for 18 months to negotiate its third syndication sale, of the 152-unit Westover apartments, but was stymied, according to Lou Ann Frederick, the group's director.
The potential syndicator asked the Arlington group to bear the risk of tax law changes by foregoing some investor payments if adverse changes occurred in the law. "But we needed all of the [$1.5 million to $2 million] we were scheduled to get," Frederick said. Eventually, a tax-exempt loan through the Virginia Housing Development Authority was used. The Westover is now undergoing rehabilitation.
Another syndication that has yet to be completed is the sale by a church group of Paradise Manor, a 672-unit development in Northeast Washington.
Without the tax-bill turmoil, the sale would have been completed early this year, generating an estimated $3 million for repair of the dilapidated units, according to Marilyn Melkonian, president of Telesis Corp., which gives technical and legal help to nonprofit groups involved with syndication.
Melkonian said she expects the Paradise Manor sale to proceed later this year, once certain tax-law changes are clarified.
Even in the midst of the present tax uncertainty, some investors remain interested. The low-income-housing syndication market is hobbling but not crippled, according to Mark Sissman, director of Enterprise Social Investment Corp., a subsidiary of the Enterprise Foundation, which helps small nonprofit developers raise capital.
"Corporate investors we talk to invest because of their positive relationship to the community," Sissman explained. They "share the vision of the social good you're doing."
Frederick said that the Arlington group hopes to begin to amass an equity investment fund from Arlington corporations. "With all this office development in Arlington, we hope to hook up with new businesses, get them to invest in having a healthier community," she said.
Law Project attorney Daniel D. Pearlman said maintaining nonprofit ownership of the land and leasing it to the partnership buying the buildings is one of the most effective ways to retain control of the use of the housing. This can ensure long-term use as low-income housing, for instance, avoiding future condominium conversion unless that is the only economic option.