Portland housing developers struggle to meet market needs

A walk down Pearl Street in Portland's Bayside neighborhood produces sights and sounds of bulldozers moving frozen earth and contractors laying a building foundation. The activity highlights what has been the thrust of Great Recession-era housing projects in the city — affordable housing, fueled by government subsidies.

Avesta Housing, New England's largest nonprofit affordable housing developer, is building the second phase of its Pearl Place project at Pearl and Lancaster streets, says CEO Dana Totman, adding dozens of units of income-eligible housing with WiFi, security and on-site laundry, to the existing 60 units.

The development adds to the nonprofit's expanding portfolio in Portland. Avesta recently completed the affordable Oak Street Lofts in the city's Arts District. Those units are being marketed to artists as live-work space. The nonprofit, which built residential treatment facilities for the homeless such as the Florence House and Logan Place, also plans to break ground this spring on 16 townhouse condominiums on Munjoy Hill.

"We like doing innovative, niche-type housing," says Totman. "There are too many people living in sub-standard housing or paying too much of their income [for housing]. There is a fundamental mismatch to what our housing supply is to what our population requires."

But affordable housing construction belies two big housing developments that are putting Portland on a path to experience something unusual in recent years — an influx of new, market-rate units.

More than 600 market-rate units are on the fast track to break ground in 2012. Hundreds of market-rate units are being planned for Bayside, a former industrial area near Interstate 295 in the middle of a makeover guided by community-based planning efforts. Construction on another 100 units in the India Street neighborhood is expected to break ground this spring.

Greg Mitchell, the city's economic development director and acting director of planning, says he is encouraged by the number of market-rate units in the pipeline.

"It's a very exciting trend," says Mitchell. "We're experiencing growth in our residential units that are market rate."

The Miami-based Federated Cos. is currently planning a mixed-used development on more than three acres of land on Somerset Street. That project, dubbed Maritime Landing, is expected to include more than 500 market-rate units in addition to retail and office space.

Suzanne Tamargo, Federated's vice president of marketing, says she expects the company to have a master plan ready in the next two to three months. Mitchell says he expects to be able to announce the details of a public-private partnership at that time.

Developers of the Bay House, Village at Ocean Gate, are planning to break ground on their India Street project this spring.

Gordon Reger, a Massachusetts-based developer and partner in the project, said earlier this year the project would bring more than 100 market-rate apartments to the site of the former Village Café restaurant at Newbury and Hancock streets. That development is expected include first floor retail and restaurant uses.

Both Maritime Landing and Bay House are under contractual guidelines with the city to get under way this year, or they could lose their development options.

Federated Cos. currently has a purchase-and-sale agreement for 3.25 acres of city land that requires the project to be fully permitted this year. Both the company and city are confident construction will begin in 2012.

The Bay House, meanwhile, has a contract zone set to expire in September unless construction on the $30 million project begins. That zone has already received the maximum time extension from city policymakers.

Mitchell notes the new market-rate housing will complement three other fully developed projects at near full occupancy: 645 Congress, 153 Sheridan St and condos above the new Hampton Inn. The housing — coupled with the city's strong creative economy, tourism industry and educational institutions — position Portland to attract young, talented professionals.

"This is in line with the direction we're trying to take this community in terms of attracting youth [and] creative economy entrepreneurs — highly educated folks who have the means to live and work anywhere," says Mitchell.

Market-rate need

Private developer Greg Shinberg of Shinberg Consulting says there is currently a need for market-rate housing in the city. Portland's housing stock is some of the oldest in the country. With foreclosures at an all-time high, many families are seeking rental housing in the city.

A lack of quality market-rate housing, says Shinberg, often deters young professionals from moving to Portland.

"Attracting a 35-year-old young professional is hard to do in Portland because they would come here and get frustrated with the very high price of housing … surprisingly higher prices because of the limited supply," Shinberg says.

Shinberg was a partner in the 645 Congress development, which he says has revitalized the area of Congress Street buffering the high-income West End from one of the city's low-income, diverse neighborhoods in Parkside.

Shinberg also developed a new residential condo development on Sheridan Street on Munjoy Hill. It took two years to sell all 20 units, he says, noting that empty nesters and young professionals were largely the buyers.

With lending frozen for condo projects, private developers say there are few opportunities to build market-rate rental housing in Portland on a large enough scale to make a profit. Additionally, smaller market-rate projects often compete with new affordable-housing units, which are priced about $150 to $200 per month lower than market rate and include heat and hot water as well as amenities like WiFi, onsite security and laundry.

"It's very difficult to make market-rate apartments work from the ground-up standpoint," says Shinberg. "[Affordable-housing projects] have heavy subsidies, which help to make it financially feasible when you're spending $250,000 a unit. If you were to rent that in a typical market rate, you'd have to get such a high rent it would not be financially feasible."

While acknowledging that affordable-housing projects are important and meeting a need, he adds, "[private developers] cannot compete with those subsidies."

MaineHousing subsidies

The primary driver of affordable-housing projects is the Maine State Housing Authority's Low Income Housing Tax Credit program, which provides tax incentives over a 10-year period to encourage people to invest in affordable housing.

These subsidies are used to keep housing costs at an affordable rate, generally considered to be about 30% of household income. A recent survey by the Maine Affordable Housing Coalition shows a significant need, indicating that 86,000 low-income families in Maine spend more than 50% of their income on housing

MaineHousing receives about $3 million a year in LIHTC from the Internal Revenue Service, leading to about $20 million in subsidies annually.

Maximum rents for LIHTC projects are set by the U.S. Department of Housing and Urban Development. In 2011, the rent limits were $760, $814, $976, $1,128 and $1,258 for an efficiency, one bedroom, two bedroom, three bedroom and four bedroom, respectively, in Maine.

Those units can only be leased to families earning less than 60% of the area median income. In Portland in 2011 those qualifying income levels were: for a single person, $40,500; a couple, $46,300; three people, $52,100; and four people, $57,850.

Bill Glover, MaineHousing's lender manager, says the agency also has the authority to issue tax-exempt housing bonds, providing additional tax credits above the tax-credit allocation, which is capped by the IRS. In recent years, MaineHousing has refinanced those bonds to take advantage of lower interest rates, says Glover, creating an additional $11.2 million in funding for 2011.

"Projects financed by the proceeds of these housing bonds are eligible to receive tax credits without having to compete for the scarce annual allocation," Glover says.

While some developers believe these additional funds, known as 4% automatic tax credits, are drying up, Glover says the availability of these funds depends on interest rates and policymakers.

"Our ability to generate these resources in the future is limited by two things," says Glover, "the spread between today's rates and those of 10 years ago, and the consent from our governor to issue additional tax-exempt bonds."

Subsidies' impact

Subsidies have fueled affordable housing developments since the economic collapse of 2008, when the housing bubble burst and lending requirements tightened. The lending market for new, market-rate condos is so tight that one developer, Village at Ocean Gate, had to convert a condo plan in the India Street neighborhood into apartments, solely because lenders would not finance a condo project, says Reger, the developer.

Another planned condo project at Danforth and High street is now being considered as an affordable senior-housing project. Ryan Cullen, executive director of the nonprofit Community Housing of Maine, says that project proposes 30 units for folks 55 or older, whose incomes range from one person making $25,350 a year to five people making $46,860 a year. The per-unit cost of the $5.4 million project is expected to be $180,000, says Ryan, indicating the nonprofit is seeking the 4% tax credits, not LIHTC funds.

CHOM recently broke ground on a controversial $10 million affordable-housing project called Elm Terrace, which received more than $730,000 in LIHTC. The initial per-unit cost of that project, which involved the preservation and renovation of a historic building, touched off a political firestorm about how affordable-housing funds are distributed. (For more, see "MaineHousing eyes changes to affordable housing," this page.)

Avesta has several affordable-housing projects under way. The $11.4 million Pearl Place is the state's first LEED-certified affordable-housing project. Phase I is rented with a waiting list of 60-70 people. Avesta is building the $12 million second phase of that project at Pearl and Oxford streets, and expects to be finished by January 2013.

Nearly a dozen people moved into the 400-square-foot Oak Street artist lofts in the Arts District within the first few weeks they were offered, says Totman, and Avesta is planning to break ground on a residential condo project at the former Adams School site on Munjoy Hill that received a one-time allocation of $1.7 million from the American Recovery and Reinvestment Act.

Unlike Pearl Place and Oak Street, the Adams School condos are not being subsidized by MaineHousing's LIHTC program, so the project is not bound by low-income guidelines. Avesta Development Officer Seth Parker says the units will be marketed to families who make less than 120% of the area median income. A family of four making about $80,000 a year would qualify for the two- and three-bedroom units, he says.

New trend?

Mary Davis, Portland's housing director, says she doesn't believe the amount of market-rate housing in the pipeline signals a shift away from affordable-housing projects in the city. Instead, she believes the pending influx of market-rate housing is being driven by specific policy goals set by the city.

Maritime Landing in Bayside is largely being planned to conform to a community planning document called, "A New Vision For Bayside," which lays out how to convert a once-industrial area into a thriving, walkable community with diverse housing that attracts young, well-paid professionals.

The timing of that project is being driven by the city, which included specific development benchmarks in a purchase-and-sale agreement with the developers to prevent them from sitting on the land.

But Davis says the city is beginning to have discussions about implementing a new policy to encourage more housing developments that include affordable and market-rate units under one roof.

That has been the philosophy of Nathan Szanton of The Szanton Co., who has built three developments in Portland with combined affordable and market-rate units. Over the years, Szanton has seen the threshold of affordable units greatly increase to take advantage of MaineHousing's LIHTC program.

Szanton agrees with Shinberg that ground-up market-rate housing is difficult to build on a large enough scale to be profitable. Szanton believes that mixing affordable with market-rate housing is one way to offset development costs and diversify housing options and neighborhoods. "I think it's good for people to live with other people from different walks of life," he says.

Not only does that seem in line with where city policy may be headed, but it's also in line with the desires of Avesta, which has one mixed-housing project under its belt and is considering another. "We love the model," Totman says. "[But it] does require a combination of resources and a certain market that is not readily available, but there is broad-based support for the concept."

Meanwhile, Davis says the influx of market-rate and affordable housing may make the existing housing stock more affordable, and compel landlords to upgrade their older buildings.

Regardless of the type of housing coming online in Portland, there is one thing most local developers and city officials can agree on.

"I think Portland remains a smart investment," says Shinberg.