The 16-story subsidized high rise in Uptown is in bad shape these days–the roof leaks and the stairwell’s cluttered with trash. But if its residents get their way, it will be cleaned up and repaired within a year, transformed into a model of tenant-managed low-income housing.
To make the deal work, they’ve forged a unique partnership with a couple of enterprising up-and-coming developers, Daniel Burke and Anthony Fusco, as well as alliances with a local community group, the Organization of the NorthEast (ONE), Congressman Sidney Yates, the city’s department of housing, and maybe the federal Department of Housing and Urban Development.
HUD is the final hurdle. The tenants and their developer partners–principals in a company called the Chicago Community Development Corporation–have put together a complicated deal that hinges, first, on federal tax credits, and second, on federal subsidies. If HUD doesn’t approve the overall package by December 31, the deal loses the tax credits it’s already been given. Without the tax credits, the deal is dead. So the pressure is mounting, as all players do their best to sound confident.
“Our goal is to have this building operated by the tenants, and I think that’s what HUD would like to see also,” says Diane Simpson, a leader of the Eastwood tenants’ association. “Buildings for low-income residents can work, if the tenants have a say in them. We think we can make this one work.”
The building, at 850 W. Eastwood, near Wilson and Clarendon, was built in 1969 with a HUD-backed low- interest loan. In return, HUD required that the building’s owners reserve occupancy for low-income tenants, who would be charged below-market rents. There was one provision: at the halfway point of the mortgage–say, after 20 years of a 40-year mortgage–the owners could repay their loan (in what is called a prepayment deal), displace the low-income tenants, and charge whatever rent the unsubsidized market would bear.
“There are about 3,000 units [throughout the city] that could be flipped from subsidized to market rents through prepayment deals in the next three or four years,” says Burke, vice president of the Chicago Community Development Corporation (CCDC). “It’s a major issue that could shape the low-income housing market in the next decade.”
The threat of eviction is most severe in Uptown and Edgewater. In these neighborhoods, organizers argue, despite all evidence to the contrary, developers are eager to tap the unlimited supply of upscale renters and condo buyers anxious to uproot the poor, as happened in Lincoln Park and other north-lakefront communities. (Most likely this is not true, but it’s to everyone’s advantage to pretend it is.) “The building has many advantages,” says Burke. “It’s relatively new. It’s near the lake and Lincoln Park.”
In part to avoid the consequences to tenants of prepayment, but mainly to acquire a good investment, Burke and Fusco bought an option last summer to buy the building from its current owners. Within a few weeks they had convinced officials from ONE–who have targeted prepayment as a key issue for Uptown–that the building could be rehabbed and saved for low-income tenants. By the end of the summer, ONE had directed Susan Gahn, its top housing organizer, to organize Eastwood’s tenants. It wasn’t long before the tenants–who include blacks, whites, Asians, and Hispanics–decided to take action: negotiate a partnership with developers and own the building themselves.
“This building is not as poorly run as some I’ve seen, but there are problems from neglect,” says Simpson, who’s lived in other subsidized housing. “Water leaks through the windows. The roof needs work. The stairwells are filthy. With the proper training, I think the tenants could do a better job running it. ONE did a great job of explaining how prepurchase worked and what might happen to us. We decided to organize before the owners could sell the building and kick us out. We didn’t want to be caught by surprise.”
For the tenants, Fusco and Burke seemed natural allies. They are former legal-assistance lawyers who learned the tricks of the development trade by representing low-income tenants who faced prepayment evictions. They failed at their first attempt to buy and then establish tenant management in an Uptown HUD high rise, on Lakeside Place. But their efforts in that building won them the respect of local politicians and community activists.
So Eastwood is part of the first wave of prepayment cases, in which private investors loom as the bogeymen. “This deal is our creative alternative to the prepayment problem,” says Burke. “The problem with prepayment is that everyone is waiting to see what’s happening. The owners are waiting to see if they can flip the building, and the residents are waiting to see if they will be displaced. But we think you should maintain the housing for what it was intended.”
If HUD approves their package, they hope to finance the deal by raising several million dollars syndicating–selling shares of–the federal tax credit they’ve already gotten from the city. An investor who buys the CCDC tax credit is, in effect, using his money to rehab Eastwood and preserve it for low-income tenants. In return, the investor can apply the credit, over a period of several years, against his federal income tax.
“Syndicating tax credits is a vehicle designed to encourage private investing in low-income housing,” says Fusco.
What follows after they sell their tax credits is a tricky bit of leveraged financing. Through syndication, Fusco and Burke should raise enough money to retire the $1 million debt Eastwood’s current owners owe HUD for delinquent mortgage payments: essentially they’re assuming the mortgage and taking over ownership of the building. They would then use the rest of their syndication revenue as collateral to obtain a HUD-insured rehab loan from a private lender.
Fusco and Burke also want HUD to subsidize rents in the building, since they could not raise enough money to repay their rehab loan with the rents Eastwood’s current residents can pay. To rent a three-bedroom unit in Eastwood now, for example, costs at most $535, or if a tenant can’t afford that, 30 percent of his income. Under a HUD subsidy program, however, the federal government would give CCDC about $250, on top of what its tenants pay, for each three-bedroom apartment. That way the developers could repay their loan, maintain the building, make a profit, set aside some money for future repairs, and charge affordable rents.
“We’re eligible to receive consideration for such a request because we’ve agreed not to prepay the mortgage,” says Fusco. “This is an incentive provided by HUD to preserve the property as low-income housing.”
Burke and Fusco say the subsidy is justified in this case because it is intended to develop much-needed affordable housing.
“We are partners with the tenants of Eastwood,” says Burke. “This is a joint venture. We will oversee the financial aspects of the building. But the tenants will be taking training, and in three or four years the plan is that they will take over the day-to-day control of the building, including tenant selection.”
So far the plan has been approved by the city’s department of housing, which has given the developers the tax credits they need. And CCDC has all but finalized a sales agreement with the current owner.
“There were two original owners, both of whom are dead,” says Fusco. “The building has passed to the estate of one of those men. One reason they are eager to participate in a transaction with us is that they want the building to remain as part of a low-income program.”
To rally public opinion and win approval from HUD, ONE held a November meeting at an Uptown church. It was a success, as more than 400 neighborhood residents, Yates, and several local HUD officials attended. A few days later, HUD officials in Washington issued an internal memorandum directing the Chicago office to “expedite” review of CCDC’s plan. (The package has to be approved by December 31 for CCDC to be able to utilize its tax credits.)
However, the memorandum also conveyed some bad news for the developers. It stipulated that CCDC could not take its developer’s fee and expenses from the revenues generated through syndication, as developers usually do.
“Syndication is the only source of funds by which we can gather our fee and expenses, such as appraisal, legal, and architect costs,” says Fusco. “What’s going on is a reaction to the scandals that HUD has faced over the last few years in which some developers were getting tax credits that they didn’t need. I’m not saying there wasn’t abuse. But the changes HUD is proposing would destroy the incentive any developer has to invest in low-income housing.”
Recognizing that this snag could kill the proposal, Yates began playing hardball with HUD.
“I was very moved by what I heard at the meeting,” says Yates. “There are 230 families at risk in that building, and a good plan might be lost because of HUD’s intransigence. Well, I’ve got a friend, Congressman Bob Traxler, who’s chairman of a House appropriations subcommittee that oversees HUD. I talked to Bob, and he’s now holding up allocation of HUD rehab moneys until I get my projects.” Translation: Yates is using his influence to force HUD to approve the Eastwood deal.
In addition, Fusco and Cynthia Reed, president of ONE, have flown to Washington and met with HUD officials, who expressed interest in and support for their plan.
“HUD is working with us to try and meet our deadlines,” says Fusco. “I don’t think that they really mean to deny a developer his fee through syndication. What they are trying to do, I believe, is legitimately formulate a policy that guarantees that most proceeds go to the project and not the developer. They want to eliminate further abuses. There is also a lot of paperwork they have to approve. HUD has agreed to expedite its review. The only issue is whether they can achieve it by December 31. Without such approval, we cannot go forward.”
As befits their status as newcomers whose first deal hinges on HUD’s approval, Burke and Fusco offer nothing but praise for HUD’s bureaucrats. Yates and ONE are not so diplomatic. They vow to maintain the pressure until the program is approved.
“This is a great opportunity to turn Eastwood into a beautiful building,” says Simpson. “I’d hate to lose it, because we don’t know if it would ever come again. You’d better believe we’re going to fight to see it come true.”
Art accompanying story in printed newspaper (not available in this archive): photo/John Sundlof.