A communication transmitted from Yi-An Huang, City Manager, relative to Policy Order 2023 #49, regarding the review of multi-family properties on the market for potential affordable housing acquisitions

C I T Y O F C A M B R I D G E Community Development Department IRAM FAROOQ Assistant City Manager for Community Development SANDRA CLARKE Deputy Director Chief of Administration KHALIL MOGASSABI Deputy Director Chief Planner 344 Broadway Cambridge, MA 02139 Voice: [phone removed] Fax: [phone removed] TTY: [phone removed] www.cambridgema.gov MEMORANDUM To: Yi-An Huang, City Manager From: Iram Farooq, Assistant City Manager for Community Development Date: June 26 , 2023 Re: Policy Order #49 dated March 20, 2023 regarding the review of multi- family properties on the market for potential affordable housing acquisitions. In response to the above-referenced Policy Order, we submit the following. CDD Housing staff and affordable housing builders work closely together to assess opportunities to create new affordable housing. Staff monitor properties on the market and work with the builders as they make offers to purchase properties with funding from the Affordable Housing Trust. The acquisition of existing market-rate properties for conversion to affordable housing used to be one of the most effective ways the City added units to its stock of affordable housing over the years. In recent years, however, high prices of properties coupled with significant costs for rehab have made this approach more difficult. As we look at existing residential properties on the market, some considerations include: • Number of family-sized units with two or more bedrooms • Amount and cost of rehab needed to prepare the property for long-term use as affordable housing • Total cost and amount of funding needed from the City/Affordable Housing Trust • Value of opportunity in context with other potential sites being assessed • Location Affordable housing builders aggressively pursue opportunities that they find most promising. They work closely with owners and brokers to assess both properties on the market and those that may become available. In recent months, we have worked with these agencies to assess more than fifteen opportunities. Several offers have been made and there are now three such sites under agreement. Pursuit of several additional sites is continuing, and staff are encouraging housing providers to make offers.

Page 2 of 3 When assessing opportunities, whether it is the acquisition of an existing residential building or a site for new construction, affordable housing providers must also consider how bringing new sites into their development pipeline works for them. While acquisition funding can be provided by the Affordable Housing Trust and plans for new building advanced through the AHO, there are other considerations. Affordable housing builders must consider how and when they can get commitments of funds needed such as tax credits from the state, their development staff capacity, and how long they might have to hold a property given such limitations of capacity and access to needed funding. Pursuing opportunities that will be competitive for state funding is especially important given high development costs and the leverage it provides to City funds in each development. In recent developments, the Trust has provided less than half of the total amount of subsidy, with the balance coming from state funders. State funders prioritize funding for developments with family-size units. There are also site-specific considerations. When reusing existing buildings, this includes the capital needs and cost of work needed to bring the property to an appropriate level to operate it as affordable housing at the standards expected in Cambridge. When redeveloping a site and building new, the process to review demolition of existing structures and assessment and costs and difficulty of environmental remediation are important considerations. In terms of the specific property referenced in the policy order, CDD staff worked with Just-A-Start (JAS) to assess the feasibility of purchasing these multi- family buildings to operate as affordable housing. The property contains thirteen units, ten of which have at least two bedrooms. The number of large units was attractive. The site was listed for $7,700,000. JAS toured the property with CDD staff and then prepared pro formas for review with us. Their pro formas revealed that the opportunity was less promising than initially hoped. They found that the buildings needed significant rehab work. While the units had cosmetic upgrades, significant mechanical system upgrades and structural work would need to be completed to bring the property up to appropriate standards where they could responsibly house affordable housing residents. Additionally, JAS discovered undersized rooms which they would need to reconfigure in order to make units work well for families and code compliance issues, which they would need to address by reconfiguring units, thereby ruining much of the cosmetic work. Unlike market-rate developers who may be able to pay for the cost of needed upgrades out of income generated by market-rents, affordable housing builders need to assemble the funding to do this type of rehab work up-front as part of their capital project. When a property is operated as affordable housing, there is not sufficient cash flow to reinvest and do upgrades over time, as may be

Page 3 of 3 possible with market rate buildings. This is a big factor when evaluating existing buildings where rehab is, or will soon be, needed. Affordable housing providers must plan for this work and account for this work in their decision-making to ensure that their properties are sustainable when put into operation. For this property, JAS’s analysis came to $920,000 per-unit in total costs, with $485,000 per-unit needed from the Affordable Housing Trust in addition to investment equity generated from tax credits that would likely be challenging to secure from the state. These numbers do not compare favorably to other opportunities now being supported by the City and the Trust. The amount of local subsidy needed was particularly high when compared to recent Trust commitments which have been less than $200,000 per-unit. JAS’s conclusion was that these units would be “extremely costly for a product that wouldn’t be up to CDD’s standards without significant work”. CDD staff reviewed JAS’s assessment and found it credible given the challenges of this property. Staff also reviewed the assessment with several members of the Trust to ask for their perspective. Staff regularly discuss with Trust members potential requests that we are reviewing in preparation for bringing a formal request to the Trust for consideration. Trust members take their fiduciary responsibility seriously and want to use Trust funds effectively looking across all opportunities and considering financial feasibility, as well as program and policy goals in their analysis of each request. Trust members agreed with the assessment relative to other opportunities being pursued by staff with affordable housing builders. Given how prices of existing residential buildings have increased so significantly over the last decade or so, and the configuration and age of the housing stock, this is not an uncommon outcome. New construction often presents better opportunities to more cost effectively create new affordable housing. Further, many existing buildings have smaller units that are not suitable as family- housing. This is inconsistent with the City Council and the Trust’s priority of creating larger units for families, and the need we see for two- and three- bedroom affordable units. Staff and the affordable housing builders will continue efforts to assess all opportunities to create new affordable housing, including looking at buildings and sites that are on the market or otherwise being offered.