Uncle Sam at your service: securing public funding has pitfalls and drawbacks, but the socio-economic benefits can make all the hard work worthwhile.

As construction costs increased in recent years and private moneys were no longer plentiful due to a rising number of bankruptcies, long term care facility developers have gone public--as in seeking out public funding to pay for their new or renovated projects.

Public money has always been available, but it has been used more frequently during the past five years due to the soft, economic climate, according to Charles Kunkel, chairman of Management and Marketing Solutions LLC in Ashland, Ky.

There is a cycle to the use of public money, said Kunkel, who works with clients to seek such funds and write grants. This grant-seeking is part of an initial team that typically involves an architect and interior designer.

About five years ago, the conventional market was open to funding projects. "When a lot of the defaults or bankruptcies occurred in the healthcare market, the conventional market backed away," Kunkel said. "HUD [U.S. Department of Housing and Urban Development] stepped to the table and ... started carrying the ball as far as nursing homes and assisted living facilities."

The rising cost of construction has added to the necessity of seeking public funds, according to Bob Verrier, vice president and managing partner of The Architectural Team Inc., Watertown, Mass. "The cost of construction has gone up so dearly [during the past 10 years] that developers are now having to go to other agencies for supplementary funds," Verrier said.

Sifting through government pockets

President Bush proposed a $31.3 billion budget for fiscal year 2005 for HUD, according to a public message from Acting Secretary Alphonso Jackson on the HUD Web site at www.hud.gov.

Of that amount, $2.1 billion is ear-marked for the HOME Investment Partnerships Program, which addresses the shortage of affordable housing. This money is distributed through state and local governments, which have substantial discretion on how to spend it.

HOME funds can be used in several ways including new construction, the rehabilitation of substandard housing or acquisition of standard housing. Historically, 36 percent of the funds have been used for new construction and 47 percent for rehabilitation.

Programs available through HUD

* The Assisted Living Conversion Program. It typically covers the cost of the basic physical conversion of existing units, as well as any common and services space. Funds for supportive services must be provided by the owners or through a third party such as Medicaid or the state.

Private owners of nonprofit facilities are eligible as long as they fulfill requirements of Section 202; Section 8 project-based, including Rural Housing Services' Section 515; Section 221(d)(3) BMIR, and Section 236 housing developments designated primarily for occupancy by the elderly for at least five years. A private nonprofit of a unused/underutilized commercial property is also eligible.

* Flexible Voucher Program (FVP). A newly proposed program to provide rental and homeownership subsidies as a temporary measure to help seniors move toward self-sufficiency and home-ownership.

* Project-Based Rental Assistance. This provides funding for renewals of expiring project-based rental assistance contracts under Section 8. This includes maintaining contract administrators serving any such project.

* Low-Income Housing Tax Credit. Federal program that finances new and rehabilitated rental housing. In 2003, the tax credit supported an estimated 94,000 units of completed low- to moderate-income rental housing.

* Supportive Housing for the Elderly (Section 202). Funding for the housing for the elderly is awarded competitively to nonprofit organizations that construct new facilities. The facilities are also provided with rental assistance subsidies allowing them to accept very low-income residents.

Since many residents live in these facilities for years and over time need more services, the program provides up to $30 million of the total $773 million in grants to fund the conversion of all or part of these facilities into assisted-living facilities. In addition, $53 million is targeted toward the funding of service coordinators who help the elderly residents obtain supportive services from the community.

* Mortgage Insurance Under Section 232/223(f). Section 232 insures lenders against the loss on mortgage defaults to facilitate the construction and substantial rehabilitation of nursing homes, intermediate care facilities, board and care homes and assisted living facilities. Section 232/223(f) allows for the purchase or refinancing of projects needing moderate rehabilitation.

* HOME Investment Partnerships Program. The program supports the building, rehabilitation and purchase of rental units.

* Community Development Block Grant Program. In fiscal year 2005, total funding for the flagship of HUD's community and economic development programs will be $4.6 billion. These funds are awarded to 1,160 grantees in 944 cities. Funds may be used for a broad range of uses including neighborhood or community development, public services, renewal of distressed communities.

Design elements

Using HUD for financing can be a mixed bag, according to Bruce Spear, a project manager with InterDesign, an architecture, engineering and planning firm in Indianapolis. Spear also developed several publicly funded senior housing projects prior to joining InterDesign. It can be difficult to get certain amenities approved despite what the market may be demanding because HUD has a cost cap per unit, Spear said.

Loan approval also takes a long time because you're dealing with a regulatory environment, Spear said. In addition, it can take time for the architect and other developers to get paid unless the owner has multiple facilities or another revenue source. Otherwise, they get paid when the loan closes. "The architect [often] goes on good faith and hopes that the loan will close and that the proceeds will go to fund his fees," Spear said. "But that can be months or up to a year."

The loan itself can often take a year to process, Verrier said. Multiple sources of funding simply add on more time, often up to six months more.

But, the benefits are significant. HUD's approval process is designed to eliminate projects that may fail in the market. "If something is not going to work, they are going to get you out the door fast," Spear said.

That comes in handy if you're a design firm that does a lot of speculative work, he said. "Their [design] restrictions may curtail your imaginations but that also makes it a pretty simple thing to design," Spear said.

A few basic preparations can prepare an owner or administrator for a HUD grant or loan, according to Kunkel. Kunkel works with clients to write grants and seeks public money. He performs as part of an initial team that typically involves an architect and interior designer.

* Get your house in order: Clean up your finances and streamline any existing operations.

Develop a vision for tomorrow's facility.

* Remain committed to the new project and its vision.

* Seek out a professional to secure public financing.

* Make sure you highlight applicable management and marketing experience. The HUD review team will look for experience within an owner or developer's portfolio.

* Make sure you have some funds in reserve. The amount depends on the type of public program. It is usually a 90/10 ratio--90 percent financing and 10 percent funding. The funding can be either in cash or equity. For example, land that is paid for can be used as equity.

* Architects, too, can do their part in preparing to approach HUD, according to Bruce Spear.

* Secure a location Find a HUD office and learn about the requirements. (HUD information is also available online at www.hud.gov. Information for rural land is available through www.usda.gov.)

* Find an investment banking firm with a Federal Housing Administration license to guide you, or a local accountant with experience in this area.

The HUD process involves three basic steps, Spear said:

A service area market analysis--the architect informs HUD how many units are planned, the nature of the units, how much they will rent for and the location of the project.

A conditional commitment--requires preliminary design documents. HUD underwrites the loan and takes another look at the market.

Project approval and final commitment--final construction documents and hard dollar quotes required.

Developers often choose public funding because it helps the community in which their projects will be built.

For example, obtaining public funding for the Brigham House renovation project helped the town of Watertown, Mass., stick to its mission of offering affordable housing, according to Verrier. Brigham House is a historic landmark being reincarnated as an assisted living facility designed to provide a range of low- to moderate-income housing for seniors.

Brigham House used one of the more popular options of public financing, the Housing Tax Credit Program [see "Give me a (tax) break," this page]. The project also took advantage of other funding, including Historic Tax Credits, according to Paul Ferreira, principal and managing partner of Baran Companies LLC in Boston, Brigham House's developer and owner.

Baran Companies also negotiated a long-term ground lease through the town of Watertown. The ground lease allows the town to retain land ownership, leverage it uses to float a bond offering to improve community schools, Ferreira said.

Older facilities that need a facelift--such as Brigham House--are the typical candidates seeking public funding today, Kunkel said.

"Some of the larger companies own a lot of older buildings that have been around [for 30 years or morel," Kunkel said. "They are now tearing these [structures] down and building brand new facilities to prepare to provide services to baby boomers coming down the pike."

It's not always for Baby Boomers, however. Public moneys are going a long way toward generating additional, high in demand mixed-use housing.

For example, Baltimore-based Enterprise Homes is co-developing Edner Apartments, a 110-unit senior building at Stadium Place, a 30-acre mixed-use campus located at the former home of the Baltimore Orioles major league baseball team.

Mixed-use housing, which attracts a range of incomes, not only provides much-needed affordable housing, but also elevates lower-income, Section 8 occupants into an arena of homes they may not necessarily be able to afford, Verrier said. Section 8 is a rental subsidy program authorized in Section 8 of the U.S. Housing Act of 1937. Through this program, HUD provides subsidies to low-income families and to private property owners who set aside units for low-income families.

SIDEBAR:

Give Me A (Tax)Break.

Getting a break in your payments to Uncle Sam is another common way to finance affordable senior housing.

But securing tax credits in exchange for equity requires expertise and know-how, so you're better off hiring a consultant to help you if you don't have the knowledge on staff according to Julia Pierson, executive director of Baltimore-based Govans Ecumenical Development Core., a nonprofit organization focusing on affordable housing for people with special needs.

Even though Pierson has a background as a developer and she has in-house help, GEDCO still chose a joint venture partnership with The Enterprise Foundation to secure tax credits for its project. Stadium Place in Baltimore.

The 30-acre campus, formerly known as Memorial Stadium--the Baltimore Orioles' old stomping grounds--will eventually hold senior housing, stores, restaurants and market-rate condominiums. So far, 250 units of one- and two-bedroom independent senior housing have been financed. Pierson said.

The campus will include a 13-acre YMCA scheduled to open in September, according to Patrick Murphy, who will be executive director.

To make everything possible, GEDCO partnered with Enterprise Homes, an affiliate of the Enterprise Foundation. Also based in Baltimore, Enterprise Foundation is another nonprofit organization that typically serves as broker for a limited partner.

The partnership applied to the state and competed with other applicants for tax credits. The application was rated on several factors including the expertise offered by the team, their background, any community involvement and the quality of the project.

The process takes four to five months. "You have to be tenacious," Pierson said. "[We want] to make retirement affordable for everyone. You don't make any money on it."

The partnership took its tax credits to a corporation that bought them in exchange for equity.

Although the tax credits were the major piece of the financing puzzle, that wasn't enough. "You have to really pull together multiple sources of funding to make your project work," Pierson said.