Affordable Housing That's Green, Too

Green Building Goes on a Budget

Thanks to tax credits and cost cutting, more affordable housing projects are turning eco-friendly

By ROBBIE WHELAN
Wall Street Journal, 10/18/10

Casa Feliz, an apartment building that opened last year in San Jose, Calif., was built with modern finishes and the latest in trendy, environmentally friendly materials: bamboo floors; organic, linseed oil-based linoleum tiles; and ergonomic chairs in the lobby made from sustainably farmed wood.

But in what might come as a surprise to some, no Prius-driving, Dwell magazine-reading, upper-middle-class professionals reside there. The project was built for people who earn less than 35% of San Jose's median income of $103,500 for a family of four, or suffer from developmental disabilities.

Casa Feliz is one of a growing number of affordable-housing projects nationwide that have been built "green"—that is, with nontoxic materials, highly energy-efficient appliances, and features such as green roofs and solar panels. Thanks to tax credits designed to attract private capital and aggressive cost-cutting on other construction features, affordable-housing developers are embracing eco-friendly building features that were once the purview of high-minded designers and wealthy developers with money to spare.

A Better Deal

Dana Bourland, a vice president with Enterprise Community Partners Inc., a Columbia, Md.-based nonprofit that helps finance affordable-housing projects, predicts that the affordable-housing industry will be 100% green by 2020. Not only are green buildings better for the environment, but they make better financial sense, too, she says, because they come with lower water and energy bills and lower tenant-turnover rates.

As such, investors view them as safer investments than buildings without such features, she says.

"The underwriting is changing," she says. "I think there's a growing recognition that these are better deals."

Most affordable-housing projects, including green ones, rely on the federal Low Income Housing Tax Credit, a Reagan-era program that provides incentives for corporations to invest in housing for the poor. Corporations purchase the credits—which are administered through a state-by-state allocation—and use them to take a credit against corporate taxes on their profits. Big investors over the past decade have included banks, insurance companies and the government-supported mortgage giants Fannie Mae and Freddie Mac.

After the housing crash and the collapse of Fannie and Freddie, the market for these tax credits softened considerably, and affordable-housing developers were forced to offer investors higher yields. Some corporations paid as little as 60 cents on the dollar for the credits, which meant developers had less money to put toward energy-saving features that earn buildings green plaudits.

But builders and investors say the market is coming back. Jeff Oberdorfer, executive director of First Community Housing, the San Jose-based nonprofit developer that built Casa Feliz, says investors are paying about 75 cents for each dollar of tax shelter now, and they are eager to underwrite green buildings because of the energy cost savings.

Investors are "starting to become more sensitive to the lower costs, the higher cash flows from energy savings," Mr. Oberdorfer says.

MetLife Inc., the big New York-based insurance company, is one of those investors. Matt Sheedy, who invests funds from MetLife's $325 billiongeneral account, says MetLife and other large institutional investors are eager to invest in green affordable-housing projects because they have a safer risk profile than more traditional housing projects.

"Investors commonly accept moderately lower returns for lower risk profiles, and green features are more in demand," he says. "I don't think we're back to peak prices, [but] this year, investor demand has picked up."

MetLife bought $14.3 million in credits on First Community Housing's Fourth Street Apartments project, a 100-unit affordable-housing building going up in downtown San Jose, and has also invested in Bay Avenue, a 109-unit senior-housing project in Capitola, Calif. Both projects are green. All told, MetLife has invested more than $1billion in affordable tax-credit projects since 1995, many of them green, Mr. Sheedy says.

Freeing Up Funds

Developers are going full speed ahead on green affordable-housing projects elsewhere across the U.S.

Enterprise Community Partners, for example, has invested more than $500 million in green tax-credit projects and recently launched a $50 million investment fund geared toward renovating low-income projects with eco-friendly features. In Utah, Enterprise is close to a multimillion dollar deal with American Express Co. to invest in green affordable tax-credit deals, according to Ms. Bourland, the vice president. American Express didn't respond to requests for comment.

New York builder Jonathan Rose Cos., meanwhile, is building $750 million of green affordable-housing projects and manages about $1.3 billion in completed green projects. It opened its latest apartment building in September.

Castle Gardens, an energy-efficient rental-apartment complex for former inmates and other low-income tenants in New York's Harlem neighborhood, was financed in large part by $16 million in tax-credit equity from Capital One Bank N.A. and other investors. Still, Jonathan F.P. Rose, the builder's founder and director, says his company had to work hard to free up money to make the complex green.

Up on the Roof

Rose saved almost $100,000 by putting gas-fired hot-water boilers on the roof rather than in the basement of the building, as is typical. That allowed it to avoid building a pricey flue that would have had to run from the ground to the top of the structure to pump out exhaust fumes. In addition, the windows in each room have "trickle vents" that encourage airflow and cool the apartments in summer, but are cheaper than a central venting system. The money saved allowed the builder to add features that made Castle Gardens 30% more energy-efficient than other buildings of comparable size in Harlem.

"In the early to mid-1990s, as a few voices were beginning to emerge and push for the greening of affordable housing, the affordable housing community's response was, the need for affordable housing [is] so great that we cannot defer any money from the quantity of the units to the quality of the project," Mr. Rose says.

That was excellent discipline, he adds, because "the green affordable housing had to grow up with no money to spare."