Blight Busters: Developers to Renovate Foreclosed Milwaukee Homes to Help Stabilize a Neighborhood

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In the city of Milwaukee, Wisc., where many neighborhoods have been pockmarked by foreclosed and abandoned homes, two for-profit developers are teaming up to restore some of these derelict properties to productive use as renovated, affordable rental housing.

In their latest joint venture, Maures Development Group, LLC, a small local developer, and Brinshore Development, LLC, a major affordable developer based outside Chicago, will acquire 27 city-owned single-family houses and duplexes in the Harambee neighborhood and rehabilitate them using federal low-income housing tax credits to create 35 affordable and market-rate rental units. The city acquired the homes after foreclosing on the owners for failure to pay property taxes.

The scattered-site development, Milwaukee Prosperity – Harambee, is one of four “high-impact” projects awarded 9% housing tax credits in a special funding round held by the Wisconsin Housing and Economic Development Authority. (See related story on p. 10.)

“The city of Milwaukee has been experiencing a fairly acute problem with foreclosures, not unlike a lot of other Midwestern cities,” says Richard Sciortino, a principal of Brinshore Development. “And what they’ve done is acquire some of these properties and in essence mothball them by boarding them up and holding them in an inventory.”

The city plans to demolish some of these properties. “Others they’re planning to hold for opportunities like these where they can be redeveloped,” says Sciortino.

As of September 2013, the city held title to more than 1,000 tax-foreclosed properties alone. The figure doesn’t include hundreds of additional bank-owned homes.

Milwaukee Mayor Tom Barrett has forged a coalition and spearheaded an initiative to tackle the issue, tapping local, federal, state, private-sector, and philanthropic funds to acquire vacant and abandoned homes and either demolish them or sell them to new owner-occupants or to developers who will repair and rent them. These efforts fix up dilapidated properties, restore them to the tax rolls, increase the supply of affordable rental housing, and improve and stabilize neighborhoods.

 

Located Near Other Properties

Maures Development Group and Brinshore Development have partnered on four previous LIHTC projects in Milwaukee. One renovated tax-foreclosed vacant houses and duplexes in an adjacent neighborhood that were acquired from the city. The other three have been single-building multifamily developments.

Asked what makes the Milwaukee Prosperity project special, Melissa Goins, the founder and president of Maures Development Group, answers: “Stabilizing neighborhoods. The whole idea is to help stabilize a neighborhood that has frequently been hit hard by foreclosures, by taking these properties, fixing them up, and getting them rented to quality tenants.”

The city has agreed to sell the 27 foreclosed properties for the Milwaukee Prosperity project for $27. The project will have a total development cost of about $7.4 million, including expected hard rehabilitation costs of about $130,000 per unit.

Of the 35 rental units created, 3 will be market-rate units and 32 will be affordable (LIHTC) units. The latter will be rented to a mix of low-income households earning no more than 30%, 50%, or 60% of the area median income (AMI). At 60% of AMI, the current annual income limit for a four-person household is $42,120.

The rental homes will have from two to four bedrooms. According to project manager Michael Roane of Brinshore, gross initial monthly rents will range from $350, for a two-bedroom home rented to a household earning 30% or less of AMI, up to $1,034, for a market-rate four-bedroom unit.

The homes will be located near other affordable housing properties previously developed by Brinshore and Maures. One reason is to enable them to be managed by the current property management staff at the other existing properties. The second is a the desire to stabilize or increase the value of the existing developments by further stabilizing and improving the Harambee neighborhood, a several hundred block area that is primarily residential with some commercial. Other organizations and the city are currently working to improve the Harambee neighborhood in different ways.

WHEDA awarded $350,000 in 9% federal housing credits for the Milwaukee Prosperity project, which has not yet closed. “We’re working through the due diligence process now,” says Sciortino. “We probably won’t close for another three months and then get started [on construction] at that point.”

 

Funding Sources

Anticipated funding sources are LIHTC equity, a soft second mortgage from the city, a conventional permanent mortgage, and a construction loan.

Sciortino says the previously renovated foreclosed homes have turned out great. “They stand out as examples of good rehab that is sorely lacking in the neighborhood,” he said. “And having activity going on, where there’s construction and contractors parked in front of these places, signifies that this neighborhood is stabilizing.”

Sciortino concedes it’s more challenging to manage scattered-site single-family rental homes and says annual per-unit operating costs for them are typically higher than the maximums permitted by state housing finance agencies in their LIHTC programs. He said the hope and expectation is that the rents on the homes can be raised in the future to eliminate red ink as the neighborhood stabilizes and improves.

Sciortino says he hasn’t had difficulty finding interested tax credit equity providers for scattered-site single-family LIHTC projects. The tax credit pricing “hasn’t been any different than for our other different product in the same market,” he says.

In addition, Sciortino says lease-up is a breeze. “The single-family homes are really desirable. We’ve been able to attract quality families into these homes.”