Talking Heads, Tom Anderson, Cohen-Esrey Development Group
By Darryl Hicks
9 min read
Opportunity Zones, vertical integration and resident outcomes
Headquartered in the Kansas City suburb of Overland Park, KS, Cohen-Esrey has evolved over its 24-year history from being a small property manager to one of the Midwest’s largest real estate firms focused on historic rehabilitation and affordable housing development.
Cohen-Esrey currently owns and operates 34 affordable communities, totaling some 1,900 units, located in Kansas, Missouri, Iowa and Oklahoma – with a footprint that’s growing day-by-day. The company’s expansion efforts are driven by a vertical integration platform, adopted early on by its founders, which allows senior management to closely monitor and coordinate activities among multiple business units focused on development, management, construction, maintenance service, building components supply, tax credit syndication and equity procurement.
Even with the vertical integration platform, there needs to be a team leader who motivates and drives people to succeed. That person is Tom Anderson, who joined Cohen-Esrey as a consultant in 2008. Anderson helped create the company’s first Low Income Housing Tax Credit Investment Fund and later on coordinated state tax credit investments. Within five years, he was managing the affordable housing development group.
Tax Credit Advisor sat down with Anderson to talk about the potential impact of Opportunity Zones—the Trump administration’s new answer to investing in underserved neighborhoods—the future of historic rehabilitation, and his ongoing efforts to improve tenants’ lives.
Tax Credit Advisor: At the NH&RA Annual Meeting in February, you commented on the potential impact of Opportunity Zones in helping develop affordable housing. Are you still optimistic?
Tom Anderson: I’m as optimistic as I was at the Annual Meeting. Since then, states have been working on setting up their Opportunity Zones and my goal will be to review and assess them and say, “Okay, where might there be opportunities for housing?” My personal opinion is that they will have less impact on LIHTC opportunities and potentially more impact on building workforce housing. Because of the way Opportunity Zones are structured, the ability to defer capital gains on investments doesn’t really mean anything to a tax credit investor. Therefore, I don’t think it’s going to have a huge impact on what happens in the tax credit space. But we are exploring ways that we can do some workforce-type housing, perhaps buying some C-class housing that we can improve up to a B-level while keeping rents at an affordable level, perhaps 60 to 80 percent AMI (area median income).
TCA: What adjustments are you making in light of recent changes to the federal Historic Tax Credit program? Has it become harder to pair State and Federal Historic Tax Credits?
Anderson: The reduction in pricing has been the biggest challenge. It has created significant funding gaps. We have several historic/adaptive reuse projects in our pipeline and the ones that are getting the most attention from me right now are being done in locations, municipalities and cities where there is a desire, willingness and capacity on the part of the local stakeholders to participate with us in those projects. The deals that don’t have local support, or don’t have access to additional funding sources, are not working. We are moving away from them and focusing more on the local partnership opportunities.
TCA: Are you rethinking projects that are now subject to the new five-year Historic Rehabilitation Tax Credit?
Anderson: We have three projects in closing that are being financed with nine percent LIHTCs with Federal and State Historic Tax Credits that fall under the old rules where our investors can claim the credits in the first year. Our investors are staying with us. It’s really the new deals, where we haven’t closed on the real estate yet, that will be difficult to do. We are dealing with the double impact of lower corporate rates and now a five-year credit flow, which will adversely impact new deals.
TCA: Does that mean you won’t be doing as many historic rehabilitation deals?
Anderson: Probably. We have had almost 100 percent reliance over the past seven or eight years on historic adaptive reuse projects. We had already started shifting our focus away from that for different reasons. I expect in the next five years that our company focus will be split 50/50 around new construction and historic rehabilitation.
TCA: More developers are building workforce housing for families who can’t live in tax credit housing but still struggle with rents because they live in high-cost areas. What is Cohen-Esrey doing in this area?
Anderson: We have not done anything outside of the tax credit supported space as of yet, but one of the things I believe will be helpful to affordable housing developers is a provision included in the recent tax bill that allows residents with incomes up to 80 percent AMI in tax credit developments, as long as the property average doesn’t exceed 60 percent. That’s going to allow us to serve another income level of people, which is beneficial for several reasons. One, it will allow us to simply serve more people. And two, there’s a real need for those folks who fall above the 60 percent AMI threshold but still have a really difficult time affording market rents.
TCA: I’d like to learn more about your Vertical Integration Platform. How long has it been in place? Why was it put in place? What daily challenges do you encounter offering this many services and how are you overcoming these obstacles?
Anderson: The platform has been in place since the beginning. We started as a property management company, then we added development and construction arms. To a large extent, it’s a risk mitigation strategy. We want to manage our own properties because of the long-term guarantees we provide to our tax credit investors. We also want to make sure the projects we develop come in on time and on budget from a construction standpoint. It’s a way of having influence on all of the major components of developing, owning and operating multifamily and low-income housing. It does create challenges with communication and coordination. We have over the past few years identified gaps between our business units and just within the past year improved the way we are working together and bringing these projects to the communities we are working in. It’s the typical business challenges of scaling and the complexities that come with it. But we believe in it and it’s a big part of our ongoing expansion plans as we grow our portfolio.
TCA: Your development philosophy states: “We are expanding our definition of success to include attractive, people-centric spaces with a safety net of support services for those who need them.” Please elaborate on what you mean by that.
Anderson: One of our core values is the idea that we don’t just build housing, rather we build communities that change lives. That is the stated purpose of the affordable housing development group that I oversee. We are putting more than just roofs over people’s heads. We want to make sure we are having a positive impact on the lives of our residents. We must be cognizant of what our residents need to thrive and have successful lives and strong connections with their neighbors and the broader community. We partner with a nonprofit organization called Preserving U.S., which has a threefold mission focused on historic preservation; low-income housing preservation and creation; and access to resident services. Preserving U.S. identifies the needs of a community, whether it’s access to transportation, healthcare or any services that might help residents remain healthy and happy, and then coordinating with local service providers to ensure those needs are met. We are continually pushing the envelope on what’s possible.
TCA: How are you pushing the envelope?
Anderson: One area of focus for me moving forward is the impact that safe, affordable housing can have on health outcomes. We are looking at how we can partner with stakeholders in the healthcare space and thinking about the considerations for designing or building housing that positively impacts people’s health. At several of our communities, we have had success with community gardens that not only provide people with healthy food, but create a sense of community where people get to know their neighbors through working in the garden and provides educational opportunities for the kids.
TCA: The National Association of Home Builders and other housing trade groups in Washington are concerned that the new tariffs on steel, aluminum and lumber will hurt consumers and harm affordability. Are you at all concerned about how these policies will impact your business?
Anderson: I have a mountain of concerns about the rising costs of construction and this is just one more stick on the pile. For the past three years, we have seen labor costs increase dramatically. It’s not just the hourly cost of the labor, it’s also the shortages of labor and the impact this has on delays, which have costs associated with them. The good news on the construction side had been that while labor rates were rising, material rates had not gone up so much. But, the tariffs will add one more component to rising construction costs. We won’t know their full impact until we start closing on projects six months from now and the budgets start coming in. It’s a big issue and I think the labor challenge is a systemic challenge that is big enough by itself that it will take a lot of will and a lot of effort from a lot of different stakeholders to fix it. This means going down into our educational system and making sure young people are aware of alternatives for education and training after high school rather than college. I personally believe we need to have a renewed emphasis on trade schools where young people can learn how to be electricians, plumbers and carpenters.
TCA: Where do you see the affordable housing industry, and your company, headed over the next five years?
Anderson: In spite of everything, I am optimistic. This is not a space we are going to overbuild in. The challenges in our business deal more with finance and cost than anything else. There’s no shortage of need for affordable housing. We’ll continue to find creative ways to meet the demand. We are expanding our staff. We are expanding our footprint. Some of the challenges we face can be met with scale. We all have to get better and more efficient at what we do, and learn to do more with less. My goal is to get bigger, not contract, so that we can be more efficient and serve more people.
Story Contact:
Tom Anderson
tanderson@cohenesrey.com
