Lafayette, Louisiana: Brooke Pointe Apartments
By Mark Olshaker
6 min read
LDG Manages to Leverage Bonds in an Unproven Market
“Lafayette, LA lies two hours west of New Orleans, but might as well be a world away,” according to the travel website, Travlinmad. The fourth largest city in the state is situated at the crossroads of U.S. Highways 10 and 49, and if you head east on US 10, in about 50 miles you’ll hit Baton Rouge, which forms the apex of a flat sort of triangle with Lafayette and New Orleans. The 125,000-population is spread out over a somewhat sprawling area for a city of its size and one of the major attractions are the various swamp tours, though more folks come for the spicy Cajun and Creole food and the up-tempo Zydeco music. The cost of living is below average for American cities, but that hasn’t prevented a chronic shortage of affordable rentals.
The municipal travel website touts the friendliness and hospitality of Lafayette’s French Canadian-derived citizenry and MarketWatch’s 2014 designation as the “Happiest City in America.” But if you’re an affordable housing developer like Nick Chitwood of Louisville, KY’s LDG Development, LLC, “It’s tough to get a highly-leveraged bond deal done where there’s no proven market.” That was his experience with Brooke Pointe Apartments, a 192-unit, 11-building affordable complex that broke ground March 20 on 13 acres in the northern part of the city on the part of US 49 known as Evangeline Throughway.
The complex will include a clubhouse, fitness center, pool, playground and walking paths throughout the property. Completion is expected by spring 2020. LDG is proud of the services it routinely provides its lower-income residents, such as flu vaccinations, computer courses,financial planning seminars, tutoring in school subjects and after-school activities for children.
Chitwood describes the company as an owner-operator with between 80 and 90 percent of its operations involving four percent bond development.
“There was a lack of existing evidence in the marketplace,” says James Spound, president of R4 Capital Funding of New York, a national syndicator and LDG’s funding partner, that provides construction and permanent finance on four percent transactions. “The [previous] product was generally smaller, older and lower in quality.
To properly monetize the deal, we had to believe in maximum tax credit rents and convince all our investors that that was prudent. And therein lay the challenge. LDG builds a very high-quality, new construction project and to make that level of quality construction viable, clearly it helps to build on scale.” Other partners include HUD, the Louisiana Housing Corporation (LHC) and Iberia Bank.
“Brook Pointe will be a wonderful addition to this district and help to provide hundreds of families with a high-quality housing that is affordable, safe and offers amenities they can enjoy throughout the year,” Councilman Patrick Lewis declared at the groundbreaking.
Driving Forces
In addition to lack of “evidence” that there was demand for the scale under consideration—no prior affordable housing had been undertaken in the past seven years so there were no comparables—other challenges piled up. During the four-year predevelopment effort, Chitwood says that three sites had to be abandoned—one by deed restriction; one due to a severe NIMBY reaction; and one through feasibility issues—before the final site was secured. And in a region so dependent on commodity pricing, the volatility of that market negatively affected Lafayette’s investment reputation.
On the other hand, Chitwood says, several “big driving forces” provided support. “Local councilmen supported our fourth site and gave us property tax abatement. LHC wanted to see something done in Lafayette and allowed HOME [HUD’S Home Investments Partnership Program] soft funds to move from site to site. R4 Capital identified the right CRA-motivated [Community Reinvestment Act] regional bank to help with pricing on the transaction. LDG and the architect affiliate deferred $1,114,704 of professional fees and reimbursements, which showed our commitment to the transaction. And the combined structuring and underwriting of equity and debt, a direct bond purchaser combining construction and permanent debt, and a competitive rate, together with low transaction costs, made for efficient overall financing.”
Spound explains, “We wanted to put the deal away with a permanent lender. In terms of what combining debt and equity in a private placement structure effectively means is that on the debt side for one and a quarter percent, Nick got all of his construction proceeds and permanent construction and the bridge portion of his equity financing. They got a singular due diligence process for both debt and equity, which was helpful since they were running against the clock on closing.”
“We were able to negotiate land costs, which started out quite a bit higher,” says Chitwood. “We were able to parcel off just the pieces that we needed to get this deal done.
Another key attribute is that we were able to squeeze down the reserves a little bit, to get to the point where the deal actually became feasible.”
Recycling Gulf Cost Funds
While Lafayette’s geographical location presented challenges, it also offered one advantage. “They’re starting to recycle some of the Gulf Coast Funds (set up in the wake of Hurricane Katrina), which I think will be huge, moving forward.”
Chitwood would also like to see government considerations and subsidies more tailored to the specifics and needs of the individual project. “In a vacuum, there’s a threshold per deal and I understand that makes sense.
But depending on what you’re doing and the different municipalities, the need—and we all know this—is different. A million dollars here, it may be double there. So, one of the policy things that would really help from a developer’s perspective is to just say, ‘Hey, one-size-fits-all doesn’t necessarily work. A lot of times it depends on the deal and the area and, frankly, the type of units you’re doing.”
And the long development period, which could have worked against the project, turned out not to be the impediment it could have been. Chitwood continues, “The earn-out component was a function of the ability of the state agency to direct soft funds. They allowed us to take a half-million dollars more in [competitively awarded] HOME funds on this deal than what they would allow on a typical deal today, so that really, in effect, helped show enough cash fee to get the deal closed. Absent that, and then stepping up and saying, ‘This was under a different QAP, so we can hold to that,’ this deal would have been really, really tough to get over the finish line.”
Story Contacts:
Nick Chitwood
nchitwood@ldgdevelopment.com
James Spound
jspound@r4cap.com
