Teaming on Arnold Gardens

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7 min read

NH&RA meetings lead to preservation partnership

“A whole lot of moving parts,” is the way Holly Bray of Love Funding in Washington, D.C., depicts the three-year process of rehabilitating Arnold Gardens, a three-building affordable housing project in suburban Suitland, Maryland.

Fortunately, as it turned out, many of those “moving parts” had met and formed relationships through NH&RA. Bray coordinated the deal and processed the loan through FHA.

She describes the three-acre facility, built in 1971, as a very basic, plain, flat-roofed three-story walkup; “an underperforming, troubled property.” Fifty-five of the 68 units have been under a Section 8 contract. HUD’s Real Estate Assessment Center (REAC) inspection scores were consistently below both the Maryland and national averages.

Now, under the leadership of new owner Gragg Cardona Partners of nearby Silver Spring, Maryland, Arnold Gardens is being transformed into a modern, secure and community-oriented development with tenant needs and comfort paramount.

But it hasn’t been easy. The project demonstrates the passion, commitment and ongoing teamwork it takes to make a positive impact in the affordable housing sphere.

“Everything was up in the air until the last moment,” says Bray. “We originally started with the HUD 223(f) LIHTC Pilot Loan Program. But with that, you can’t spend more than $40,000 per unit, and once the borrower started looking at the project, they realized it was going to cost more like $60,000. So we had to change into a regular 221(d)(4) loan.”

“We want to make sure above all that we’re providing decent housing,” states Gragg Cardona partner Juan Cardona, a graduate of the Catholic University School of Architecture. “The building has to function well. What conditions are the systems in? Once we understand what the systems require, then we figure out what most impacts residents. Then we back into what the financing structure will allow. We look at both sides of the ledger and see what we can afford to do.”

The company states its mission: “To develop high quality urban residential and mixed-use projects that link public policy objectives and stakeholder input to revitalize neighborhoods and communities.” In 2014, outgoing D.C. Mayor Vincent Gray selected Gragg Cardona over other competitors as members of the master developer team of the first phase of the massive St. Elizabeth’s Hospital redevelopment, centered around the Congress Heights Metro station.

For several years, the company had been looking at multifamily properties in Baltimore. They found a 45-unit building that happened to be owned by someone one of the partners knew. They put in an offer, but when they ran through their due diligence, found that it didn’t meet their metrics. Less than a year later, however, they reconnected with the owner, who mentioned he had a property in Suitland. “Literally a week later,” Cardona recalls, “we had it under contract.”

His company didn’t have much experience with tax credit deals, so Bray put him together with Gerry Joseph of Joseph Development, Inc. in Washington. Joseph has more than 30 years in the affordable housing and community development industry and consulted with Cardona and his partners on the tax credit and bond specifics.

Bray and Gragg Cardona went to the Prince George’s County Council, which was “sympathetic” to the project goals and approved a $975,000 HOME loan, as well as real estate tax abatement for 39 years. “We explained that the new owners see this as a long-term mission,” says Bray.

They then went to HUD and asked to transfer the Section 8 contract, with a mark-to-market provision, and then issue a new contract for 20 years. “When we switched to (d)(4), area rents had gone up, which supported more loan dollars.”

But the road remained rocky. “One of the hiccups we had was that HUD’s Northeast Region was in transformation,” she recalls. That translated into mortgage credit out of Boston, underwriting out of Hartford, architectural and engineering review out of Baltimore, the application submitted to New York, and “a lot of back and forth inside Maryland. There were months of figuring out who was the appropriate party for each step of the deal. Fortunately, we had a very patient seller.”

The NH&RA connection proved valuable throughout the two-year effort to pull the financing together. Bray and John Rucker, the bond underwriter from Stifel, Nicolaus & Company in Birmingham, Alabama, had met on one of the association’s information trips to Cuba. Another member, attorney Kent Neumann, of D.C.’s Eichner Norris & Neumann, is a municipal bond expert who represented Stifel. Bray knew partners at Nixon Peabody in Boston, the equity counsel, from NH&RA conferences, which is also where she met Corrine Sheridan from Boston Capital, which bought the tax credits. These meetings gave her “a high level of confidence” that she was able to pass on to the leaders of Gragg Cardona.

The project’s standard distribution list of key players’ addresses, phone numbers and emails, shared with NH&RA, enumerates 15 separate entities and contains 42 individual names, each of whom participated at some point in the purchase and/or development.

“People said we couldn’t do this deal, that it was too small a project for such a complex transaction,” says Bray. “But since so many of us were members of NH&RA and knew each other, there was a trust and comfort level that certainly helped keep us going over the long haul. None of us were afraid of a hard and complex deal. As each challenge came up, we’d just say, ‘How are we going to fix this one?’”

When work is complete less than a year from now, Arnold Gardens will have had substantial interior and exterior modernization, including all new kitchens and bathrooms and ceilings and floors where needed; and updated roof; energy efficiency and conservation upgrades with individual metering; improved resident access and security, including a new fire alarm and smoke detector system, enhanced exterior lighting, video monitoring, a personal access card system and full ADA compliance; free Wi-Fi, a computer lab and youth education support; a playground and community garden; two laundry rooms; senior transit shuttles; a hospitality suite and new rental office; and a fully repaired parking lot and hardscape.

The buildings will be 100 percent affordable, with the 55 under the previous Section 8 contract remaining that way and 13 under LIHTC.

With the exception of four units that have to be gut-renovated for ADA use, tenants will remain in place during the renovations. Gragg Cardona will pay all moving expenses for those who have to be relocated. And when work is completed early next year, the transformation will be profound.

So at the end of the project, how will Holly Bray feel about the three-year slog to get the sale and rehabilitation through to completion? “Actually,” she responds, “It’s something fun and challenging – with an emphasis on challenging. But it has the added benefit of knowing that when you do a deal like this – coordinating, massaging, getting it to the end – you’re helping people who really need it. There will be about 40 kids living here, and those kids are going to have the advantages that other children have. There’s a lot of satisfaction in that.”

Ultimately, adds Cardona, “It is a labor of love and takes a lot of specialized knowledge from a lot of people. No one at the table knows everything, so you have to rely on the knowledge and expertise of everyone on the team.”

Sources and Uses
Arnold Gardens, Suitland, Maryland
Sources
Boston Capital 9% LIHTC……………………………… $6,032,841
Love Funding FHA 221(d)(4) Loan……………….. $8,709,000
Boston Capital 4% LIHTC Equity………………….. $3,676,664
Prince George’s County Maryland HOME Loan…. $975,000
Interim Income……………………………………………….$438,374
Deferred Developer Fee………………………………….$453,253
TOTAL:………………………………………………………. $14,252,291

USES
Acquisition…………………………………………………….. $6,150,000
Construction………………………………………………….. $3,803,380
Design……………………………………………………………… $128,500
Interest Carry……………………………………………………. $400,000
Permits/Third Party Reports/Taxes/Insurance……….$241,650
Title and Recording………………………………………….. $146,875
Financing/Placement/Bond Costs……………………. $813,034
Legal/Accounting……………………………………………… $155,000
Developer Fee………………………………………………. $1,433,748
TOTAL:………………………………………………………… $14,252,292

Capitalized Reserves
Relocation/Transition Costs/Reserves……………… $132,772
Tax Credit Operating Reserve………………………….. $446,995
Contingencies………………………………………………….. $400,338
TOTAL:  $980,105