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Date: 03.01.2004
Author: Urban Land Magazine
Bruce Dorfman and Will Thompson, principals of the Sausalito, California-based Thompson | Dorfman Partners, LLC, a multifamily development and advisory firm, decided to go beyond the talking stage a few years ago. As a result, they have actually been on the front lines producing viable workforce housing; primarily, at this point, housing for teachers for several northern California communities.
In a recent conversation with Dorfman, Tim Gallen, principal of Gallen, Neilly & Associates of Walnut Creek, California, asked if he and Thompson believed that their concept was transportable; specifically, how apartment communities dedicated to select workforces could be produced anywhere in the country.
This concept of workforce housing, isn't really new, right? We've heard of company-sponsored worker housing for hundreds of years.
Bruce Dorfman: Right, it's not new in concept; it's just a new execution. Today, we are building housing for professionals, not only to make it more affordable or convenient to live in the community, but also with the hope of giving them the opportunity to generate savings that eventually will give them the flexibility to buy in these communities and thereby make a longer-term commitment.
So unlike in a company town, the apartment units you are producing through a public/private venture are eventually sold to the residents?
Dorfman: No. The concept behind the recent community we developed for the Santa Clara Unified School District (named Casa del Maestro, house of the teacher), for example, was built using a two-step strategy: first, solve the district's problem recruiting teachers in a high-cost housing market by offering these professionals a high-quality living environment at a very economical rental rate. Then, after three to five years, when they have had the opportunity to create a nest egg, encourage them to leverage into homeownership somewhere in the community through another gesture of support, such as a mortgage assistance program. The "company town" concept was not structured to provide ownership opportunities nor oriented toward professionals.
Moreover, the districts with which we have been working establish an independent, nonprofit entity to deal with the management and operation of the property in order to maintain an arm's-length relationship between the residents and employer. With the rental housing, the district is trying to provide a transition opportunity, an environment where homeownership and an employee's long-term commitment is the eventual goal.
So, the public/private joint venture is now moving beyond just urban redevelopment?
Dorfman: Correct. I would say it is probably even beyond just the school districts being the joint venture partner. We are effectively venturing with the cities, redevelopment agencies, and local utilities; everyone is really on the same page, trying to alleviate a major burden.
How is the project financing handled?
Dorfman: Financing is handled by the school district, and that is a unique aspect of building housing for public employees. The agencies, districts, and cities have the ability to use financing structures that provide full funding and lower-cost financing for the community. The Santa Clara Unified School District and the community for the College of San Mateo project were financed with an instrument referred to as a 'certificate of participation'. The certificate of participation typically is not used for financing housing and is a great vehicle because it has absolutely no strings attached on affordability requirements. This is important because many of the target residents would not qualify for affordable units.
Who manages the property? The school district? Or is it outsourced?
Dorfman: School districts are in the business of teaching kids, not building or operating market-rate rental communities. The employer in this case does not actually want to be the landlord. It wants the arm's-length relationship between the employer and the employee, so in the situations in which we have been involved, it has set up foundations to actually deal with the day-to-day administration of the housing, including hiring a third-party property manager. Our involvement, except for warranty issues and the like, virtually ends on the day we turn the units over to the district.
You probably receive cooperation that you don't get from other developmental scenarios?
Dorfman: No question about it. We typically have much more public support. I can honestly say that the only time Will and I were ever applauded at a public hearing by an elected body was when we presented the design concept for a teacher housing community for approval.
Case in point: we recently had a hearing down in San Mateo. The faculty and staff workforce housing that we are helping to develop will be located on a campus, which is surrounded by higher-end, single-family homes. The fundamental issue that came up at the meeting was the neighbors saying, "We like the mandate of building affordable and high-quality housing for your employees, but we also want assurances that the district will not turn it around and flip the developed community to a market-rate owner." My hunch is that if we had originally proposed for-profit market-rate housing on site, it never would have been approved.
There has to be some obstacles?
Dorfman: Surplus school sites are often surrounded by expensive homes, particularly where this problem is most acute. Public schools are predominantly located in single-family neighborhoods. Over the years, these surplus campuses have gone from functional spaces to become community open spaces. As a result, the neighbors have bought into the notion that this space is essentially their 'open space.' They have bought into that feeling of ownership over the years. They don't necessarily want to see change. Consequently, working with the surrounding community and developing a high-quality multifamily community that fits into the neighborhood is very important.
Also, there has to be a champion for these types of projects within the district. We have been fortunate to work with very thoughtful and energetic people in both Santa Clara and San Mateo who have helped us implement this concept.
What did the districts do with these sites before this alternative came along?
Dorfman: In the past they would sell them off, but now they are thinking differently. The districts realize, "If we sell surplus sites, we're never going to get them back." Given the uncertainties of population shifts, they may need the campus again as an operating school site. So, given the long-term paydown of the bond financing, districts find that this is a terrific land banking strategy. The option to return it to its former use is always there.
Do you try to work exclusively with the school districts?
Dorfman: No. This concept goes well beyond just school districts. Appropriate sites can be found in more places than just school campuses. States, counties, and municipalities as well as other public entities have surplus sites in which similar type housing would be appropriate. In northern California, we can effectively venture with cities and other agencies in order to relieve this burden for public employees.
So, that opens up the possibilities to other employee groups like public safety employees?
Dorfman: You bet. The benefits available through using this kind of program are cost-effective and fiscally appropriate.
We have advised one municipality that has a particular problem with housing costs and retention of public safety employees, such as police officers and firefighters. The structure we are looking at would use part of a surplus school site to create a community to house local police and public safety employees as well as teachers.
So, even though workforce housing is the driving concept, it is all dependent on surplus school sites?
Dorfman: Not necessarily. Cities and counties frequently have surplus and underutilized real estate. Some would shy away from fostering a community strictly for one category of worker, like police officers, but would find a community for public employees in general appropriate. The point is that if land is available, this concept is viable to solve housing problems for just about any public agency, especially in high-cost areas and communities with a physical lack of housing.
The communities you are involved with look like newer luxury market-rate rental housing.
Dorfman: Absolutely. The quality of architecture, site planning, and unit plans is the same. The only area in which perhaps we have "detuned" the product is in terms of interior finishes. Granite countertops and higher-end fixtures would be more expensive, and the public entities generally don't want to be seen as going overboard. High-quality design also helps in getting neighborhood support and eases the entitlement effort. In addition, the residents take pride in living in a nice community.
Does the lease agreement with the employees prevent thinking long term?
Dorfman: No. As a matter of fact, in both of the districts where we are currently developing these kinds of communities, the teachers can stay for up to a maximum of five years, paying roughly 50 percent of what they would pay for a comparable apartment in the market. The condition of the lease is employment in the district. At the five-year mark, the districts hope that the employee will have saved enough money and be able to take advantage of the mortgage assistance program and buy a home nearby. After the five-year period, the rental rate will move to market, or above market, in order to encourage some turnover so the district can bring in new employees.
How did the teachers react to the clustering?
Dorfman: This is a very interesting question. At first, when the teachers moved into the community that we developed for the Santa Clara Unified School District, there was apprehension about living in such proximity to other teachers. However, we had a focus group a year later and found that they not only liked the living experience and casual group support, but the young teachers were especially enthused. They felt an overwhelming sense of community and security knowing that they had a common ground.
In Santa Clara and throughout the Bay Area, young teachers are the most difficult to retain. They often stay two or three years, gain valuable experience, and then move on to another district, or even a different profession. This teacher housing community seems to have curbed that attrition for the Santa Clara district.
What is the school district's perspective?
Dorfman: The Santa Clara Unified School District was particularly pleased. Its original motivation was primarily teacher retention. In the end, they were pleasantly surprised by how loyal these teachers had become as live-in members of the community. And perhaps more profound, again with the younger teachers, many retained their initial enthusiasm for the profession. In the focus group, several stated that if it wasn't for this support, which took a major burden off their shoulders, they probably would have moved on to another profession or at least taught in another, more affordable area of the country.
Do you think your plans could be adapted by any developer in the country who is willing to do this for its school district?
Dorfman: Architectural design is something that is very local, but what we can see happening is sharing the concept of how you structure a venture with a district, how it is financed, and how the operating entity is established. That part of the wheel has now been invented and is available for use by anyone interested in helping their local community solve this problem. Several school districts in California are now looking at the concept, especially the universality of the deal structure. If developers look beyond the profit motive, the time and expertise invested also help to build better working relationships with both the city government and the community.
Can these types of deals be made attractive to other developers who would be more motivated by a profit?
Dorfman: Well, let me put it this way. We are developing these properties with the objective of not losing money. For us, this is first and foremost a socially conscious exercise. That is not to say, however, that there can be only psychic benefits. This can easily be structured as a development fee arrangement, and the numbers can pencil out. What districts like about a fee deal is they continue to own the asset. I would like to believe that every successful multifamily developer would go out, contact his or her local school district, and offer to build something like this. But I don't think that will occur. A key component of this deal will probably be an opportunity for profit. The fact is the districts are providing the land and low-cost financing as part of the deal structure. Between those two things, there is such a cost benefit, the project can absorb attractive development fees and still provide below-market rental rates. However, you must consider that the higher the development costs, the higher the debt service, the higher the rents, and the lower the benefits to the residents.
So, can a developer make a reasonable fee without adversely affecting the social benefits?
Dorfman: I believe so. The rental rates in the two communities in which we have developed are set at break-even . . . covering all of the debt service and the operating costs, as well as a small reserve, and at rental rates that are 50 percent of market. We probably could have charged a market-rate development fee, but in our case we are just getting reimbursed for our direct costs. Frankly, we make our profits on our other development business, so we haven't put a fee on these deals.
So, along with your other development and advisory activities, you intend to continue to find the time to develop these communities?
Dorfman: We are working on several right now. What we're really hoping to do is to get other developers around the country on board. There is no pride of authorship here. Granted, we've worked hard in our ventures with school districts to come up with a more universal approach, but the best thing that could happen is that other developers and districts improve upon it. As I said, there are benefits executing this business, other than profits, that are very rewarding.
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