Background

The Greater Centennial African Methodist Episcopal Zion Church sponsored the construction of this scattered site, low income, master-metered, project in the early 1970’s.  The original loan was FHA-insured. By 2006, the project was in serious need of substantial rehabilitation. The HAP rents, having only received OCAF increases over the years, were seriously below market. The project, although fully occupied, was struggling financially. During the course of environmental review, it was discovered that the project was located directly over an abandoned coal gasification plant site. The soil and groundwater were seriously contaminated with volatile hydrocarbons, some of which had been permeating the air outside project buildings for over a generation.

The Challenge

This project presented five key challenges:

• Substantial Rehabilitation. The project needed extensive exterior work (brick pointing, new roofs, windows and doors, resurfacing of parking areas, sidewalk repairs) and all of the apartments needed new cabinets, appliances, retiling, subflooring and flooring. All of the boilers needed to be replaced. To reduce energy costs, the apartments required submetering.
• Tenant Relocation. The project would lose its HAP contract benefits if tenants were moved out of the project and there was no money to cover the cost of securing alternative housing during renovations. 
• Rents. The HAP rents were insufficient to cover the existing debt service much less the debt service for the much larger loan needed to fund the substantial rehabilitation of the property.
• Environmental Remediation. Con Ed, the successor in interest to the original coal gasification plant operator, entered into a voluntary cleanup agreement with the New York State Department of Environmental Conservation to remediate all abandoned coal gasification sites for which they were responsible. HUD guidelines in effect at the time did not allow such a seriously contaminated site to be eligible for mortgage insurance. Furthermore, the remediation work, which was more costly than the substantial rehabilitation, would be disruptive to the construction work and would expose several buildings to high levels of contamination during excavation.
• Sale of Parcel of Mortgaged Land. The sponsor church wanted to subdivide a vacant parcel of land owned by the mortgagor entity for the purpose of developing a conventionally-financed community center.

Outcome

• Substantial Rehabilitation. The mortgagor retained an architect who developed detailed plans for the rehabilitation of the project. With assistance from Rockhall, the mortgagor’s consultant sought a State Weatherization grant to cover the cost of boiler replacement, new insulation and installation of energy efficient windows and appliances. The plans included submetering so Rockhall calculated the utility allowances to be used for Section 8 certifications once the improvements were completed.
• Tenant Relocation. During processing, the managing agent was directed to not lease up vacant units and let natural attrition increase the vacancy rate to the point that there was the equivalent of two empty buildings in the project. Rockhall and the mortgagor’s consultant held extensive meetings with the tenants to explain the process and to earn their cooperation. The plan was that tenants would be moved into vacant units to clear out two buildings at a time so that work could be done. Once the buildings were completed, tenants would then be returned to their original units and the next two buildings would be cleared out. Although this process involved moving each of the tenant households twice, it was vastly cheaper than the cost of off-site relocation. An additional benefit of this type of relocation is that many of the occupants of larger units had, over the years, become “empty nesters.” This stage of the process was used to “right size” tenant households with apartments to more effectively use the available affordable units.
• Rents. Rockhall commissioned the necessary rent studies and worked with HUD to obtain a budget-based rent increase for the project that would ensure that project revenues would be sufficient to support operating costs and the new debt service.
• Environmental Remediation. Because the project was already FHA-insured, the HUD office realized that without new financing, the project would become a default and an assignment. Eric Axelrod, HUD’s Chief Environmental Clearance Officer worked directly with HUD field office personnel, the mortgagor and Rockhall to craft a strategy that would make it possible to complete the substantial rehabilitation, conduct the environmental remediation and do the post-remediation monitoring necessary to ensure that the site was clean. Given iron-clad guarantees from Con Ed that the remediation work would be done, along with full approvals from the New York State Department of Environmental Conservation and the New York State Department of Health, HUD waived numerous environmental requirements to allow the initial endorsement of a loan to fund the substantial rehabilitation prior to remediation of the site. Remediation followed the rehabilitation work. During remediation work, Con Ed paid the cost of relocating tenants in the affected areas to off-site apartments. The site will have monitoring wells for the next ten years.
• Sale of Parcel of Mortgaged Land. The loan was processed as if the vacant site had been carved out. Before and after surveys were prepared. The transfer of the vacant land to the new church entity was done simultaneously at initial endorsement of the new FHA-insured mortgage.