Much of today’s senior housing is envisioned as ground-up projects or repositioning of existing senior living assets. Yet one Chicago-based development company has completely changed the vision by trying new models of senior living in some unusual settings.
Evergreen Real Estate Group, with David Block leading its development team, counts project examples to date including Chicago Housing Authority-subsidized senior apartments situated above new Chicago Public Library Branches; as well as a recent hospital conversion to senior housing.
In addition to innovative development and design approaches, Evergreen is also cutting edge in its approach to financing, utilizing models and tax incentives that allow it to create senior housing that is both new and affordable. Through these models, Block and Evergreen are driving change and are cutting the path for others to follow.
Senior Housing News: How did you and Evergreen come to work in the senior housing development space?
David Block: I’ve been with Evergreen five and a half years now, and I have been in the world of affordable housing, including both senior housing and family housing, for almost 20 years. I’m an architect and urban planner by background and training. I spent quite a few years working for a large national nonprofit developer [previously] and in 2014, I had an opportunity to come over to Evergreen.
I think one of the things that I most appreciate about working at Evergreen is we take a very entrepreneurial approach to the way we develop and operate housing for all of our populations, including our senior population. If there is a niche that somebody isn’t filling, if there is an opportunity to build something that others may not have recognized, we will try to seize those opportunities.
These kinds of opportunities have popped up several times in the five-plus years that I’ve been around [including several] hospital adaptation projects. One was in Aurora, Illinois, the old St. Charles hospital, which is now called St. Charles Senior Living. That was a project that we started in my first year at Evergreen. It was a beautiful building that was in a great location in a city that really wanted and needed development. We saw this opportunity, but more importantly from a development perspective, there was a little-used financial resource called the River Edge Redevelopment Zone that provided a significant amount of additional equity available for the redevelopment of a historic asset like this.
We were the first developer to use this River Edge Redevelopment Zone Program with low-income housing tax credits. [Illinois Housing Development Authority] IHDA in Illinois really loved the fact that we were bringing $4 million of this additional resource to the table, plus the federal historic tax credit, and so they got very strongly behind this project. They featured this project in their annual report in 2017, I think.
The reuse of hospital projects has become a bit of a template for us. The project that we now have under construction is even more complex than the Aurora project because we are trying to build a mini continuum of care for an affordable population in Illinois, which has a fairly strictly controlled Medicaid waiver program. In Illinois, it’s called the Supportive Living Facility Program, or SLF, and they’re not granting new SLF licenses.
We needed to identify an existing SLF license that was available to be used on the site. We actually had to get new legislation passed in Springfield here to be able to do a mixed-use facility like this in one building. We went to Springfield, we enlisted some help from local friendly legislators in order to allow this mini CCRC approach within one building.
Then it took a very complicated financing approach. Low-income housing tax credits on both the SLF and the independent living unit, and then working closely with the Chicago Housing Authority.
The last [project] I will mention, we had a lot of experience working with housing authorities, and so when the Chicago Housing Authority announced an opportunity to take the lead in developing projects that incorporated both affordable and deeply subsidized senior housing with new public library branches, we jumped at that opportunity. I think our focus on mixed-use projects and our relationships with the city here in Chicago really helped move those projects forward. The Northtown and Independence Library Housing projects, they’d been really important to us, we’re passionate about them, and they’ve really been wonderful projects for the community.
As you noted, many of these projects, if not all of them, would not be possible without the use of low-income housing tax credits and other tax financing mechanisms. How did the firm become adept in this area?
Evergreen has been around for about 20 years. The company grew initially through acquisition of existing apartment complex assets. Most of those were senior apartments, whether they were low-income housing tax credit properties, or old HUD 236 or section eight properties. Evergreen had a lot of experience in the world of affordable housing, and through that experience, we also had a fairly deep set of relationships, both on the public side and on the private side. With IHDA in Illinois in particular, but as we grew and expanded in other States, we cultivated relationships with other state housing finance authorities, because if you’re going to be in the business of owning and operating affordable housing, those relationships with the state, they’re not really just regulators. They’re really our partners in doing these projects. Those relationships are critical.
We like to think that the agencies like working with us because we deliver on our commitments. When we put in an application and say we’re going to do a project, we do it, and we do it in a way that is helping to advance the broader mission of supporting affordable housing. We made a turn from pure acquisitions to development about six or seven years ago; we formed a subsidiary at the time called VeriGreen Development. This was before I joined the firm. Company founder Jeff Rappin and his son, Steve, who is now the president of the company, wanted to branch out into new developments of both senior affordable housing and family affordable housing.
They pursued a number of 9% applications where previously, when they had been doing acquisitions of existing assets, they would almost always use the non-competitive 4%. As you know, the 9% credit is a competitive credit. They were very successful back in 2013 or so in pursuing these competitive credits. They received four separate allocations of this 9% credit at that point, and they knew that they needed to grow the development group to make that happen. They had another partner with them at the time, but they wanted to bring in somebody whose full-time job was to run the development business. I came along, it was a good time for me to be making a career change.
Through a mutual friend we had we discussed my plan and my vision of how I think I could grow the development business for them, and so we started working on it. I think it was a conscious decision to turn into development of these assets, but as I mentioned earlier, a lot of the kinds of projects that we’ve done have really been opportunistic views of either resources that are out there or [requests] that we’ve responded to, or we find a building that we think we can repurpose and then we pursue a plan to do it. That’s how we’ve grown.
Evergreen has made a name for itself as an adaptive reuse specialist. What are the advantages and drawbacks to repurposing those older and obsolete buildings such as hospitals?
My answer is probably the same, whether we’re talking about adaptive reuse for seniors are adaptive reuse for families. I see adaptive reuse as a real competitive advantage in terms of creating apartment environments for people that are hard to replicate with modern materials. If you’re building a new apartment building, no matter how thoughtful your design, no matter how careful your detailing, even to some extent with luxury properties, you’re still dealing with the same palette of materials.
You’re putting up drywall, and you’re using some form of contemporary windows, and it really takes a lot with a new building, especially when you’re dealing with affordable housing budget constraints. It takes a lot to create an environment that is warm and has more character than a typical apartment. We need to recognize that our clients are tenants. Even as affordable tenants, they still have choice in the marketplace.
We think that saving buildings is the right thing to do for neighborhoods.
If we can offer not just a competitive price point, because that is fundamentally what affordable housing is offering, but also a really interesting old building that has interesting unit layouts and high ceilings and some of the old character, whether it’s woodwork or tile that a historic building offers, we think that tenants are going to be drawn to those buildings more often than they might be drawn to our competitor’s building, and that helps us keep our buildings full. That’s good for our bottom line, but we also think it’s good for our communities.
We think that saving buildings is the right thing to do for neighborhoods, because it takes a piece of history that may or may not have been important for a community, but it repurposes it for another use, and it allows that building to take on a whole new life for the foreseeable future.
I guess the last advantage is that it’s also the greenest thing to do. The greenest building is a building that’s already been there. If you think about the embodied energy of an existing building, if you are spending energy and fuel to demolish a building and clear a site and then build a new building, versus the energy it takes to simply restore an existing building, the green equation works out much better for adaptive reuse. For all those reasons, we are really enthusiastic about adaptive reuse projects.
You talked about the law change in Springfield to get the Ravenswood project off the ground. What are the regulatory hurdles that Evergreen is facing with regards to getting its development projects shovel-ready?
I’ll give you two examples. The first is probably closer to the Ravenswood example. We, as I mentioned, took full advantage of this River Edge Redevelopment Zone Program when we did the St. Charles Hospital in Aurora. It’s a great program. Unlike the new Illinois Tax Credit Program, which is capped at a certain amount and is severely oversubscribed, the River Edge Program, like the federal credit, is not capped at any particular amount.
If you do a project and your building is a historic building within one of these designated River Edge zones, you get these credits without having to apply for them. That’s a very valuable resource for any developer to use. We’re trying to do another project in Aurora, and we’re running up against the same challenge that we saw on the St. Charles project, which is that the program is set to expire. It’s a little bit of a race against the clock to try to get projects done. The current environment that we’re in right now where markets seem to be frozen up, that’s a little worrisome to us, but we’re continuing, full speed ahead, to try to work on that.
The other example of this kind of regulatory challenge is many cities are enacting what they call an inclusionary housing ordinance, [such as] in Chicago with the ARO, the Affordable Requirements Ordinance, and figuring out how to make these programs successful and work well with the regulations that govern other kinds of programs like the low-income credit has sometimes been challenging.
Often the regulations for these programs are not put together by people who necessarily have a lot of experience with these other programs. It takes a lot of education efforts to try to say, “Look, the program would really work better if you did X, Y, Z instead of what the regs currently say.” We spent a fair amount of time trying to get programs that weren’t necessarily designed to work together to work together.
Speaking of the current economic climate, has the COVID-19 pandemic affected Evergreen’s senior housing business. Do you think that it could lead to any longer-term changes in senior living?
It’s been all hands on deck for our entire team. We have a portfolio of about 10,000 units [including] total units that we own, units that we manage for others, and of that, I think a little more than half are seniors. Our property management side has been working very hard to make sure that the senior sites, in particular, are secure. We’re not limiting visitors yet because these are, by and large, independent living facilities. They’re apartment buildings. They’re not health care facilities like those that have been hardest hit.
We’re certainly sending out information to our tenants. We’re making sure that our staff are trained in the hygiene and the protocols that are out there to try to slow the spread of this virus. We’re certainly looking to try to take care of our residents. There’s been a lot of turbulence in the capital markets right now. We’re seeing that more on the bond side than on the tax credit side, but it’s a very difficult time to try to close a transaction, particularly if you’re in the municipal bond market.
If you’re doing the 4% non-competitive credit, then you’re trying to sell a bond to what may be a much more limited or more risk-averse market than we had even a few weeks ago. We’re working through it. Usually, if one way is blocked for us, we will try to find another way, but it’s scary times out there right now. We’re hoping that construction doesn’t slow down because we are under construction at our Ravenswood project. So far, it hasn’t, but subcontractors are like everybody else. They’re concerned for their health and their family’s health. We’re worried that they may say, “Look, we don’t want to be out right now, even if we’re working on a large construction site, we don’t think it’s safe.” If that happens, then we need to figure out what we do from there. I’m not sure that anybody has a plan for this yet.
Do you think the senior living industry is changing fast enough? For example, in meeting that need for affordable housing or even middle-market housing?
I think the senior housing industry as a whole has done a wonderful job in creating beautiful, comfortable, very well integrated facilities for people who have the ability to pay $6,000, $8,000 or $10,000 a month to be part of a continuum of care.
The bigger challenge that I think remains unanswered is nobody, as far as I can tell, and I count us among that, has really answered that middle-market model effectively, because the economics of it are not set up. The population there has too many resources and perhaps an income that is just too high to be accommodated in the real affordable housing, but they can’t afford the high-end product that’s out there.
I think as a society, we have probably failed to identify ways to help bridge that gap, whether it’s through public programs or through other incentives to lenders and investors to make that middle-market housing possible. We think on the affordable side, it’s simply a question of far too much demand and not enough resources to build it. If the number of tax credits and the availability of soft resources to support those tax credits doubled, I think we would fill that pipeline immediately, and there still wouldn’t be enough new affordable housing produced to meet all the demand that’s out there, but at least it would be a step in the right direction.
You mentioned that real estate by nature is a conservative investor group and changemakers are risk-takers. How do you describe your appetite for risk?
I think we have a good balance in the office of how we look at risk. Right now, there are three partners in our development group. I head up the development group and then with Jeff Rappin as the founder and Steve Rappin as the president, the three of us are really making the primary decisions around risk on projects.
It’s my job to try to push the envelope a little bit and identify opportunities, but I think we have a robust dialogue in the office about whether we’re taking too much risk with something and how we are mitigating risks.
I am able to move many of those projects forward because we find ways to deal with that risk or mitigate those risks. There are also a number of projects where the more conservative voices in our group prevail and we say, “Yes, that’s too much risk for us and we’re not going to do that project.” We have those conversations internally all the time.
How do you approach changemaking efforts, so as to be ahead of the curve but not too far ahead of the market?
Sometimes the new opportunities are so clear that you can simply reach out and grab them.
For example, in Aurora with that resource which we knew was worth $4 million on a $24 million project, [that] was both available and potentially expiring. We knew that we had to grab that resource and prove that it worked or it would go away. That was easy in terms of timing.
Similarly, on the Ravenswood project, we had access to a license that was in Illinois a rare commodity. We had a site and a building and a political will to build the project and we had the strong interest of the Chicago Housing Authority. All of those things came together and we knew that that was the recipe for success. We can only take so much credit for the library projects. They really were an initiative of former mayor Rahm Emanuel, and he and the team that he assembled on the public side were really the drivers for it. We certainly made our contribution and we like to think we ran the projects efficiently and we delivered them cost-effectively.
Sometimes the new opportunities are so clear that you can simply reach out and grab them.
In that situation, we took advantage of the fact that you had a very powerful political leader saying, “I want this to happen.” We stepped up and raised our hand and said, “OK, Mayor we’d like to help make this happen.” I think that there are different ways to say yes to opportunities and we’ve tried to be flexible in how we do that.
Can you talk about scalability or adaptability of what you are doing across the country? Evergreen has a lot of expertise and connections in Chicago; do you see potential for similar types of projects elsewhere in the country?
I think from our perspective, we will be opportunistic and go anywhere, but the decisions that we make about where we will go to pursue projects have a lot to do with the kinds of resources that are available in an environment.
We’re realistic enough to know that if we get a call from a small community that just doesn’t have any resources, and it looks like maybe the state is unwilling to put resources in to doing a project in that community, it’s unlikely that all of the good ideas and excitement in the world is going to result in a successful project.
On the other hand, if there’s a community that has a strong resource base — whether it’s from the local housing authority or many cities now have their own affordable housing fund that they use to help support affordable housing — if there is a resource base that can actually support the development of projects and they’re looking for good ideas to help use those funds effectively, those are the kinds of places that interest us. Because, as we all know, it is expensive to build this kind of housing. We will use as many tools as we need from the national arsenal of tools to make it happen. Ultimately the local community needs to be able to step in and provide some resources as well.
In terms of adaptive reuse and creating a competitive advantage, can you elaborate on how Evergreen approaches design and pushing the envelope there a bit, versus luxury communities that may not be as innovative?
Sure. As I mentioned, I’m an architect, and I guess I think about design in such a way that design is fundamental. To me, good design is not spending money on expensive granite countertops or in buying high-end appliances and all that. That is icing on a cake. The best design is about light and space and a relationship between public space and private space and making people feel good about living in an environment. It doesn’t have to be expensive.
The library projects we did were more expensive than typical buildings, but when you consider that we were delivering a brand new public library as part of them, we did deliver those buildings within the constraints of the world of affordable housing. I think a lot of architects have discovered that affordable housing is a fruitful market that they’d like to work in because it allows them to express their creativity within the limits of a budget, and so it requires that much more creativity from them.
I think that one of the things that Evergreen offers is we do try to bring a design sensitivity to all the projects that we do because we want people to feel good about where they live. We think even if you are a low-income senior or a low-income family, you should still have that right.
You mentioned the middle market as a big challenge that no one really has figured out yet. Is that something that Evergreen is thinking about? Do you see some creative public/private partnership possibilities?
We’re pretty resourceful when it comes to using public funds. We are not afraid of any of the public tools that are out there to help make a project work. We’ve used just about all of them. At the end of the day though, we’re not magicians. We can’t manufacture a return for an investor and we can’t manufacture an artificially low interest rate.
If the industry is being driven by investor returns and by a particular interest rate environment, which, for the last few years has been about as low as it ever gets, and we’re still not able to deliver those mid-market products, then you really do need other tools. You do need the tools from the public sector in order to make that work. The problem is that almost all of the public sector tools are geared toward the low-end affordable housing end of the income spectrum.
There really aren’t any public tools available to help serve that middle-market of families from between 60% or 80% of area median income, up to 120% or 140% that are of median income. It’s interesting. I think it is definitely too early to say, given that we’re still in the crash of a really scary crisis right now. It is my hope that maybe if something good comes out of this pandemic that we’re living through — and a lot of people are going to lose their jobs and seniors may be more vulnerable than they were before — it is that the public sector steps up with some new tools that we can use to help provide more comfortable housing for seniors and retirement, additional assisted living tools to help seniors age comfortably in place. I think all of those tools are needed and maybe this crisis, something good will come of it.
I liked what you said that sometimes the opportunities just present themselves and you’ve got to seize them. Do you have any thoughts on what makes Evergreen able to seize those opportunities?
Yes. I think there are lots of opportunities that we pass up. I like to think that some of it is a careful vetting process of what opportunities are the best bets for us to spend our time and money pursuing. As we grow, it’s harder to do this if you’re working on a national platform. We have been fairly focused on Chicago and we’ve gone into Wisconsin, but we’re continuing to branch out. We’re exploring a big new opportunity in Atlanta. The bigger you get, the harder it is to be as nimble as a smaller, more local firm. We’re trying to figure out how we strike that balance every day.
I don’t know that I have a magic answer for that, but I think it’s just kind of continuing a culture of careful but not too restrictive balancing of risk on every new opportunity.