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Deconversion Yields Affordable Homes in Lehigh Valley |
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In the late 1970s hard economic times pushed many homeowners in Pennsylvania's Lehigh Valley to subdivide their homes into multiunit rental properties. Now, 20 years later, the Alliance for Building Communities (ABC)—a nonprofit community development organization—is buying up some of these rental properties, reconfiguring them into 3- and 4-bedroom single-family homes, and making them available to low- and moderate-income families through a unique lease-to-purchase program. Drawing on a combination of public and private sources of financing, ABC has deconverted more than 23 properties consisting of 55 apartments into 23 large 3- and 4-bedroom homes for low-income families. More deconversions are in the pipeline. A short history. The Lehigh economy was hit especially hard in the 1970s and early 1980s when Bethlehem Steel, Mack Truck, and other major local employers laid off thousands of workers—causing the bottom to fall out of the housing market in the area's central cities. "Houses that had been selling from $100,000 to $150,000 [in some of the historic areas] were now selling for $60,000 or less in places like center city Allentown and South Bethlehem," says ABC Executive Director Ed Pawlowski. To prevent foreclosure, many owners converted their pre-World War II, 2,000- to 3,000-square-foot rowhouses into several smaller apartments (usually one bedroom) and put them on the market as rental units. Unfortunately, absentee landlordism, poorly maintained properties, pressures on municipal services due to higher densities, and a disproportionate share of small rentals occurred as a result. Over the past 10 years, the economic situation has dramatically turned around in the Valley. High-tech firms such as Lucent Technologies have expanded operations, causing a perceptible shift from a blue- to a white-collar economy. "But this transformation," says Pawlowski, "is leaving people behind—those who do not have the skills for the new economy. Although we now have one of the highest median incomes in the state of Pennsylvania—around $50,000 for a family of four—the majority of our urban dwellers are not making $50,000, and most of them are having a tough time finding suitable affordable housing." The ABCs of deconversion. Though several cities in the area had small loan programs to help people who already owned their properties deconvert them to single-family homes, it was ABC that implemented a turnkey operation in 1997 to acquire converted homes, oversee their complete deconversion/rehabilitation, and sell to families who qualified as low- and moderate-income first-time homebuyers. One of ABC's major goals in any deconversion is to minimize the amount of money a low-income family will need for repairs over the first several years of homeownership, thus minimizing potential financial difficulty once the family moves in. According to Pawlowski, "The first thing we do in our rehabilitations is to make sure we address all the major structural systems—roofing, plumbing, heating, electrical wiring—and then, depending on how much subsidy money we have left over from our funders, we will go to work on the cosmetics." In addition to putting function before cosmetics, ABC takes a number of other steps to ensure homeownership success. First, it issues the new homeowner a builder's insurance policy, guaranteeing that if anything goes wrong during the first year of occupancy, ABC will cover all of the repair costs. Second, it provides extensive postpurchase counseling so that new homeowners understand how to maintain their homes properly. The organization charges new homeowners $100 at closing and refunds $25 to them each time they attend postpurchase counseling sessions. "This approach helps us motivate the new buyer to attend postpurchase counseling and lets us monitor to make sure the family is adequately handling its new home and responsibilities," says Pawlowski. During the rehabilitation stage, ABC acts as a general contractor, subcontracting all the work to local building firms—managing the bidding process, monitoring contractors during the construction period, and conducting a final check at the end. Because its board is 51 percent minority-controlled, ABC makes a conscious effort to seek and use minority contractors. Minority contractors currently perform more than 30 percent of the renovations. According to Pawlowski, the biggest problem associated with deconversion is deciding what to do with the extra kitchens. "Sometimes what we end up doing is making them into a third or fourth bedroom, or we will extend a bathroom or construct laundry facilities on the second floor; but it is not a simple business to rip out those second kitchens, restructure the whole floor plan, and then make something presentable for someone to live in." How the lease-to-purchase initiative works. ABC's lease-to-purchase initiative offers low-income families with poor credit histories the opportunity to purchase a home. Under the initiative, a low-income family with credit problems can settle into a new home while taking steps to put its finances in order. To participate in the program, families must agree to attend monthly sessions with an ABC housing counselor and adhere to a strict financial budget that includes depositing at least $50 a month into an escrow account for closing costs and paying at least $50 a month toward credit card and other outstanding debt (which cannot exceed $2,500 at application). Most families are able to meet these conditions. But after a year, if a family is not able to cover its monthly mortgage payment and meet its debt reduction plan, it is asked to leave the program and relinquish the house. Once a family purchases a home through the program, it must live in the house for a 10-year period to assist in stabilizing the community. If a family must move before the end of this period, it can sell the house to another qualified low- or moderate-income buyer, repay a prorated share of its subsidized cost, or sell the house back to ABC for resale. The ways in which ABC combines its public and private financial resources allow it to place families in homes where, in many cases, their mortgage payments are lower than their former rent payments. This is how their approach works: Two banks, First Union and Summit, provide ABC with lines of credit worth $1.1 million combined for acquiring and leasing homes. Then, a local foundation, the Century Fund, provides ABC an annual grant of $75,000, which ABC deposits into the two banks. These deposits pay the monthly interest charges on the banks' capital funds, giving ABC essentially interest-free capital. ABC then leverages this private money with the public subsidies it receives from the HOME program and the Federal Home Loan Bank. "It is difficult to renovate houses with three or four different funding sources and several sets of regulations," Pawlowski acknowledges, "but it has enabled ABC to quadruple the number of homes in the program than if we had just used HOME or CDBG [Community Development Block Grant] funds." This approach has allowed ABC to move several families directly from the Section 8 program into homeownership situations. For more information, contact: Ed Pawlowski, Executive Director, Alliance for Building Communities, 830 Hamilton Street, Allentown, PA 18101, (610) 439–7007. Or see: "Alliance for Building Communities," Maxwell Awards of Excellence Program for the Production of Low-Income Housing: Case Studies of the Awardees and Finalists; Round Twelve, Fannie Mae Foundation, 4000 Wisconsin Avenue NW, North Tower, Suite One, Washington, DC 20016.
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