In 1992, Historic Seattle Preservation and Development Authority (HSPDA) acquired and rehabiliated the historic Victorian Row Apartments, located on the border of the International and Central Districts, into low-income housing. Like an increasing number of historic rehabilitation projects, the Victorian Row project used a combination of financial incentives and creative financing to meet its goals of preserving the past while fulfilling a current need. The Victorian Row rehabilitation was initiated early in 1992 and was granted its certificate of occupancy in January of 1993.

Victorian Row is a good example of the important role that non-profit organizations can play in the protection and rehabilitation of historic properties. Organizations such as Historic Seattle can provide technical assistance and advice and act as project sponsors or developers. They can also be an important conduit for funding and incentives. In addition, Victorian Row highlights how a concerned property owner can enlist the assistance of other organizations and agencies to ensure the protection and stewardship of their property for generations to come.

Context

In 1992, the Victorian Row apartments were both historically and architecturally significant as Seattle's only extant, unaltered, nineteenth- century apartments. The building is representative of low cost multifamily housing once common in Seattle during the 1890s. Many similar examples have fallen victim to redevelopment and Seattle's many well-known regrading projects over the past century.

Victorian Row was built in 1891 on a nearby lot, and was moved to its present location in 1909 during the regrading of South Jackson Street. The apartments were entered into the Seattle Landmarks Register in 1979, and were also listed on the National Register of Historic Places in 1990.

The neighborhood is in an area zoned light industrial, approximately three blocks east of the Interstate 5 corridor, at the cross roads between the Central and International Districts, and Beacon and south Capitol Hills. For many years, these areas have served as centers for Seattle's Asian and African American communities. Nearby, there are several small retail shopping centers, including a small supermarket at 12th Avenue and South King Street, several produce markets, restaurants along South Jackson Street, and other commercial enterprises.

The building is a two-story wood frame structure, rectangular in shape, with about 12,000 square feet of residential space that was originally divided into 12 rental units. Prior to the rehabilitation, the apartments sat essentially unaltered for many years, and the building retained most of its historical features. These included much of its interior wood molding, fishscale shingles on its exterior bays, decorative spindle work, clapboard siding, and its internal structure and floor plan.

The late Stacia Champie, at the time an 84 year old widow, purchased the Victorian Row Apartments in 1940 with her husband, and had been living in one of its units since. By the 1990s, the building was in a serious state of disrepair, and none of the units were in compliance with Seattle's housing code. Only six of the twelve units were occupied.

In 1991, the Seattle Fire Department condemned the dilapidated porches on the eastern side of the building, which served as secondary exits for ten of the units and as primary exits for two, and threatened to condemn the entire structure. Like many long term owners of older properties, alone, Ms. Champie lacked the financial resources to undertake a renovation of the magnitude that was required to address the building's issues adequately. However, she was interested in saving the building. With help from city officials, a search was conducted to find a non-profit organization with experience assembling funding for and developing similar projects. HSPDA, which has been developing similar projects since 1974, was selected.

Description of the Project

The rehabilitation of the Victorian Row Apartments was a complex undertaking that involved extensive work on the foundation, structure, roofing, interior elements, building systems and plumbing. The apartments were in need of both serious repair and extensive upgrades.

The building had dry rot on the roof, floors and walls. Damage such as this, and the addition of insulation, meant that some walls had to be opened and then reconstructed with gypsum wall board. In circumstances in which the original details could not be salvaged, as was the case with some of the wood molding, a protocol for the reproduction of original elements had to be established.

Externally, there was very little paint left anywhere on the structure. The original color scheme was derived using scrapings taken from beneath the eaves and porches. The condemned porches on the eastern side of the building, constructed of wood, had degraded to such an extent that complete replacement was necessary. Likewise, the south elevation was badly damaged from years of exposure and required substantial repairs, including completely new cladding. Because of the extensive work on the south elevation, code required the addition of gypsum board to meet fire protection requirements. This added about 5/8 of an inch to the thickness to the building.

To meet seismic code, the post and pier foundation was replaced with a concrete perimeter foundation with plywood shear walls. All of the building's systems were also upgraded, including the replacement of all plumbing and wiring. In addition, an automatic sprinkler system was added to all of the inhabitable areas of the apartments.

Due to its century-long continuous use as an apartment building, 100 years of odds and ends had accumulated onsite, which also had to be removed. Because of the age of the building, lead and asbestos assessment and abatement was also required.

Lastly, the several residents currently occupying the building had to be relocated before major work could commence.

Challenges

There were several significant risk factors acknowledged in the pro forma, related to the age of the building, and that it was a rehabilitation using federal historic rehabilitation and low-income housing tax incentives. The costs of renovating historic buildings can be somewhat more difficult to predict than those of new construction projects.

The use of historic tax credits places physical constraints on any rehabilitation project. The fact that the Victorian Row Apartments retained most of their historic integrity presented additional design challenges. Original details needed to be restored where possible, or faithfully reproduced.

In addition, the historic floor plan needed to be retained where possible, which meant that in some units the kitchen and the living area were in opposite ends of the units, an awkward layout by modern standards. Such requirements can affect the marketability of the rehabilitated units. This and the fact that the location was less than ideal by real estate standards, exposed the project to some financial risk.

The use of housing incentives introduced other constraints and risks. The use of city and state housing incentives affected the operational side of the project, which reduced some of its flexibility and introduced another layer of complexity to the project planning process. As John Chaney, Executive Director of Historic Seattle puts it, "These projects are like aligning many pieces of paper. With this alignment comes some risk, because each change causes other changes that must be reviewed."

The financial analysis was brightened, however, by the strong need for affordable family housing in Seattle. The International District was a Special Objective Area for the City of Seattle's housing programs, meaning that the city had targeted the neighborhood for low-cost residential development. In addition, the project had a well regarded and experienced development team, including HSPDA, the design services of Stickney Murphy Romine Architects, and owner's representative Michael Trower of Trower Development Services.

The Structure of the Deal

The Victorian Row Apartments used a complex package of financing and incentives. As part of the transfer of interest in the property, Stacia Champie received a life estate that allowed her to live the rest of her life rent-free in one of the units.

The total cost of the Victorian Row project was approximately $1.5 million. A combination of loans and an equity investment in the tax credits by the National Equity Fund provided the majority of funding.

The project raised approximately $540,000 in equity from the sale of tax credits. The project qualified for a total of $904,000 in tax credits, of which approximately $260,000 was Historic Rehabilitation Tax Credits (HRTC) and $645,000 was Low Income Housing Tax Credits (LIHTC).

The City of Seattle provided a low-interest loan for $670,000 from Housing Levy funds, and the remainder, approximately $290,000, was financed through a private loan from Washington Mutual (summarized below).

Funding Sources

Loans

City of Seattle 672,841

Washington Mutual 286,643

Equity Investment

General Partners 100

NEF Investment 540,331

Total Sources 1,499,915

Because the HRTC can be used during the year that the building is returned to service and has a relatively short 5-year recapture period, it represents a fairly low risk investment. Because of this, the credits were sold at $.85 per dollar, generating about $220,000 in equity.

Conversely, the LIHTC is used over a ten-year period, during which time the project must continue to meet low-income housing standards. Therefore, the per dollar credit yield is lower. In this case, the LIHTC credits were transferred at a rate of $.50 per dollar, yielding approximately $320,000 in equity. The breakdown of the tax credits is shown below.

Tax Credit Summary

Historic Rehabilitation Tax Credit

Eligible Basis (costs) 1,296,294.00

Tax Credit Percentage 0.20

Total Credit Available (20% of costs) 259,259.00

Equity Yield Rate 0.85

Equity Raised 219,996.00

Low Income Housing Tax Credit

Eligible Basis (costs) 721,107.00

Tax Credit Percentage (annually) 0.0894

Annual Credit 64,467.00

Total Credit (over ten years) 644,670.00

Equity Yield Rate 0.50

Equity Raised 320,335.00

TOTAL OF CREDITS 903,929.00

TOTAL EQUITY YIELD 540,331.00

The Ins and Outs of Incentives

Because government financial incentives are designed to achieve a certain public objective, their use generally includes a series of requirements or introduces constraints. When multiple incentives are used, it creates an additional layer of intricacy. When changes in the project occur, the use of incentives can raise issues that require additional negotiation or planning to ameliorate. Victorian Row was no exception.

For instance, negotiation was required at several stages regarding the use of the low-income housing credits, as well as with the city's housing and building code requirements.

For instance, the Washington State Housing and Finance Commission, which allocates low-income housing tax credits to housing projects on a competitive basis, was reluctant to include Stacia Champie's apartment in the low-income housing basis. Although Ms. Champie would not pay rent under her life estate, she did not qualify as a low-income tenant. The Commission thus asserted that there was technically no rent restriction on the unit. If her unit could not be included, it would affect both the status of the project as a 100% low-income housing project, and also its qualifying basis for tax credits.

Upon further analysis, HSPDA also realized that it would be necessary to revise the basis for the rent restrictions outlined in the affordable housing contract from 40% median income to 50% median income, although the tax credit allocation was based on the project as a 40% median income housing project. Eventually the change was approved following the filing of a "request for amendment."

The involvement of City Housing Levy funds also carried some consequences. City housing policy outlined a maximum density for municipally-funded projects in any neighborhood. Once a certain number of projects in a given area had been reached, policy prohibited further City investment in that area. Because the neighborhood already had several City-funded housing projects nearby, levy funds for the Victorian Row project were in jeopardy.

The two exceptions to this policy included continuous ownership and continuous use. If the housing project retained the same long-term owner, or if the building had continuously provided affordable housing, the project was exempted from the restrictions. To meet the continuous ownership stipulation, HSPDA restructured the limited partnership to include Ms. Champie as a "special limited partner". This restructuring introduced additional legal fees, in addition to affecting the project's non-profit property tax exemption for its first year. To mitigate the resulting tax penalty, HSPDA applied for and received Special Tax Valuation as a City Landmark.

However, because the building was already a registered landmark, and the standards used to evaluate qualified expenses for rehabilitation are the same as those used by the National Park Service for the HRTC, the use of the Special Tax Valuation did not introduce additional constraints. Still, the increased tax burden for the first year and the paperwork costs were significant, especially for a housing project.

The Department of Design, Construction and Land Use (DCLU), the City office that administers permitting, granted certain code exceptions, such as relief from some of the dimensional standards for stairwells and minimum parking requirements. The project was grandfathered and not required to add to its existing four parking stalls.

Outcomes

There is no question that the project achieved its mission of rehabilitation while retaining the historic integrity of the building. Victorian Row was given a new lease on life, and will undoubtedly last well into the centuries to come. The project, an innovative use of resources, won a number of awards for its achievements.

From the operational side, however, the results are more mixed. While the physical rehabilitation of the building was close to the projected budget, Victorian Row has only recently met its operating pro forma.

Over the last decade, costs have been higher than anticipated, while the rental revenue has been lower. Because of this, HSPDA has not received the management fee stipulated in the limited partnership agreement intended to cover its costs.

The income has been hampered by several factors. In the original management agreement, onsite management services were to be provided by the original owner, but she was unable to do so. An onsite manager was hired in exchange for rent, which reduced the available rental units to 12.

In addition, the units have not achieved the rental rates projected and the vacancy rate has been higher than anticipated, for several reasons. The historic floor plans may not have been optimal for some modern families. In addition, City requirements for low income housing at the time restricted 3 bedroom apartments to "large families" (two adults, and three children), which narrowed the market and caused longer vacancies. Likewise, one of the three bedrooms was fairly small, and more suitable for a family of three than a family of five.

When it became clear that these requirements were a significant constraint, the required allocation of units reserved for large families was reduced from four to two. By this time, the City had also revised its definition of "large families."

Ten years have passed since the project was begun, and in 2002 Victorian Row is performing more as projected. Occupancy has stabilized and the units are achieving higher rents, possibly related to the major housing crunch Seattle experienced during the late 1990s, when rental rates climbed dramatically.

Victorian Row is in need of some maintenance and improvements, such as new windows. The cost of this work will exceed the revenue generated to date. HSPDA is currently seeking foundational and grant support to cover these costs.

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