The group of women’s religious communities that established the Catherine McAuley Housing Foundation (CMHF) (see New Heritage case study) also formed Mercy Housing Inc. (MHI). MHI was interested in a few properties in CHFA’s bulk purchased RTC properties. However, when CHFA kept those properties, MHI turned its interest towards the Grace (then Le Baron) Apartments.
MHI consultant Dan Morgan recalled, “No one was interested in Grace because the buildings were in very bad shape and it was in a bad neighborhood. We did some quick pro formas, but it had been appraised much too high, the numbers would not work.” Then, after area gang activity drew negative publicity, the price dropped “overnight” from $400,000 to $60,000. MHI financial consultant Ken Hoagland recalled, “We were aware that Grace was a high-risk property, but when the price dropped dramatically, it seemed like such a good deal, Mercy couldn’t not buy it. CHFA tried to convince them not to buy it, and refused to finance it. Essentially, they said ‘no’ to the neighborhood.”
The two-building Grace apartment complex, in Denver’s East Colfax neighborhood at the City’s eastern edge, sits at an intersection that forms the border of the city and county of Denver. Across the street is the city of Aurora, a working class suburb in Arapahoe County. The East Colfax neighborhood is a square, bordered by Stapleton International Airport to the north, Lowry Air Force Base to the south, sparsely developed land in Aurora to the east, and the upscale Denver neighborhood of Montclair to the west. This location was once an asset, the gateway to jobs and activities at Stapleton and Lowry. Because both were scheduled to close, the neighborhood’s future is uncertain.
East Colfax shows all the signs of neighborhood disinvestment-run-down buildings, garbage-strewn vacant lots, and a general appearance of neglect. The area’s large blocks of low-rise apartment buildings, built in the 1960s and 1970s, reflect the style of that time-set back from the street and surrounded by lawn and asphalt. The generic architecture and property layout contribute to a lack of visual cohesiveness that seems to reflect an underlying lack of community cohesiveness. And while East Colfax has a semi-suburban appearance, the area has its share of inner-city problems. In the last five years, it has become notorious as a center of gang activity, drug trading, and related turf wars.
Grace Apartments’ neighborhood is predominantly African American, and one local individual said of the area, “If there is a ghetto in Denver, this is it.” Census statistics, however, do not reflect any ghettoization that may exist, in part because the census tract includes sections of the prosperous Montclair area. According to the 1990 census, East Colfax had only a slightly higher concentration of minorities, at 17 percent, than the City of Denver as a whole, at 14 percent. African Americans comprised about half the nonwhite population and 9 percent of the total population in East Colfax, compared to the citywide ratio of about one-third of the nonwhite population and 6 percent of the total population. East Colfax’s Hispanic population, at 12 percent, was lower than the proportion citywide, at 23 percent.
East Colfax’s housing stock consisted mostly of rentals; only 10 percent of the area’s units were owner occupied, compared to nearly 62 percent citywide. Rents-both in the census tract and at Grace (about $340 per month for two bedrooms)-were below market rate in 1990. Yet 23 percent of the area’s units were counted as vacant, compared to 9.3 percent citywide. This suggests that the combination of cheap rent and available units is not enough to convince people to live in the neighborhood.
Yet according to Mary Dray, head of property management for MHI’s Denver office, the quality of applicants at Grace has improved, although many people still fear the neighborhood. “That’s probably more of a perception problem, lingering from past, than reality,” she said. “The problem now is how to change that perception.”
To an outside observer, however, the neighborhood has more than an image problem. New management took over the building next to Grace, and property manager Richard Birkey said it seemed to be full of drug dealers. “In this neighborhood there is not much of a continuum,” he said. “The buildings are either good, safe, like an oasis, or drug infested. …The problem here is, some owners seem to be in cahoots with the gangs or really don’t care. They buy a building, fix it up to a minimum, and fill it with dealers-because they pay their rent on time and in cash.”
Mercy Housing Inc., a network established in 1981 and co-sponsored by five religious groups, manages over 600 affordable housing units and has developed or preserved more than 1,500. MHI and its subsidiary, Mercy Services Corporation, provide direction and support to nine Regional Housing Corporations throughout the country. Of MHI’s 222 units in Denver, about half are independent rentals and half are transitional units. Sister Geraldine Hoyler, who heads MSC, explained MHI’s philosophy: “We consider housing to be on a continuum from shelters to ownership, but we only work in the mid-part of the continuum: transitional, supportive rentals, and independent rentals.”
MHI defines transitional housing as limited to two years, during which residents must participate in an intensive program of services, as required by lease addenda. “Typically such addenda would be general, based on case management,” said Sister Geraldine. “But the program often includes elements such as education, budgeting, clearing up past stains on record, parenting skills, conflict management, or other training to help that person position [himself] for independent living.”
MHI mainly works on family-oriented developments. According to the organization’s promotional literature, its programs “focus on enhancing practical skills, strengthening the family unit, and providing individuals with the skills and motivation to set and pursue goals.” MHI believes families require supportive services to help them break the cycle of poverty. The organization also helps residents locate additional, outside services, if needed.
MHI felt strongly about its capacity to revive the troubled LeBaron (now Grace) complex, which it saw as a next step for residents of its Decatur Place transitional project. MHI convinced CHFA to include the property in the bulk purchase. Financial consultant Ken Hoagland explained, “Both the city and CHFA said ‘yes’ because it was Mercy. Mercy was well aware of the risk involved, but their attitude was, ‘Someone’s got to do it, and that’s our role.'”
MHI financed Grace with tax credits, a conventional mortgage, and a small amount of grant money, including funds from the federal Rental Rehab program (through the city and the FHLB’s Affordable Housing Program). Hoagland helped MHI president Sister Lillian Murphy compile the financing, since CHFA would only agree to serve as pass-through, not to finance the project. The acquisition price was $43,000, and the rehab came to $1.5 million, or about $28,302 per unit. “But it could have probably used $2.5 million in rehab,” said Sister Geraldine, who became involved at the end of the rehab. “We never could get enough money to do all the rehab we should have done.”
“We fund most of our property development at this point in time through tax credits,” she continued. “But after several years of doing this, my rule of thumb for a tax credit deal to be affordable is that you can finance 50 percent from the tax credit buyer, paying at least 60 cents on the dollar; 25 percent can be serviced debt, i.e. a first mortgage; and 25 percent must be unserviced, i.e. a grant or other ‘free money.'” Sister Geraldine thought Grace-which was done before MHI had “concocted those rules”-was carrying too much debt. “We’re way below my 25 percent target for unserviced debt.” But, Ken Hoagland pointed out, “the deal was done that way because it was what was available.”
When MHI acquired the Le Baron property, the two four-story brick buildings were in poor condition. The only clue that these simple slab structures were built as middle class housing less than a generation ago was that the buildings were painted white and landscaped with shrubs. Aside from that, the complex possesses no amenities often found in formerly middle class dwellings that have become low-income housing. Odd features such as nonstandard window openings-which make the place a maintenance nightmare, according to property manager Richard Birkey-suggest that the place was built in a rush, possibly as housing for personnel of the nearby air force base or airport.
The building contained all one- and two-bedroom apartments, and MHI decided to reconfigure the units to create a mix of two, three, and four bedrooms, thereby reducing the total number of units from 67 to 53. With an extremely limited budget, Sister Geraldine said, “We made all sorts of judgments about what we would replace or not, and how to do the rehab. We ended up with more two-bedrooms than the market could support, though, and not enough three- and four-bedroom units. And because of the layout of the buildings and assumptions made about the target market, we ended up with some really small bedrooms.” Sister Geraldine said the organization had estimated its market for Grace to be families with younger children, but the demand has come more from families with older children, for whom the second bedrooms are too small.
Although the Grace complex was much more habitable after the renovation, the place was simply never built to last. Less than three years later, MHI had to lend money to its subsidiary, Mercy Services Corp., to replace the boiler at Grace. Then, faced with massive destruction of units by tenants, Mercy Services had to borrow substantially more for a major reconstruction program. Without a parent company with such deep pockets, Grace would have been in deep trouble. As one observer noted, “Banks that did not want to lend to the project initially would certainly not lend to it after it had failed once.”
Property Management and Security
Early on, MHI hired former Decatur residents as property managers at Grace. “MHI made that decision,” according to Sister Geraldine, “because people thought that you would have a manager that was understanding of the needs of those folks and that would help facilitate the move [from Decatur to Grace]. And I would say it worked well with some people, but it wasn’t adequate to deal with some of the more difficult problems.”
MSC helps ensure high-quality, long-term property management. Sister Geraldine explained some of the property management changes at Grace: “We have changed security, staffing, and the way we manage the project. It took about a year to make these changes, because you keep thinking that there’s got to be a more economic way to do this ….There’s no reason for a development this size to have to put security in the building all night, every night. ….A 53-unit project should not require more than one full-time [on site] staff, and we have one and a half, plus the security guards.”
Nevertheless, the building’s 24-hour security appears to be producing the desired results. Before adding more security, “[Grace] would have the police…here two or three times a night,” Richard Birkey said. “We were on the police department’s top ten public nuisances list. Now, we’re off the list. The police are also working more closely with us; they are more responsive now, and get here quicker when we call.”
Birkey, who got the manager’s job by responding to an ad in the paper, recalled that during the interview, MHI staff wanted to be sure he knew what he was getting into. He was warned that the gangs were literally chasing managers out. But Birkey has over 11 years of experience in low-income housing management, and he needed a job and a place to live. He sees this current experience as a challenge. “Occupancy was low when I came in, and I had to evict at least 10 residents. We spent the first six months ridding the project of undesirables-gangs and drugs are innate in this neighborhood.”
MHI staff suspected that bad elements in the neighborhood were a major source of the problems at Grace. A previous property manager helped organize a group of local landlords to share information about tenants and help improve the neighborhood. Interest has waned among other owners, but Birkey is trying to rouse participation again. MHI hopes the landlord group and the relationship with Decatur will make Grace a viable place.
Despite the external origins of some problems besetting Grace, MHI still concentrates its property management efforts more at improving conditions within the complex than in the neighborhood at large. Birkey believes that MHI needs to “quit investing in heavy security doors. The problem is inside already.” After less than three years of occupancy, many of the rehabbed units had already been badly “trashed.” Birkey described the damage to the units as “burned carpeting, person-size holes in the walls, burns on walls, incense burns, empty ammunition cases strewn about, extreme filth, bad smells.” He noted that “a combination of poor housekeeping and damage go hand in hand with drug dealing.”
MHI’s Mary Dray concurred with Birkey’s assessment. “The problem now is not so much the rehab, or investing in the latest security system. It’s more labor intensive. It’s more important to invest in people. We need people to tend to this place on a 24-hour basis.” However, Dray added, “As we have been able to afford to, we are fixing up the units one by one, then renting them. Now, we have rented all the units that are clean and sanitary-in fact they are going quickly.”
To address the problems with its tenancy, MHI strengthened its tenant screening. Sister Geraldine said MHI has reduced the number of people in the building with Section 8 certificates. “We were having a lot of trouble with Section 8 folks fronting for the dealers,” she said. “And this has never been our experience with Section 8 before.”
At Grace, as well as at another MHI-run project in Kansas City, criminal background checks are conducted on all potential tenants. But according to Sister Geraldine, some dealers are finding women with no criminal history to front for them. “There are not hundreds of these cases,” she said, “but enough to note a pattern.”
Out of Grace’s 53 units, 42 were occupied at the time of this research. The resident population was racially mixed: of nine households surveyed, five were black and four were white. The median age of heads of household was 32. The median income was between $10,000-12,500. Three of the respondents had lived in the complex for six months or less; one had lived there between six and twelve months. None had lived in the building before it was acquired by MHI.
Many Decatur residents objected when MHI tried to convince them to move to Grace. “Given a choice,” said Mary Dray of MHI’s Denver office, “they didn’t want to move there.” Dray, who had been working with Catholic Charities, recalled, “Catholic Charities would send people to Grace, but they would move out. It was not being managed properly, and they felt it was too scary to live there. Our case managers wouldn’t refer people there. And then some families from Grace moved into Decatur.”
Of 27 original tenants, Grace retained only 10 or 12, according to Birkey, the on-site manager. Some of those residents were ready to move, Birkey said, but Grace staff reached out to keep them. “We said-‘Please stay. What are your needs? We want you.'”
While Grace residents echoed the problems associated with ongoing crime and the initial management, residents also confirmed improvements since the new management team began. One resident commented, “The new manager has done much better at clearing up the crime. I get immediate results with any maintenance or anything else I ask for.” Another concurred, “Finally we have a management/maintenance team here who truly care about the tenants. …The buildings are finally being filled with decent people who care and appreciate their surroundings in most cases.” The tenant said she didn’t know how long she would stay at Grace, but “as long as we have a manager like we do, I won’t move.”
About half the respondents reported satisfaction with their units. Some reported such benefits as security, low rent, and a clean and quiet environment. However, residents disliked the water system, drugs and crime, trash, and the size (too small). Although several respondents said their current housing was an improvement over their previous situations-which included other apartments, a hotel, and even no housing at all-no respondent saw Grace as permanent housing. Most expected to stay for only a few years.
One respondent was unhappy with his living unit and the lack of play facilities for children. He wrote, “Too many people here have drug and gang connections. People and kids trash it out too much. Peeing in the elevator.” He also did not find the atmosphere friendly, commenting, “…As far as a community, no-most are drug and gang connected.”
Yet another resident’s primary source of satisfaction was a sense of community and independence at Grace. The man, who had previously lived in a hotel, wrote, “It has nice apartments at low rent, the families are nice, and it’s a close community setting.” He said Grace’s atmosphere is friendly because “everyone knows each other.”
These comments coincide with Birkey’s perception of a growing sense of community among Grace residents. “They smile at each other in the halls,” he said. “We had a Christmas party and everybody came.”
Although Grace is not one of MHI’s “supported rentals,” the organization initially worked with residents to design community-building and self-esteem programs. With less than full occupancy, MHI must subsidize Grace’s operating expenses. “We can’t afford support staff right now,” Mary Dray explained. “We are working to afford full-time management and maintenance staff.” Birkey tries to encourage community spirit by holding resident meetings, but less than half of the residents tend to participate. And when Birkey and Dray conducted a needs assessment before beginning the reconstruction program, they “didn’t get a great response.” Still, they appear optimistic, and noted that some interns from the University of Colorado School of Social Work may help with tenant organizing.
Participation at Grace is made more difficult because many residents need a support system and education. Sister Geraldine said some Grace residents-for example, one who dumped spaghetti on the living room rug and let it mold-need to be in housing where there is subsidy attached to the project for a mental health agency to provide support services.
MHI has concluded that it did not understand the market for this location. “We have learned that we have to get more focused on market assumptions and figure out where the invisible boundaries are that people won’t cross,” Sister Geraldine said. “Grace sits on a street that is a jurisdictional line between Denver and Aurora, which is both a different town and county. So that has made the neighborhood a wonderful hot spot for drugs, since police just chase criminals to the line, they won’t cross the border. And Section 8 certificates also won’t cross the line; they are portable, effectively, but that’s how the program is administered here. So boundaries exist for a variety of reasons-psychological, monetary, and irrational.”
Sister Geraldine said MHI has changed its target market for Grace. “It is employed people, with or without children, who are earning the minimum wage or slightly higher. We have moved away from targeting so heavily to families with children. And we are allowing smaller families in the larger units. The rooms are just too small, at least with the two-bedroom units. We’re fine with the three’s and four’s, but the property is roughly half two-bedrooms. ” Sister Geraldine believes Grace would have been better off with about 40 larger units. “But that would have required a lot more soft money,” she said, “because there would be fewer units to service the debt.”
She continued, “As long as rental subsidies are being continuously reduced, then in order to make properties affordable, the rents have to be low enough for people to afford them….. That’s why there is a need for soft money, but the soft money sources are drying up.” She added, “The government can’t have it both ways: take away the subsidies and then depend on nonprofits. Nonprofits also have to pay bills, pay staff. ….I don’t think the bureaucrats appreciate the high cost of running income-eligible projects.”