When Tackling Affordability Is a Family Business

The affordable housing crisis under the magnifying glass of Cruz Cos. leaders.

John B. Cruz III with his son Justin Cruz, who has joined him in the business. The photo captures John Cruz with his father, John “Bertie” Cruz Jr. Image courtesy of Cruz Cos.

Cruz Cos. is one of the country’s oldest and largest entirely Black-owned companies, active in the fields of construction, development and property management. It is a third-generation family business launched in 1948 by Cape Verdean immigrant John “Bertie” Cruz Jr., under the name of Cruz Construction in Boston’s Roxbury neighborhood. His legacy is carried on by his son John B. Cruz III—acting as president & CEO—and by grandson and future leader Justin Cruz, COO at Cruz Cos. and director of the company’s management arm.

Multi-Housing News sat down with the Cruz family to talk about housing affordability—the company’s primary focus—and their thoughts on how to overcome challenges to help grow the sector. Cruz Development Senior Vice President Daniel Cruz Jr., Senior Real Estate Project Manager Edgar Carrere and Project Manager Armond McCoy, also joined the conversation.

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What was the most difficult decision you had to make during your tenure at Cruz?

John Cruz: Our new development project in Maryland—Branchville Crossing—is a good example of how these difficult decisions can play out. We had an approved 80-unit building, but the financing disappeared. So, we had to make a call about whether to keep the project at 80 units and turn it into a market-rate development or preserve the affordability and lose apartments. We felt that keeping the building affordable was crucial for this community, so we took a hit and brought the project down by 30 units.

Daniel Cruz Jr.: We must make difficult decisions when it comes to determining how to balance our social vision of creating housing opportunities where they are most needed, while also providing a diverse mix of housing opportunities. At the same time, keep in mind that the communities we work in do not typically afford the income sources that are considered market-rate to support the housing diversity we seek.

To say it another way, the ethos of Cruz Cos. is about using affordable and mixed-income housing to facilitate economic and social diversity in the communities where we work. The challenge is often about determining the right affordability mix that unlocks the financing puzzle and allows the deal to pencil out.

From a developer’s perspective, how does the housing affordability crisis look today? 

John Cruz: One alarming trend is that in some respects, it’s much harder today for minority entrepreneurs to become affordable housing developers than it was 20 or 30 years ago. There’s so much time and money needed to do this kind of work. It’s a daunting task and the realities of affordable housing development have closed the door on many minority entrepreneurs trying to climb the ladder.

Daniel Cruz Jr.

Daniel Cruz Jr. has 30 years of real estate, construction and finance experience. Image courtesy of Cruz Cos.

Daniel Cruz Jr.: The most difficult task today is, hands down, making projects financially feasible. Unfortunately, we are in a market where material and labor costs have increased at a staggering rate. Over the last three to four years, costs have increased by 50 percent. We are seeing deals that would have had construction costs penciled out at around $300 per square foot, come in at more than $500 per square foot.

However, the resources that are needed to produce housing have not kept up with the costs. We see per-unit costs increase by $200,000 to $300,000. Developers are continuously trying to find money to fill financing gaps. Cost is the number one issue today in affordable housing, followed by the delays that result from the challenges of assembling that financing all the while trying to navigate the many approvals needed to bring a project to fruition.

How can the federal government boost support for affordable housing developers?

Justin Cruz: The government is the key. If supporting affordable housing is really the goal at a national level, the federal government needs to introduce broader subsidies and incentives to increase production and ensure that new developments also take a forward-looking approach to issues like sustainability.

Daniel Cruz Jr.: The federal, state and city government agencies should be working in collaboration to find ways to shorten the development timeline. Every developer knows that a project’s success is significantly impacted by two key factors: time and money. The current affordable housing development process stretches both resources to the limit.

For example, a given state may fund 20 affordable housing projects each year but may have 80 to 100 projects that are looking for funding. If you play out the math and assume that a project will eventually come to the top of the funding pool, it could take upwards of six years to get that project to completion.  And, if a developer has more than one project that he or she is working on, it could take almost a decade to get that second project to where it’s ready for occupancy.

Affordable housing projects, which are sorely needed, can’t wait that long to be available. The need across the country is only growing more intense. Clearly, there needs to be more money in the marketplace and a faster process for allocating it.

Armond McCoy: A related challenge is that, in many cases, city, state or federal requirements for funding try to solve many problems at once but put them on developers and owners of affordable housing. Yet, the government needs to put the infrastructure in place to make these solutions sustainable beyond the immediate term.

For example, there is a serious need to provide shelter for our cities’ unhoused populations. As a result, one increasingly common requirement is that 10 or 15 percent of units of new affordable developments be set aside for formerly homeless residents, but the funding sources for these units often last only one or two years. A stopgap measure like this only pushes the financial problem down the road.

135 Dudley at Nubian Square

135 Dudley at Nubian Square is a 170-unit, mixed-income, mixed-use project comprising a 10-story condominium building with 27 units reserved for individuals/families at 80 percent and 100 percent of the AMI, and a five-story, affordable rental building with 60 units. Image courtesy of The Architectural Team via Cruz Cos.

Tell us about the affordable housing developments in your pipeline.

Daniel Cruz Jr.: We’re truly excited about Branchville Crossing, our Maryland project. Due to cost constraints, we have adjusted the size of the development, and the pieces are coming together, well on track. We’re hearing from people in the community that it will fill an important gap in the local housing market, and it’s generating a lot of buzz as we continue expanding our presence in the Mid-Atlantic region, which is definitely a growth market for Cruz Cos.

135 Dudley at Nubian Square is another important project. It’s one of the most significant developments we’ve ever worked on at Cruz Cos. It will make a huge difference in the Roxbury community, which is also where we’re based. Located at a major intersection near a public transit hub, it’s a two-building, LEED Gold-tracking community that offers 170 affordable and market-rate apartments and condos, 132-space garage parking, 8,000 square feet of ground-floor retail and new offices for the local NAACP chapter.

As with all our projects, at least 60 percent of all the contracts will go to MBE contractors, 15 percent to WBEs, while 60 percent of the construction jobs will go to people of color, and 15 percent of the jobs will go to women workers and, in this case, 60 percent of the jobs will go to Boston residents. Construction is projected for the spring of 2024.

Edgar Carrere

Edgar Carrere oversees all facets of the development process, from project inception to construction and rent-up. Image courtesy of Cruz Cos.

Edgar Carrere: We have two other significant affordable developments in the same part of Boston. One—the Michael E. Haynes Arms—is on track to open this year and will also hold our new offices.

On a site nearby, we have a 48-unit, mixed-income property in development—it has apartments that will rent at 30, 50, 60, 80 and 120 percent of AMI. This is not the norm, because developers lose pro forma by having so many AMI levels in one building, but we believe a deep income mix is critical for multifamily housing. More so, in many of the communities where we work, there are a lot of people who need affordable housing but won’t qualify if the units are keyed to an AMI that’s set too low, so having a broader mix is a solution that also receives a lot of support from residents and local leaders in these areas.

Tell us about the former orphanage in New Bedford, Mass., you’re redeveloping into affordable housing.

Daniel Cruz Jr.: Cruz Development bought this site at 593 Kempton St. from the state after a competitive RFP process, because the governor of Massachusetts has prioritized reactivating state-owned properties as housing. We’re taking a local landmark that has been underutilized and in a state of disrepair and adapting it into mixed-income apartments. The mix will be 70 percent affordable and 30 percent market-rate. We worked very closely with the Commonwealth on this deal and have received a lot of support from the local community for this project.

The former St. Mary’s Orphanage is an example of the type of projects we like to undertake. The fact that it is historically significant and eligible for inclusion in the National Register of Historic Places is very exciting to us and consistent with the type of restorations we like to assume. Also, the fact that we are combining this site with three others—of which two are also eligible for listing on the national register—lets us bring additional restoration opportunities to New Bedford. Moreover, we are providing more affordable housing opportunities by reducing cost, via an economy-of-scale approach that includes an additional 59 units to couple with the 28 that will be housed in St Mary’s Home.

The former St. Mary’s Orphanage at 593 Kempton St.

The former St. Mary’s Orphanage at 593 Kempton St. in New Bedford, Mass., is set to be converted into an affordable housing community. Rendering courtesy of Cruz Cos.

With construction costs so high, how can housing affordability improve? What federal incentives are you using in the development of all these projects in your pipeline?

John Cruz: To meaningfully improve housing affordability, the federal and state administrations will also need to come up with a new paradigm to subsidize homeownership and make it more accessible. This is such an important way to build equity and wealth. Homeownership supports sending children to college, being able to retire and being able to build generational wealth. But it’s a commodity that is increasingly out of reach for middle-class people.

Daniel Cruz Jr.: Our affordable housing deals tend to bring together financing from seven or eight different sources. We utilize federal and state tax credits, along with federal and state housing subsidies, while incorporating soft debt funds from city and state agencies. We look to infrastructure and brownfield funding to help with project costs, which are very useful when other housing funds are at their per-project limits.

In Massachusetts, some of the target funding for our current pipeline of projects includes MassWorks Infrastructure funding through the EOHED, Commonwealth Builder and Affordable Housing Trust Funds through MassHousing, HOME, HSF and federal and state tax credits through the EOHLC, National Housing Trust funds through the local municipality. It’s really a hodgepodge of city, state and federal resources that go into making a deal pencil out.

Michael E. Haynes Arms

Michael E. Haynes Arms is a fully affordable 55-unit, mixed-use, mixed-income development that is set to open later this year. Image courtesy of Cruz Cos.

As a result, many developers are turning to tools that would have been considered too risky even several years ago. Income averaging is a good example of an increasingly popular approach that creates certain risks: If you’re in the deal at 60 percent AMI and exceed that by hitting 60.001 percent, you can lose compliance for the whole building and, therefore, the funding. A lot of developers may be hesitant to use this tool, but we find it can add significant additional dollars to a deal’s pro-forma. This approach helped us generate an additional $1.5 million for a project.

Armond McCoy

Armond McCoy holds more than 25 years in the real estate and financial services industries. Image courtesy of Cruz Cos.

Armond McCoy: It takes a lot of work to not only identify every incentive that’s available but then to understand what the requirements are and how to combine programs in the most effective way. The state-to-state variability is a challenge. For example, Massachusetts has a gap filler in its state tax credits—which we’ve used to a great extent—but Maryland doesn’t. Each program has its own requirements which also leads us to try and match AMIs to the funding source. It is really a balancing act.

How can housing affordability improve in the U.S.? Are there any immediate solutions? 

Daniel Cruz Jr.: Not one to advocate for more government or red tape, but I think we need a national housing Czar at the federal level. Housing is too important of an issue to not have an organization that is focused on significantly improving the availability of affordable housing via collaborations with federal, state and local governments, to ensure that sufficient resources are available to create affordable housing. Some of the goals should be cost-cutting, streamlining the approval process and identifying additional housing resources, while addressing the economics that can help alleviate an individual’s or a family’s need for affordable housing.

John Cruz: We also see some interesting opportunities for the government to innovate in terms of funding affordable housing. For instance, the federal government should subsidize home purchase prices, and when that home is sold or refinanced—likely at a higher value—the government should receive back a portion of that initial investment that can then be put into affordable housing funding. There needs to be a change in the way government participates in housing, but if the rental and homeownership markets come together more effectively at the federal level, the results could be incredible.

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