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Community Development Investments (February 2012)

Great Lakes Capital Fund: Raising Capital for Permanent Supportive Housing

Dennis Quinn, Senior Vice President, Great Lakes Capital Fund

Coniel Norman, a resident at Detroit’s Piquette Square housing complex, shares news clippings of his former NBA basketball days—before his military service, before his homeless experience, and before he found supportive housing.
Coniel Norman, a resident at Detroit’s Piquette Square housing complex, shares news clippings of his former NBA basketball days—before his military service, before his homeless experience, and before he found supportive housing.
About Great Lakes
Great Lakes was established in 1992 by the MSHDA, in response to a lack of equity capital investments in Michigan projects. At that time, national syndicators were passing up opportunities to invest in affordable housing projects because they were located in inner cities or rural areas, sponsored by nonprofits, or included support services. The Michigan Housing Authority created this state-based private equity fund to insure investment in those important markets. Since 1992, Great Lakes Capital Fund has grown into a $2 billion equity investor, serving Illinois, Indiana, Michigan, Minnesota, Wisconsin, and upstate New York.

Imagine for a moment a homeless person panhandling in front of your neighborhood dry cleaner—disheveled at best, in very poor mental and physical health at worst. Now imagine that same person as a productive, self-supporting member of society—someone with a job, a bank account, even an apartment.

Such a transformation might sound like a miracle—and yet it is happening in neighborhoods across the United States. In the Midwest, developers of permanent supportive housing (PSH) for the homeless are working with Great Lakes Capital Fund and other organizations to give chronically homeless individuals a chance at better lives. Great Lakes Capital Fund is a community development financial institution (CDFI) certified by the U.S. Department of the Treasury and is a syndicator of low-income housing tax credits (LIHTC).

Led by a team of housing industry professionals, Great Lakes serves as underwriter, risk mitigator, and asset manager for investors.  These investors, especially in a volatile market, may worry that the cost of providing services-enriched PSH for the chronically homeless will diminish their returns. On the contrary, “supportive housing isn’t higher risk and lower return if it’s managed right and underwritten to account for any unforeseeable costs,” said Mark McDaniel, Chief Executive Officer of Great Lakes.

With an average fund of more than $100 million invested annually, Great Lakes, a nonprofit, 501(c)(3) corporation, has helped raise capital for 40 supportive housing projects in Illinois, Indiana, Michigan, Minnesota, Wisconsin, and upstate New York. Over its 19-year corporate lifetime, Great Lakes has invested more than $103 million of equity in the 40 properties, creating 1,483 affordable supportive housing units for those formerly considered chronically homeless.

Great Lakes’ primary investment model involves multi-investor funds that invest in a diverse pipeline of properties across multiple states. Typically, investors in the LIHTC program have been larger national banks and regional banks. To attract more bank investors, Great Lakes initiated a state community fund five years ago. The community fund is a multi-investor fund targeting community banks that historically have not participated in the tax credit program. While multi-state funds tend to attract banks with multi-state branch networks, community banks tend to invest in states where they are chartered. As a result, state community funds target community banks. Great Lakes seeks to attract these small banks by lowering the required minimum investment from $1 million to $250,000.

Great Lakes examines the specific needs of each community to determine the type of housing development that would work best for the area. To assess the strength of a potential investment, Great Lakes looks at the expertise of the developer and its partners; the level of commitment and the stability of funding sources; and whether the developer can handle service delivery, as well as any architectural and engineering needed to make the space user-friendly for new residents. Great Lakes puts a strong focus on ensuring that projects are geared toward environmental efficiency and sustainability, and closely examines construction budgets. Typically, a third-party reviewer evaluates the construction plans and provides an opinion as to cost and quality of construction. Great Lakes carefully reviews operating budgets and compares the budgets with those for similar properties in its portfolio.

Piquette Square, a PSH project in downtown Detroit, Mich., provides 150 one-bedroom units for formerly homeless veterans. One of Great Lakes’ LIHTC funds financed the project. The project began when a nonprofit developer, Southwest Housing Solutions, acquired the site of a former Studebaker factory near the John D. Dingell VA Medical Center. The 3.28-acre site required extensive environmental cleanup before construction of the new project could begin.

Piquette Square is an example of a project that might have been financed only through the issuance of tax-exempt bonds by the Michigan State Housing Development Authority (MSHDA). To mitigate its risk, MSHDA simultaneously approved the issuance of a project-based Section 8 housing subsidy for 150 units. The rental subsidy will remain in place for at least 20 years. The Section 8 rental subsidy typically equals the fair market rent for comparable units within the community where the property is located. In the case of Piquette Square, a project-based housing subsidy provides enough income to cover annual debt service as well as to subsidize the general operations of the property.

In addition to reusing an abandoned brownfield site, Piquette Square incorporates many environmentally sensitive and energy-saving technologies, including a geothermal heating and cooling system; water-saving features; and sensory lighting in each unit to cut down on utility costs and to minimize operation costs. Table 3 shows that the $22.9 million Piquette Square project included eight different funding sources to complete, plus many thousands of dollars in donated furniture, linens, and other kitchen and household items. Piquette Square offers mental health counseling, substance abuse treatment, on-site job training, computer labs, educational programs, and other support services to help veterans develop healthy and independent living skills.

Table 3: Piquette Square Sources and Uses of Funds

Sources of funds Amount
MSHDA* tax-exempt bond $6,681,761
MSHDA HOME funds (chronically homeless) 1,000,000
MSHDA HOME funds (multi-family) 4,528,285
Wayne County, Mich. 510,000
Federal Home Loan Bank of Indianapolis 500,000
City of Detroit HOME funds 1,520,000
LIHTC capital contribution 6,524,503
Brownfield Tax Credit capital contribution 1,701,579
Total sources of funds $22,966,128
Uses of funds Amount
Land acquisition $578,000
Construction costs 17,251,767
Soft costs 3,318,785
Financing costs 731,933
Start-up costs, reserves, escrows 1,085,643
Total uses of funds $22,966,128
Source: Great Lakes Capital Fund
* Michigan State Housing Development Authority

Piquette Square opened its doors on July 15, 2010. "Our veterans have fought to protect the safety and the freedom that we enjoy every day, and we have a duty to provide them with adequate housing and medical care," U.S. Senator Carl Levin (D-Michigan) said during the opening ceremony. "Piquette Square is a major development in meeting that hallowed responsibility."

One of Piquette Square’s first residents was Coniel Norman, a former University of Arizona basketball star. His story—playing with the NBA, joining the military, succumbing to drug abuse, and spending nearly a year living on the streets of Los Angeles, Calif.— illustrates the painful and quick slide from dignity to dysfunction that can lead to homelessness.

Piquette Square offered Norman a helping hand, a supportive environment, job training, and a second chance. Now, Norman is rebuilding his life alongside other former veterans and has the opportunity to stay connected with his family in Detroit.

The cost of providing services to the homeless, such as job training, mental health, and substance abuse services, are included in the original proposal a developer brings to Great Lakes. Typically, service costs are paid by a mix of state and federal dollars, such as the U.S. Department of Housing and Urban Development (HUD) Supportive Housing Program, or a project-based Section 8 rental subsidy. At the state level, supports such as Medicaid and other wellness, nutrition, and housing assistance programs are provided. Great Lakes examines a potential investment for a host of red flags, including overall sustainability (the minimum fund investment is 15 years), and whether a developer has the expertise to manage the housing or must hire someone else to manage the property. A big measure of success—or failure—can be seen by gauging the long-term commitment of any state and federal funds or private grants a developer counts on to cover expenses.

Funding levels and length of commitment vary depending on the program and agency providing the assistance. HUD’s Supportive Housing Program provides an initial five-year commitment for a rental assistance program for the homeless known as Shelter Plus Care. The program requires the service provider to match dollar-for-dollar the amount of the rental subsidy provided. Once the initial commitment period ends, providers must reapply to HUD for annual renewals. In the case of Section 8 rental subsidy, HUD provides an initial commitment of 20 years, but funding is subject to annual congressional approval.

Clearly, investors, developers, and Great Lakes would prefer to have a 20-year Section 8 subsidy for every PSH project. Fortunately, Great Lakes and its developers have been successful in securing these funds for investors and developers when PSH projects required them.

Great Lakes also examines government subsidies that go directly to a developer, including operating support grants, supportive service grants, and subsidies that go directly to tenants such as HUD’s Section 8 housing vouchers.

For instance, if a project relies on rental income to fund support service staff, which often is the case, can the project continue to provide services if state or federal rental subsidies are cut? Does the developer have a backup plan and is it viable? Great Lakes’ standard underwriting criteria require operating reserves equal to four to six months of operating expense, debt service, and replacement reserves. Depending on our risk analysis, sometimes we require a year or more of operating reserves. Backstopping the operating reserves are the personal and corporate guarantees of the developer and general partner.

Part of Great Lakes’ overall strategy is to assist development partners by maintaining a referral network made up of service providers who have access to rental subsidies and support service funding, as well as clients who can benefit from PSH. As a result, the supported units have higher average occupancy when compared to non-supportive units. In Detroit, for example, where Great Lakes works to meet the goals of a Ten-Year Plan to End Homelessness, which is sponsored by the local Homeless Action Network, 30 supported properties have been developed. The average occupancy for the supported units is 95 percent, compared with a standard tax credit unit with average occupancy of 92 percent. All the projects have long waiting lists and stable tenant populations.

In addition to conservative underwriting, Great Lakes performs ongoing asset management, meaning that it reviews monthly, quarterly, and annual financial statements and audits; conducts regular site visits to ensure compliance in terms of tenant eligibility and income limits; and determines whether the developer and management deliver on the services they promised and keep the properties in good shape.

An important factor in financing supportive housing for the homeless is the ability to obtain soft debt financing (debt where repayment is deferred until the sale of the security, as with the Ferguson Apartments, a PSH project in Grand Rapids, Mich.) or grants through local and state governments. “Supportive housing needs to carry less hard debt, typically none at all,” said Jim Logue, Chief Operating Officer for Great Lakes, who also serves as board member for several groups, including the national Corporation for Supportive Housing and the Federal Home Loan Bank of Indianapolis. Less hard debt (for which monthly debt service is required) means less chance of default or foreclosure for nonpayment.

Grand Rapids’ Ferguson Apartments project illustrates how soft debt financing works. The apartment complex was developed by Dwelling Place, a local nonprofit organization. Dwelling Place has four supportive housing projects for the homeless in its portfolio of about 25 properties.

As table 4 shows, the Ferguson Apartments project was financed through the generosity of many community agencies, state grants, and a soft loan of nearly $2.8 million from the sponsor. In addition, Dwelling Place raised funds from individuals, corporations, and foundations, and received an equity investment from Great Lakes.

Table 4: Sources and Uses of Funds for Ferguson Apartments

Sources of funds Amount
Grand Rapids, Mich., HOME loan $500,000
MSHDA HOME loan 2,000,000
HUD Loan and Federal Home Loan Bank
AHP grant
Sponsor loan 2,775,999
General Partner Capital contribution 96,949
LIHTC Capital contribution 9,691,313
Total sources of funds $15,566,658
Uses of funds Amount
Construction $12,651,339
Soft costs 2,191,056
Financing costs 110,328
Start-up costs, reserves, escrows 613,935
Total uses of funds $15,566,658
Source: Great Lakes Capital Fund

Ferguson Apartments opened in 2002. Now, it has a nine-year successful track record. MSHDA also provided a $3.8 million Housing Assistance Payment grant to subsidize longer-term operating costs and further minimize risk to investors. At the apartments, more than 100 residents share a city building with four nonprofit agencies that provide medical care, drug and alcohol counseling, and job training. The project’s kitchen provides additional job training for some residents, who help prepare and deliver meals to residents confined to their apartments.

The performance of the Ferguson Apartments shows that tax credit investments are attractive to investors. Investment results from Ferguson Apartments exceeded investor expectations and, at the same time, helped to solve the homeless problem in Grand Rapids. Returns from the project helped the city’s economy, investors, and residents of Ferguson Apartments.

PNC Bank has been in partnership with Great Lakes for almost 20 years because its geographic target area mirrors that of the nonprofit syndicator. From PNC’s perspective, “There’s a financial return and a social return,” said Michael J. Taylor, PNC Senior Vice President, Community Development Banking. PNC wants to “empower citizens, to the extent possible, to actively participate in their community and perhaps reach greater opportunities in the future,” Taylor said. Investing in Great Lakes’ funds is one way the bank accomplishes this dual goal.

For more information, contact Dennis Quinn at (313) 841-3751, ext. 1317, or e-mail