FEATURE ARTICLE, APRIL 2012

CARVING OUT A NICHE
NorSouth develops affordable rental communities for independent seniors.
Interview by Matt Valley

HearthSide Brookleigh, a NorSouth Development, is a new $15.7 million affordable senior living apartment community in Atlanta’s DeKalb County.

While many seniors housing developers are active in the assisted living and memory care segments of the industry due to a growing number of frail, elderly seniors with special needs, NorSouth Development has carved out a niche in independent living with its HearthSide brand. The driving concept is that an environment that creates community and activity for seniors can extend and enrich their lives.

Against that backdrop, Atlanta-based NorSouth is developing affordable rental communities for independent seniors age 62 and older, using a mix of public and private financing. For example, HearthSide Peachtree City, a 96-unit, $14.2 million project slated for completion in the second quarter of 2013, utilizes both tax credit equity and conventional debt. The newly completed HearthSide Brookleigh, a 121-unit, $15.7 million project in Atlanta, represents a partnership between NorSouth and the Housing Authority of DeKalb County.

HearthSide Towne Lake, a 100-unit, $15.35 million development in Woodstock, Georgia, completed in the fourth quarter of last year, was the brand’s inaugural project. A fourth development, HearthSide Johns Creek, a 90-unit, $13.7 million project in Johns Creek, Georgia, is scheduled for completion in the third quarter of 2012.

Barr

Since 2004, NorSouth has completed nearly 1,000 senior living rental units in metro Atlanta. Southeast Real Estate Business recently interviewed Brendan Barr, vice president of development for NorSouth, about which subset of the senior population the HearthSide brand is targeting and the challenges of building affordable rental communities in today’s marketplace.

SREB: The Low-Income Housing Tax Credit (LIHTC) is a critical resource for creating affordable housing for seniors. What challenges are developers who apply for these tax credits facing?

Barr: I can only refer to the state of Georgia. It’s becoming very, very competitive. The reason is that there is a limited amount of resources. On an annual basis, you have more and more quality developers competing for those limited resources. The rule of thumb in the state of Georgia is that for every two LIHTC applications that are submitted each year, one gets funded. So, there is about a 50 percent success rate. That said, during the last three funding cycles NorSouth has had a 100 percent success rate. We’re experienced, and our reputation and performance speaks for itself.

SREB: Does the LIHTC program present any other obstacles for developers?

Barr: Each project has a limitation on the amount of tax credit equity that it can raise, so that limitation has a significant impact on the number of units you can develop. For us, that means about 100 units. Being somewhat capped on your deal size presents upfront project challenges, but also longer-term operational challenges that we need to meet and overcome. We own all of our HearthSide developments and manage them. We need to reach a critical mass of units that will translate into efficient operations in terms of how we staff those properties and how we operate those properties.

SREB: You describe your communities as mixed-income. What does that mean exactly?

Barr: You’ve got a certain percentage of the residences set aside for a specific income level, which would comprise the affordable housing component. Then you have a percentage of the residences that are market rate, or available to people with unrestricted income. The rent disparity between the affordable and the market-rate units most of the time is within $100 per month. So, there is not a huge discrepancy in those income profiles.

SREB: Usually, how many of the units at a property are affordable versus market rate?

Barr: Approximately 80 percent would be affordable, and 20 percent would be market rate.

SREB: What is the average size of a HearthSide community and the age of your residents?

Barr: A typical size is 100 units. The typical age of our residents is probably in their early to mid-70s. Our age restriction starts at 62. There is some aging in place until it is evident to the residents, their families or our management personnel that they need a higher level of service. We are trying to bridge a gap for people in their 70s between home ownership and when health care starts to dictate their housing needs.

SREB: What is the average occupancy of your portfolio, and how negatively was it affected by the Great Recession?

Barr: These are very stable assets, with occupancies typically ranging from 95 percent to 100 percent. The challenge for us is the lease-up. It’s a very significant decision-making process for the seniors, but once they get there and move in they tend to remain there. Until there is an occurrence in life that mandates they move on to a different type of housing, they age in place. We don’t see a lot of turnover. This is not a transient demographic.

As far as the economic downturn over the last 3 or 4 years, it really didn’t have much of a negative impact on our communities because of the way that we finance our deals, and because of the income class we’re targeting. Again, we’re talking about retirement income, not earned income. These are folks who are typically living on pensions, 401(k) plans, Social Security payments. This is a high-quality housing option for these seniors.

SREB: Can you successfully brand seniors housing projects? Developers and owners in other property sectors have had mixed results in their attempts at branding.

Barr: We think we can. What it’s done for us is instill discipline and focus on every portion of our decision-making process. At the end of the day, we’re trying to deliver a lifestyle. It extends beyond the bricks and mortar of the development. It’s about what we are trying to provide our residents on a daily basis. That lifestyle translates into everything from site selection to design to programming, even how you staff and how you start your day at the property level. You can create a brand in this space.

SREB: What is NorSouth’s approach to site selection?

Barr: We look at our target audience as typically seniors in their 70s. For the most part it’s a single-person household. What our research has found is that more than half of our residents migrate to [the Atlanta area] to be near their adult children and grandchildren. I’m looking for households with persons 35 to 54 years old. In Atlanta that demographic points to the suburbs, which have been the real growth area during the last 25 years.

About 50 percent of our resident base is already living in the area. They might not want to leave their community, their church and their friends — everything that is comfortable to them. But they are no longer interested in living in the 3,500-square-foot home and caring for that home. Or maybe they recently lost a spouse and their needs are changing.

SREB: NorSouth has a significant presence in the independent living space. Would you ever consider expanding to the assisted living arena?

Barr: My short answer to that question is not at the present time. At the end of the day, we consider ourselves to be in the real estate business, not the healthcare business. Once you start getting into assisted living and memory care for Alzheimer’s patients, obviously that is going into the healthcare direction.

SREB: Where do you see the growth potential for the HearthSide brand in metro Atlanta?

Barr: We are concentrating on the northern suburban triangle that extends I-75 to the west and I-85 to the east, north of I-285. We’re already in Johns Creek, and we’re in the Towne Lake area of Woodstock. If you think of those other areas where adult children are living, you land on Roswell, Alpharetta and Suwanee. Those are the areas where we think we will fill a need.

Our near-term goal for HearthSide is to expand our geographical footprint outside of Georgia into other areas of the Southeast, and even Texas. q


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