Square Feet: Mixed-Use Developments Get Regulatory Break From F.H.A.

When the real estate investment manager Jamestown Properties began renovating a massive old Sears warehouse in Atlanta last year, it had a good idea of what it wanted to create: a bustling urban hub with 440,000 square feet of offices, 330,000 square feet of shops and 259 residential units.

The composition of the residential piece, however, remained a question. Would it be all rentals or a mix of condominiums and rentals? If a mix, what blend would perform best in a sluggish housing market characterized by scarce mortgage financing for condo buyers?

Now, thanks to a recent Federal Housing Administration rule change aimed at supporting mixed-use properties, condos are getting more serious consideration in the $200 million development, known as Ponce City Market.

“We continue to assess the right mix of what those units should be,” said Katharine Kelley, director of Jamestown’s development and construction division. “But the new F.H.A. ruling strengthens the attractiveness of condos as an option, because it increases the field of potential condo buyers.”

Enacted in September, the rule change opens the door to government-insured mortgages for condos in mixed-use buildings with commercial footprints of up to 35 percent, up from the previous 25 percent limit. Exceptions may be granted for projects in which as much as half of the space is commercial. Developers hope this, along with other F.H.A. changes, will help revive condo sales just as the overall housing market is improving.

The F.H.A., created in 1934, insures mortgages and offers programs that focus largely on first-time home buyers. Its support allows lenders to offer favorable mortgage terms, with down payments as low as 3.5 percent.

Because the agency and the government-sponsored entities Fannie Mae and Freddie Mac now back 95 percent of residential mortgages — roughly double their share before the financial crisis — certification from one of them is considered critical to the success of residential developments.

That is the case even though Fannie Mae and Freddie Mac are in conservatorship and an independent audit of the F.H.A. has projected a $16.3 billion loss for the fiscal year ended Sept. 30, leading to speculation that the agency will need a taxpayer bailout.

“We have to think three steps ahead as to how the condo buyer is going to get their financing,” Ms. Kelley said.

The F.H.A.’s mixed-use change is part of a broader shift in condo policy. In September, the agency increased the number of units that investors can own in a development to 50 percent from 10 percent, provided that the other half are owner-occupied, and it relaxed personal liability rules related to condo association boards and officers.

Developers and others say that in addition to strengthening home sales, the changes represent a vote of confidence in the creation of sustainable, pedestrian-oriented neighborhoods, which are more likely to have projects that incorporate mixed-use buildings.

The trend toward such development has grown in recent years, as younger and older people alike have migrated to urban centers to be close to jobs, cultural amenities and entertainment, said Peter D. Cummings, chairman of Ram, a Florida-based mixed-use developer focused on the Southeast and Michigan.

That “back to the city” movement is now spilling into the suburbs, said John K. McIlwain, senior resident fellow at the Urban Land Institute, a nonprofit research organization.

“We’ve learned that this mixing of development makes for a better urban design, so towns and cities are designing codes to encourage it, and the market is showing interest,” he said. “We’re going to see a lot more mixed use, whether it’s in the urban central city or suburban town centers.”

The F.H.A.’s mixed-use rules date to its inception and the growth of federal housing initiatives, according to the Chicago-based Congress for the New Urbanism, which promotes pedestrian-oriented, mixed-use neighborhoods. The rules stemmed from fears that one component of a mixed-use development could fail and place strain on others to maintain the property, a concern revived by the housing crash in 2007.

“We understand that risk has to be assessed somehow, but associating it with commercial is just not the right way to do it,” said Ben Schulman, a spokesman for the Congress for the New Urbanism, which led the push for the rule changes.

Although the rules have existed for decades, the F.H.A. started enforcing them only after the housing market crashed, developers say.

In 1998, the developer David Mayfield began building Afton Village, a $160 million, pedestrian-friendly neighborhood in Concord, N.C., about 20 miles northeast of Charlotte. After building single-family homes, town houses and commercial spaces, Mr. Mayfield began developing properties with condos atop retail on the main streets.

Article source: http://www.nytimes.com/2012/11/28/realestate/commercial/mixed-use-developments-get-regulatory-break-from-fha.html?partner=rss&emc=rss