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'Urban Cottages' make debut as work force housing option

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During the 30 months Phoenix Realty Group has been managing work force-housing funds in Southern California, most of its investments have been concentrated in traditional urban infill projects. Typically these developments are multifamily in nature and are located near the urban core. They involve either the adaptive reuse of an existing building or new construction on former industrial sites.

Granite Hills Village, located along East Washington Avenue in El Cajon, will be available by March.

But San Diego's ongoing suburban sprawl presents both the need and the opportunity to build single-family housing in infill locations that are affordable to a targeted work force housing market, classified as middle-market wage earners who make less than 200 percent of the average median income for the area. Buyers of this housing will be teachers, firefighters, health care workers and office workers who are by some accounts allocating as much as 50 percent of their incomes toward mortgage or rent payments. Many others are instead making long commutes to distant suburbs where they have been forced to move in their search for affordable housing.

While large master-planned communities throughout the county are flooding the market with hundreds of single-family homes at higher prices, these properties are not accessible to middle-income workers. These new communities have even created a new category of high-end housing, the "million-dollar tract home."

This disparity caught the attention of Phoenix Realty Group and its urban private equity funds, which focus on the "middle market," making mid-size investments with community-based developers for the creation of urban housing affordable to middle-income households. One of these funds, The San Diego Smart Growth Fund, was created in May 2005 to provide $90 million in equity financing for the development of work force housing in the greater San Diego area. The fund invests in residential properties, including townhomes, condominiums, live/work lofts, multifamily apartments and single-family homes, as well as mixed-use and commercial properties.

To address the infill housing opportunity, this fund is providing most of the equity capital for construction of 58 four-bedroom homes in the city of El Cajon that will be priced around $599,000, approximately 10 percent below the average price of a comparable single-family detached home in San Diego, which is currently $661,000. Developers have labeled these homes as "urban cottages," single-family homes on smaller lots in established neighborhoods of older communities.

This relatively recent concept allows new, affordable single-family housing stock to be built close to the large employment centers in East County, Mission Valley and downtown San Diego, a need that is evident in many of San Diego's more mature suburbs. It is estimated there will be approximately 1,070 single-family home resales in El Cajon during 2006, where the average age of the housing stock is 36 years. At the same time, while the demand for new construction is strong, less than 50 new homes will be built in this market in 2006, representing a meager 5 percent of all single-family home sales.

The lack of available land causes the constraints in this market, but also creates the demand and the opportunity. The San Diego Smart Growth Fund's joint venture partnership was able to purchase a single four-acre lot, one of the few parcels of its kind remaining in El Cajon. All of the homes in the project will have four bedrooms, two-car garages and landscaped yards and will range in size from 1,700 to 2,400 square feet. Demand for this product type is strong, as research shows that the four-bedroom configuration is the most popular in the market today, having appreciated 6 percent from 2005 to 2006. In contrast, prices for the three-bedroom configuration stayed flat over the same time period, and prices for five-, six- and seven-bedroom homes actually declined.

Ground has been broken on the project, which is called Granite Hills Village and is located along East Washington Avenue in the Granite Hills neighborhood of El Cajon. Three model homes will be available by March, in time for the spring home-buying season. It is the only known single-family development in El Cajon to start construction in 2007 and the high-quality homes are expected to sell out quickly.

Financing is being provided through a construction loan for 80 percent of the project cost, and the 20 percent equity funding is being provided by the San Diego Smart Growth Fund, which is managed by Phoenix Realty Group and the developer, Shoreline Communities. Formed in 1998, Shoreline Communities has completed over 13 local real estate developments totaling 355 units of residential housing in San Diego County.

The San Diego Smart Growth Fund was created with an initial investment of $60 million provided by the California Public Employees Retirement System (CalPERS). The remaining $30 million was contributed by investments from The Northwestern Mutual Life Insurance Co., Washington Mutual (NYSE: WM) and Phoenix Realty Group. Investors in the fund benefit from attractive returns while making investments that have a positive social impact on communities.

By financing the Granite Hills Village project, these investors have provided funding for a unique infill opportunity that will produce new single-family homes within minutes of major employment centers at prices affordable to people earning less than 200 percent of area median income.

Harpster is senior vice president of acquisitions at Phoenix Realty Group.

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