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A rural, upstate New York preservation project in Hudson Valley.
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Cobble Knoll development in rural Washington state.
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Walden Oaks in Woodstock, Illinois.
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Rehabilitated property in the Bronx, New York.
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by Debra D. Schwartz, Director of Program-related Investments, The John D. and Catherine T. MacArthur Foundation
With so much attention and concern focused on homeownership and rising foreclosure rates, it is easy to forget that one-third of all U.S. households, roughly 37 million, currently rent their homes. The fact is that nearly all of us are or have been renters at some point in our lives, and only a minority of low-income renters benefit from direct government subsidies.
Unfortunately, our nation’s existing supply of subsidized and unsubsidized affordable rental homes is eroding, even as the need for decent, low-cost homes continues to grow. Harvard University’s Joint Center for Housing Studies reports that over the past 10 years two existing units were lost for every affordable rental newly built. Without concerted action, our nation’s stock of affordable rental housing is projected to fall by another million units or more in the decade ahead.
Why Preserve and Improve Affordable Rental Homes?
Affordable rental housing is a precious national resource. For those who cannot afford homeownership, rental housing allows families and the elderly to live in stable, diverse communities close to services, transit, and work.
In 2005, more than 15.6 million renter households had annual incomes at or below $24,000. They can afford an apartment that costs at most $600 per month, but the median monthly rent for a newly constructed apartment currently averages $850.
Federal and state government programs currently provide more than $30 billion annually to make privately owned housing more affordable for low-income renters. Nonetheless, the number of renters paying more than half of their income for housing or living in severely substandard housing now totals nearly 9 million. This is the highest number reported since HUD began collecting data in 1990. This increase in “worst case” housing needs occurred among all family types and in all regions of the country.
Part of the problem is that wages at the bottom of the economic ladder have not kept pace with rising rents. The stock of low-cost rental homes also has fallen because of demolition, condominium conversion, and the expiration of government subsidies and affordability restrictions. Between 1993 and 2003, the number of housing units renting for $400 per month or less, in inflation-adjusted terms, declined by 1.2 million.
Billions of taxpayer dollars were invested over the past 50 years to create and maintain the rental homes now being lost. Preserving and improving the existing stock of affordable housing capitalizes on this past investment while also making cost-effective use of newly raised capital. The NHT recently determined that it costs approximately 40 percent less to preserve an existing apartment than to build one anew. Renovating an existing building produces less construction waste, uses fewer new materials, requires less energy than new construction, and does not require new land development. Renovating existing affordable housing also leads to energy-efficient improvements that produce utility savings for owners and residents, lower maintenance costs, and a healthier environment.
State and local energy efficiency and water conservation programs include renewable energy tax credits; incentive programs for replacement of older fixtures with low-water use fixtures; rebate programs for alternative energy sources, high-efficiency washers and dryers, and low-flow toilets; and sales and property tax exemptions for photovoltaic and other alternative energy sources. As part of their LIHTC programs, many states provide incentives and even include threshold requirements for integrating “green” methods into the rehabilitation of existing apartments.
MacArthur Foundation Support for Affordable Housing Preservation
The John D. and Catherine T. MacArthur Foundation has long recognized the importance of affordable rental housing. In 2003 it responded to growing pressures threatening this vital resource by launching the program called Window of Opportunity: Preserving Affordable Rental Housing. This year MacArthur announced that it was expanding its commitment to this national initiative to $150 million. A third of these funds are directed to national and regional nonprofit organizations that acquire, renovate, and manage existing affordable rental housing and to specialized lending intermediaries that facilitate their financial transactions. Another $60 million is devoted to innovative public-private preservation partnerships in Chicago, New York City, and 10 other jurisdictions that will be selected in 2008 through a competitive proposal process. The remaining funds support nationwide data collection, policy research, and technical assistance activities.
To date, this initiative has supported the preservation of more than 35,000 affordable rental homes across 37 states, Washington, D.C., and Puerto Rico (see map). Roughly half of this activity has taken place in urban markets, a third in suburban communities, and the balance in rural areas. By the end of 2007, the foundation expects to invest more than $3.5 billion in new long-term subsidy and financing in Window of Opportunity projects at an average cost of roughly $80,000 per home. This is significantly less than the cost to build a new affordable rental unit anywhere in the country today.
Nearly 50,000 Affordable Rental Homes Preserved
and Improved |
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Source: The John D. and Catherine T. MacArthur Foundation
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| The John D. and Catherine T. Map depicts unduplicated count of preservation projects purchased or financed by MacArthur-supported affordable housing owners and lenders, plus projected activity through the end of 2007. Results include all projects initiated during or after the year in which MacArthur funding was awarded, beginning in 2001 when the Foundation made four initial awards. Results self-reported by each funding recipient in response to an April 2007 Foundation survey. For a definition of affordable rental housing preservation, visit the MacArthur Foundation. |
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To make it easier for other foundations, banks, social investors, and CDFIs to provide the financing that facilitates this type of activity and to improve the performance and sustainability of long-term, mission-driven affordable housing owners throughout the country, the foundation is funding a new collaborative best-practices initiative called, “Strength Matters.” Led by a partnership among NeighborWorks America, the Housing Partnership Network, and Stewards of Affordable Housing for the Future, this initiative seeks to improve the resources available to nonprofit owners of affordable rental housing to help make the public policy arena more supportive of their efforts and to broaden their access to the conventional financial and real estate marketplace through “best-in-class” business practices and financial reporting.
Bank Support for Affordable Housing Preservation
A growing number of banks and financial institutions recognize the urgent need to combat the loss of affordable rental housing in urban, suburban, and rural communities throughout the United States. Working in partnership with nonprofits, foundations, and the public sector, these banks are seizing the window of opportunity that exists to preserve and improve tens of thousands of affordable rental homes each year. In addition to the strategies and examples offered by Michael Bodaken see "Saving America's Affordable Rental Housing ", the following are examples of how banks can invest and partner to help preserve affordable rental housing.
Short-term Loans for Preservation Projects
The combination of market pressures and time-sensitive regulatory requirements frequently creates a “need for speed” among preservation buyers. Predevelopment and interim acquisition loans are critical in these situations because they enable preservation-minded buyers to compete effectively for properties that are at risk of conversion to condominiums, higher-cost rentals, or “opt out” from government subsidy programs and expiring affordability restrictions. A preservation buyer may need predevelopment financing to cover early due diligence and earnest money deposits. When multiple regulatory agencies are involved or extra time is needed to obtain and close on tax credits and other long-term financing, an interim loan may be needed for a few months or as long as two or three years.
Arizona Bank and Trust is helping meet this critical need for Community Services of Arizona (CSA), a nonprofit developer and operator of affordable housing in the Southwest. Using a secured line of credit from this bank, CSA can acquire small multifamily apartment buildings, up to about 12 units in size. The $2 million line of credit is a key part of CSA’s effort to preserve smaller multifamily projects in the Phoenix area. Access to these funds enables the nonprofit to act quickly in the marketplace to secure a preservation opportunity and to take up to a full year to replace the line with a permanent loan and other resources from the local government subsidy providers.
Providing capital to CDFIs is another way for banks to help preservation buyers meet their predevelopment and interim financing needs. CDFIs can blend bank funds with below-market, unsecured loans from foundations like MacArthur to offer customized, timely financing on attractive terms. A number of CDFIs cater to the preservation market and have the expertise to assess and resolve complex financing and regulatory issues that frequently crop up for preservation projects. Today’s national leaders in this arena include National Housing Trust Community Development Fund; the Housing Partnership Fund; Neighborhood Capital Corporation; Enterprise Community Loan Fund; and Local Initiatives Support Corporation (LISC).
Rehab Construction Loans for Preservation Projects
Financing is almost always needed whether a preservation project requires extensive renovations or modest rehab. “Green” upgrades are increasingly part of this mix. Energy-efficient improvements enhance the affordability of the existing multifamily rental stock while reducing the carbon footprint of renters. These loans may be in the form of standard construction loans or can be revolving lines of credit to facilitate access by nonprofit developers working on multiple projects.
SunTrust Bank has provided a line of credit to the Maryland-based nonprofit Homes for America that enables this active, capable nonprofit to quickly acquire and renovate its preservation properties. The bank conducts only minimal underwriting for each project and funds up to 90 percent of each acquisition. For a recent project in Richmond, Virginia, the bank’s initial acquisition loan was followed by a $3.2 million loan for rehabilitation costs provided at the closing of the tax credit syndication. A permanent mortgage from the state housing agency and equity paid off the bank’s loan after the rehab work was completed for this 102-unit property serving low-income families.
Long-term Financing for Preservation Projects
Beyond providing loans for predevelopment, acquisition, and renovation of preservation projects, banks are actively involved as sources of market-rate, first-mortgage loans. Locally based community banks also play an active role in this market. They can be especially important partners in smaller preservation projects that fall outside the guidelines for typical sources of public subsidy and debt financing.
For example, long-term loans from US Bank were instrumental to the success of Mercy Housing’s groundbreaking acquisition of a 926-unit portfolio of rental properties located in rural areas across Washington state. The property serves both low-income families and seniors, about half of which receive direct rental assistance from the USDA. This groundbreaking project subsequently became an important model for the USDA Rural Development Multi-Family Housing Preservation and Revitalization Program, which is working to save hundreds of at-risk affordable rental properties in rural communities nationwide.
In Maryland, Susquehanna Bank has helped Homes for America carry out two preservation projects with long-term loans subsidized through the Affordable Housing Program (AHP) of the Federal Home Loan Bank of Atlanta. Each of the projects has fewer than 50 units and has needed only a small amount of subsidy for acquisition and minor rehab. Neither project was a good fit for other local or state funding programs.
Credit Enhancement to Mitigate Special Risks
Some preservation projects face unusual funding risks and timing challenges related to government appropriations refinancing prohibitions associated with particular types of government-backed mortgages. By providing letters of credit, banks help preservation buyers bridge these problematic funding and timing gaps.
For example, Labe Bank in Chicago provided a $550,000 letter of credit that helped Hispanic Housing Development Corporation preserve a 192-unit rental property in Woodstock, Illinois, which is home to seniors, physically handicapped individuals, and low-income families. Three community development financial institutions (Local Initiatives Support Corporation, Enterprise Community Loan Fund, and the Housing Partnership Fund) came together to provide a loan that allowed Hispanic Housing to cover its full purchase price, while leaving in place a government-backed second mortgage that could not be refinanced for another seven years. While the three lenders are sharing the future refinancing risk associated with this loan, the bank letter of credit mitigated significant interest rate risk to which they also were exposed, making it a key element in this innovative transaction.
Public–Private Preservation Funds
Larger preservation projects may prove especially difficult and costly if the developer needs to cobble together interim acquisition loans from multiple sources. This might be necessary when individual lenders are unable to extend the full amount of financing needed. Across the country, foundations, government, and leading banks are working together to create dedicated, geographically targeted financing vehicles that help overcome these critical financing barriers for preservation projects.
In 2005 New York City launched a $200 million Housing Acquisition Fund backed by $8 million in public funds, $32 million provided by a group of six foundations, including the MacArthur Foundation, and loan purchase commitments from a syndicate of 16 banks, led by JPMorgan Chase. Together, the public and foundation funds are being used as a guaranty pool to provide credit enhancement for short-term acquisition/bridge and predevelopment loans that the banks agree to fund on favorable, pre-negotiated terms.
Working through New York’s new fund, one of its designated originators, Enterprise Community Loan Fund, provided a $23 million loan in mid-2007 to Fordham-Bedford Community Development Corporation. Fordham-Bedford used the loan proceeds to purchase a portfolio of six unsubsidized rental buildings in the Bronx. To retire the bridge loan and secure the long-term affordability of its newly acquired properties, the organization will use a future allocation of LIHTCs and a mix of other long-term capital sources.
Other regionally focused public—private acquisition funds are operating, in development, or actively under consideration in: Washington, District of Columbia; Atlanta; Louisiana; Los Angeles; Chicago; Florida; and Portland, Oregon. In Chicago, the nonprofit Community Investment Corporation used a below-market loan from the MacArthur Foundation to help raise a $22-million bank pool led by Park National Bank. Funds from this bank pool will enable the organization to expand its work on behalf of the city of Chicago’s innovative Troubled Buildings Initiative and the Cook County Preservation Compact.
To provide both short- and long-term financing for preservation projects in rural areas, the Housing Assistance Council has established a national loan fund with program-related investment funding from MacArthur, a long-term loan from the USDA, and a recent grant award from the U.S. Treasury Department. During its first year, this new fund provided financing for 12 preservation projects, including properties in Washington state, Kansas, New Mexico, and upstate New York.
An Ongoing Priority for Community Investment
This mounting track record of innovative financing activity and preservation success is encouraging. But much remains to be done. The best available data suggest that 50,000 to 100,000 units are preserved each year, but an average of 150,000 or more are being lost. As long as affordable housing remains a pressing concern, preservation needs will have to be met. As with all real estate, rental properties require periodic recapitalization and renewal, notwithstanding the lack of dedicated programs designed to address this ongoing affordable housing need.
More than dollars and buildings are at stake. When affordable rental homes are lost, families and seniors with modest means and few housing alternatives are destabilized. When communities lose their rental stock, it becomes more difficult to accommodate a diverse population with a healthy mix of incomes, ages, and occupations. Moreover, a growing body of research indicates that people who live in stable, affordable homes near where they work do better in holding jobs, and their children do better in school. For aging seniors and others with health problems or physical limitations, stable and affordable housing often is a critical lifeline that provides ready access to vital services.
To directly counter the losses otherwise projected to occur over the decade ahead, existing affordable rental homes must be preserved and improved. Banks can play a vital role in this arena, helping to address a pressing community need while capitalizing on a time-sensitive opportunity. Through partnerships with the public, nonprofit, and philanthropic sectors, banks can deliver the capital and financial tools that capable, mission-driven preservation owners need to carry out successful projects, to strengthen communities, to expand social and economic opportunity, and to provide decent, affordable housing for many years to come.
| Debra D. Schwartz leads the foundation’s $75 million national initiative, Window of Opportunity: Preserving Affordable Rental Housing. More information, visit the MacArthur Foundation. |
Why Owners Sell Affordable Rental Units
Rental housing continues to meet the needs of about one in three families in the United States, or more than 35 million people, at any given time. This population is projected to rise by another 2 million households over the next 10 years. More than half (about 19 million) of today’s renters live on annual incomes that qualify for government housing programs, and only 5 million (over 25 percent of the needy population) receive direct housing assistance. While the number of families that need affordable rental units is increasing, the number of rental units being built and maintained as affordable is declining.
The stock of affordable rental units is eroding because a number of economic factors are coalescing and encouraging owners to sell the properties. Some of the reasons for selling are:
- In hot real estate markets, large financial profits can be made by converting properties to market-rate rental units or by selling units as condominiums. For many owners, this is merely good business.
- In weak real estate markets, owners may be unable to generate enough cash flow to support debt service. This is especially common after the expiration of a rent subsidy.
- Older buildings may need substantial capital and energy improvements for stability. In many cases, when cash flow is limited and may only support debt service, properties are left to deteriorate.
- Building management issues, including criminal behavior, may need to be addressed. Minimal cash flow and/or poor management may leave issues unaddressed and undesirable for owners.
- Many original owners are interested in divesting properties they have owned for 30 and 40 years to focus on retirement and liquidating assets.
- Many original owners had 15- and 20-year government subsidies with affordability restrictions. These are nearing the end of the obligation period, and owners are looking for financial options.
- Some of the subsidies, in the form of below-market interest rates, have lost value in the current environment of low interest rates. Owners are uninterested in government funding programs because they can find alternative financing without rent restriction requirements.
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Strength Matters for Community Development Real Estate Institutions
Strength Matters is a collaborative effort among many national and local organizations in the affordable housing field to increase the capacity of community development real estate institutions (CDREIs). The organization is coordinated by NeighborWorks America and funded by The John D. and Catherine T. MacArthur Foundation. Strength Matters’ mission is to lay the groundwork for more investors to support the capital needs of CDREIs.
CDREIs are nonprofit organizations focused primarily on the development, preservation, and long-term ownership of affordable housing and commercial real estate serving low-income communities or households. The infusion of increased capacity and financial resources will better enable CDREIs to preserve affordable rental housing units.
Three focus groups of investors, chief executive officers, and chief financial officers proposed in 2006 the following initiatives for Strength Matters to:
- Develop financial reporting best practices for CDREIs.
- Develop common underwriting and monitoring guidelines for investors in CDREIs.
- Research and recommend reducing policy constraints confronting CDREIs.
- Document strategies to improve overall CDREI financial sustainability.
For further information about Strength Matters, e-mail Frances Ferguson, Director of the NeighborWorks Multifamily Initiative.
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