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New Capital for Housing Preservation

By Stockton Williams, Executive Director of the ULI Terwilliger Center for Housing


Photograph of multiple low-rise apartment buildings surrounded by landscaped grounds. A pond with a fountain is visible in the foreground.
The Avanath Affordable Housing II fund purchased the 304-unit Oakwood in Orlando, Florida in 2015. The firm has re-branded the property as Bella Cortina and will invest roughly $7,000 per unit to upgrade its exterior paint, wood finishing’s, kitchen appliances, HVAC and landscaping. The property will serve households earning between 50 percent and 75 percent of the area median income. Credit: Urban Land Institute

A new report from the Urban Land Institute Terwilliger Center for Housing sheds light on an encouraging development in affordable and workforce housing: the growth of innovative financing approaches bringing new sources and structures of capital to preserve the affordability of existing subsidized and “naturally occurring” affordable properties. These efforts are proving there are significant financial returns available to investors and lenders – up to 12 percent “cash on cash” – willing to place capital in entities that are committed to preserving current affordability for current low-income renters.

These creative approaches are ramping up at time when preservation has arguably never been more important. Skyrocketing development costs and declining public subsidies have sharply constrained development of new units. Meanwhile, thousands of older, subsidized developments are approaching the end of their federally required rent restrictions, making them vulnerable to conversion to market rates. The unsubsidized affordable stock – often overlooked by housing policymakers, but probably at least as large as the subsidized inventory – is also at risk, as value add real estate investors seek yield through repositioning opportunities in a hypercompetitive environment.

ULI’s report analyzes three principal types of financing approaches: below market debt funds, private equity vehicles, and real estate investment trusts.

Below-market debt funds are established by partnerships of private, public and philanthropic institutions to provide low cost loans. These funds typically require significant seed funding to organize and administer, but once up and running have helped mission-oriented developers compete for land and buildings in hot housing markets. Below-market debt funds are typically revolving, so once established can supply capital for a sustained period of time. They are active in the metropolitan Denver, Los Angeles, New York City, and the San Francisco Bay Area, among other areas.

Private equity vehicles use private capital to acquire and rehabilitate multifamily workforce and affordable housing properties, delivering significant returns – from 6 – 12 percent “cash on cash” – to investors while maintaining their affordability. Common strategies among these types of entities are an intense focus on property management and resident services, joint venture or co-investment structures, and access to an eclectic range of capital sources – ranging from banks and insurance companies to family offices and foundations. Avanath Capital Management, Enterprise Community Investment, the Jonathan Rose Companies, and the Turner Multifamily Impact Fund are among a growing set of preservation-focused private equity vehicles.

Photograph of multiple two-story residential buildings located adjacent to a small playground.
The Denver Transit Oriented Development Fund provided financing to the Urban Land Conservancy to acquire this property from foreclosure in Denver’s Northeast Park Hill neighborhood. The property consists of six buildings with a total of 36, 2-bedroom apartment homes and serves over 100 residents. The conservancy has completed several capital improvement projects including weatherization, new roof, and community gardens. Credit: Urban Land Institute.

Real Estate Investment Trusts (REITS) are an investment vehicle created by federal law in the 1960s to provide a means for small-scale investors to invest in income-producing real estate. REITs typically bring specialized expertise and the ability to offer several forms of financing for a property acquisition and development. A number of REITs are involved in bond-financed affordable housing developments as part of broader investment portfolio. Two – the Community Development Trust and Housing Partnership Equity Trust — focus solely on affordable multifamily developments.

While the growth of these and other new financing approaches is encouraging – and notable in that it has accelerated substantially in the last several years – much greater flows of private capital will be required to meet rapidly growing affordable and workforce housing preservation challenges.

Public policy can play a helpful role. For example, more responsive guidance to banks from their Community Reinvestment Act regulatory examiners could generate more bank investment in the preservation of unsubsidized “naturally occurring” affordable properties. According to the National Association of Affordable Housing Lenders: “Current [CRA] guidance offers little or no encouragement of bank financing for much of the naturally affordable rental housing stock. Because examiners are less likely to consider rental housing outside [Low and Moderate Income] (LMI) geographies, the policy is particularly unsupportive of fair housing efforts to offer affordable housing in middle- and upper-income ‘high opportunity’ areas, an objective integral to HUD’s new Affirmatively Furthering Fair Housing policy.” (NAAHL, “CRA Policy Guidance on Community Development,” October 16, 2015).

In addition, the proposed “Duty to Serve” requirements recently released for public comment by the Federal Housing Finance Agency set the stage for Fannie Mae and Freddie Mac to bring new capital and financial products to support preservation. Ensuring Fannie and Freddie make robust efforts in this area should be a priority in the public comment and annual review processes for the requirements.

The results to date of the financing vehicles profiled in the ULI report make a strong case that workforce and affordable housing segment of the market now offers an array of investment opportunities for investors of all types – from financial institutions and pension funds to family offices to high net worth individuals. These investment vehicles and other like them are a scalable solution to an important aspect of the affordable housing crisis, especially with greater awareness and attention from policymakers.

Stockton Williams is Executive Director of the ULI Terwilliger Center for Housing and author of the report referenced in this article.