Despite the wealth of state and local policy innovations and success, the volume of affordable rental homes preserved still falls well short of what’s needed to keep our existing affordable housing, much less add to it. On one hand, preservation efforts have been stymied by a lack of information and a tangle of overlapping federal, state and local policies and practice. On the other hand, growing market pressures and the absence of coordinated funding strategies that are quick and robust enough to compete with market-rate capital have made it harder to put together viable preservation deals. At a basic level, there are three fundamental problems that create the need for a systematic, comprehensive approach to rental housing preservation:
1. Incentives are misaligned. Current resources, incentives and requirements tied to affordable rental properties do not adequately encourage or require owners to preserve long-term affordability or to sell to another owner committed to that objective.
2. Policies undermine “strong ownership.” Current regulatory policies limit the ability of affordable rental housing owners to recapitalize, earn sufficient cash flow and build a sustainable capital base from which to successfully improve, manage and operate quality properties affordable to low- and moderate-income renters.
3. Current policies lack coherence. Regulations and programs are fragmented, cumbersome, often unpredictable and inconsistently applied. As a result, buyers who want to preserve affordable housing find it difficult and sometimes impossible to acquire properties that are at risk of loss from expiring subsidies, market-rate conversion or severe deterioration.
States and localities could use a number of policies to increase the likelihood that rental housing preservation efforts will succeed over the long run. For example, by giving residents of subsidized (or any) rental properties a right of first refusal to purchase a property that an owner puts up for sale, communities can empower residents to negotiate with owners and potentially facilitate the transfer to an entity willing to maintain the property over the long-term. To the extent it prompts owners to better maintain their properties, code enforcement can also be a tool for rental housing preservation. Strategies that allow an owner to capitalize or borrow against its entire portfolio as opposed to the balance sheet for one property could enhance the ability of owners to compete for unsubsidized properties as well as to more effectively pursue affordable preservation transactions.
Notice and right-of-first-refusal laws
A number of states and localities have established policies that require owners of rental properties to give residents advance notice of any intention to sell the property or convert it to condominiums. The notice period gives residents a chance to plan how they will address the change in ownership. Oftentimes a change in ownership can lead to higher rents or the new owner will decide not to renew leases for existing tenants; the notice period is important for tenants to find other affordable housing options. When combined with a right of first refusal allowing residents (or another qualifying entity) to match a legitimate offer to purchase the property, the notice provisions can set in motion a process that leads to the successful transfer of ownership either to the residents or to another entity willing to preserve the property as affordable over the long-term.
Right-of-first refusal laws vary in the length of time they provide to tenants to make an offer to purchase, but typically range from 30 to 90 days. In some cases, existing residents can preserve the property as affordable by agreeing to waive their rights to purchase the property in exchange for a promise by the purchaser to keep some or all of the units affordable for a certain number of years. In other cases, the tenants either purchase the property themselves or transfer their rights to a nonprofit or mission-driven for-profit company that agrees to maintain the property as affordable rental housing.
For a right of first refusal to be successfully exercised, two factors need to be put into place very quickly. First, the tenants need to be connected with an entity that has experience purchasing and operating rental housing. For example, organized tenant groups in the District of Columbia have turned their rights over to Community Preservation Development Corporation and to NHT/Enterprise Preservation Corporation. Second, funding is needed to make the transaction work. Government funding programs, like the flexible programs and acquisition funds discussed above, which can respond quickly and flexibly to requests from nonprofits and tenant groups seeking to purchase and rehabilitate at-risk housing, can enhance the effectiveness of notification and purchase rights laws.
Policies that support long-term ownership
In a world of limited funding for affordable housing, it makes sense to fund the strongest proposals. States and localities often create incentives to deliver projects with the lowest costs and the smallest margin of profitability (the more technical term is “cash flow”).
While it is clearly sensible for states and localities to use competition to drive down development costs for affordable housing, it is also important to recognize that long-term ownership and maintenance of affordable rental housing requires financially strong entities that can sustain themselves over the long-term. Squeezing all cash flow out of a transaction may bring down initial costs but can also starve nonprofits and mission-driven for-profits of the capital they need to weather difficult rental markets, to keep up with changing rules and regulations, to support the management of their overall portfolio and to pursue additional preservation transactions without the need for costly predevelopment financing. It also creates an incentive for entities to focus on new deals so they can earn additional developer fees, which pay the developer for staff time and labor to complete the property, including profit for the risk taken and resources expended.
Many high-quality affordable rental housing opportunities are being lost due to poor maintenance. Whether because of outright neglect or legitimate financial limitations on the ability of the owner to keep up the property, improperly maintained properties create ongoing problems for the building, its residents and the surrounding neighborhood. Without intervention, this situation can lead to poor housing conditions, foreclosure, abandonment, and, in the most severe cases, the need to demolish properties that have become abandoned and cost-prohibitive to restore.
Well-executed code enforcement programs help to maintain the quality and the safety of existing units, thereby supporting preservation efforts. Code enforcement alone typically will not prevent the loss of units. This tool works best when coupled with other rehabilitation tools and funding streams, including programs to help small property owners secure financing for repairs.
While the “stick” of code enforcement can be helpful in bringing difficult owners to the table, some communities have found it helpful to adopt a more facilitative attitude toward code enforcement. Taking the approach of an “educator” rather than a “police officer,” inspectors work with building owners and developers to make redevelopment feasible rather than just penalizing them for noncompliance.
Rental housing preservation can be a complex endeavor. A strong data collection effort to identify properties at risk of loss and key issues that need to be addressed can aid good decision making and allocation of resources while helping communities prioritize their outreach and development efforts. Preservation efforts can also be strengthened through better coordination among the various players: local, state and federal officials, as well as nonprofit and for-profit developers, owners, potential buyers, advocacy groups, lenders, community groups and other stakeholders. Finally, communities can use outreach and technical assistance strategies to reach more owners and residents.
Experience has shown that not all affordable rental properties are equally at risk. A strong information collection and analysis program can help you determine which properties are at risk of loss and for what reason, helping you target and tailor your preservation efforts. A number of cities and states have developed databases of their subsidized rental housing stock that help them identify and conduct outreach to properties that are most at risk of being lost due to expiring affordability restrictions, increases in market rents, physical deterioration or other factors.
Statewide in California, all localities are required to prepare a 10-year analysis of at-risk subsidized properties. The analysis must include the locality’s preservation goals and provide a five-year action plan that identifies available financing and subsidies. In Chicago, the Rehab Network, a local nonprofit, tracks subsidized multifamily properties at risk of terminating their affordability contracts through a statewide database of the properties, which includes information on when their affordability term expires. The nonprofit also assists in lining up purchasers for the properties.
In Florida, the Florida Housing Data Clearinghouse combines federal and state housing data to produce a comprehensive picture of the subsidized housing stock, aiding state and local decision making. In particular, the Clearinghouse features an Assisted Housing Inventory that contains property-level data about assisted rental housing.
In New York City, practitioners can access the Subsidized Housing Information Project (SHIP) database, which provides access to information on some 235,000 privately owned subsidized rentals. Created and administered by the NYU Furman Center for Real Estate and Urban Policy, the database — which is easily accessed and explored through the Center’s Data Search Tool — includes data from 50 different public and private sources that can be easily filtered and viewed on a map.
Many different policies need to be put into place and many different actors need to be arranged to ensure a successful rental housing preservation strategy. Through processes that facilitate cooperation and coordination, states and localities can develop more effective and coordinated preservation strategies and improve accountability through the ongoing tracking of progress. The National Low Income Housing Coalition has prepared a series of reports on “potential tools in the affordable housing preservation toolbox,” which draw connections between other policy documents, such as the HUD-mandated Consolidated Plan, and preservation goals. Incorporating a preservation agenda into these documents allows communities to strengthen their efforts and ensure that preservation initiatives align with other policy priorities.
In several localities, interagency councils have been formed to coordinate the activity of organizations engaged in preservation-related work and streamline funding applications and other processes for developers involved in preservation projects.
Notable examples include:
- The Housing Development Consortium (HDC) is a not-for-profit trade association that brings together public development authorities, nonprofit housing developers, government agencies and other members of the housing industry to promote the development and preservation of affordable housing in King County, Washington. “Affinity groups,” organized for members by HDC, give organizations facing similar issues the opportunity to collaborate and develop shared solutions and proposals. The group also organizes stakeholder meetings, works to promote affordable housing legislation and conducts outreach to improve community perceptions of affordable homes.
- Members of the Interagency Stabilization Group (ISG) in Minnesota’s Twin Cities include representatives from the metropolitan area government and private sector affordable housing funders. The group was first convened in 1993 by the Family Housing Fund to coordinate funding and other efforts related to the preservation of affordable homes.
Outreach and technical assistance
Outreach and education can be an important part of the solution, even in communities that do not have specific local policies to preserve affordable rental homes. One way for communities to encourage preservation is simply to educate owners of federally assisted or insured housing about the latest incentives available from the federal, state and local governments to facilitate the preservation of affordable homes. Federal incentives include Mark-to-Market — a program for properties with above-market rents that provides for restructuring at market rents, which may include an infusion of new capital for renovations; Mark-Up-to-Market — a program to allow project-based Section 8 properties with below-market rents to raise their rents to market; and budget-based rent adjustments, which allow rent increases tied to certain increased expenses.
Both owners and tenants of multifamily properties need education about their options for preservation. They also may need technical assistance to take advantage of refinancing options, rights of first refusal and other preservation tools. The Chicago Rehab Network, (CEDAC) in Massachusetts, and the California Housing Partnership Corporation are just a few of the organizations providing capacity building and technical assistance to sellers, buyers, residents and officials participating in affordable rental housing preservations. Activities range from providing advocacy and policy development support to offering training workshops.
Funding for preservation
Rental housing preservation policies seek to preserve as many of these developments as possible as quality affordable housing. Some owners can be induced to preserve their properties through tax incentives or through special financing that enables them to improve their property while keeping rents affordable. In other cases, the only way to preserve the affordability of the property is through purchase by a nonprofit or mission-driven for-profit corporation. A number of state and local housing agencies have established special loan products for affordable properties with expiring use restrictions to encourage owners to keep those properties affordable. Some of these products provide funding to allow owners to repair their properties. Others allow owners to refinance their properties at a reduced rate. In both cases, the financing is often conditioned on a promise of ongoing affordability.
Affordable financing, including low-cost loans, grants or tax incentives provided by government agencies are inevitably required to make preservation transactions possible. The funds are needed for the purchase of the properties and for physical improvements that ensure they will provide quality housing opportunities over the long run. One example is San Francisco’s Citywide Affordable Housing Program, where the city uses for preservation. Fairfax County, Va., has used a housing trust fund model, and Seattle supports preservation activities with funds raised through its Housing Levy, while other states and communities dedicate a portion of their general funds to preservation. Some state housing finance agencies use their reserves or ongoing program revenue.
Set-asides of tax-exempt bonds and 9 percent Low-Income Housing Tax Credits.
Some 47 states prioritize the preservation of existing affordable homes in the Qualified Allocation Plans that determine how they will allocate Low-Income Housing Tax Credits, usually done by reserving a portion of 9 percent tax credits for preservation or by awarding additional points for preservation-related projects under a larger competition. A smaller number of states have made a major push to use 4 percent Low-Income Housing Tax Credits for preservation.
Set-asides within housing trust fund.
Housing trust funds are separate funds established by states or localities to provide a stable source of revenue reserved solely for affordable homes. Because they are created at the state or local level, they are extremely flexible and can be tailored to meet local needs. A growing number of states and localities are dedicating a portion of their housing trust fund revenues for affordable rental housing preservation. Currently, some 38 state housing trust funds support preservation. New Jersey sets aside a portion of its trust fund for preservation. Other states that prioritize preservation in their state trust funds include Florida, Indiana, Vermont, Washington and Washington, D.C.
Flexible preservation funds.
Some communities have found it helpful to create a flexible fund, separate from or in addition to a housing trust fund, to cover the great variety of needs that arise with respect to different preservation transactions. This flexible fund can address the variety of financing needs that can be involved with affordable housing preservation transactions:
- funding to cover the “gap” between what it costs to redevelop a property and what can be raised through tax credits and private financing;
- funds for the backlog of accumulated capital needs;
- predevelopment funds to facilitate investigation of a preservation opportunity;
- funding to help a nonprofit or mission-driven for-profit act quickly to purchase an available property in need of preservation;
- providing permanent financing for preserved properties, and
- providing loans to property owners to help them refinance without raising rents to such a level that they are no longer affordable.
A flexible fund to meet the myriad of rental housing preservation needs can help build capacity among local government staff and affordable housing developers as well as help communities expand their preservation efforts.
Predevelopment, acquisition and interim financing.
In many cases, it will be desirable to facilitate the transfer of ownership of an affordable property from the current owner to another owner who is more interested in preserving the property as affordable over the long-term. To cover the costs associated with investigating potential leads and conducting the due diligence necessary for determining whether a particular transaction can work, organizations interested in purchasing a property will need predevelopment financing. Other financing needs include financing for the acquisition of a property and interim financing to operate the property until it is recapitalized and permanent financing is put into place.
While some of these financing needs can be met by the private sector, in other cases public financing or some combination of public and private financing is needed. This is especially true for smaller nonprofits that do not have as ready access to capital as do larger organizations. Even larger nonprofits and for-profits may have difficulty accessing financing to purchase larger properties as quickly as may be needed to compete with other purchasers.
For all of these reasons, states and localities may wish to consider establishing predevelopment, acquisition and interim financing programs to facilitate preservation transactions. Communities can also work to build partnerships with community development financing institutions, many of which are active in this area.
Programs for small multifamily properties.
Much of the affordable rental stock — both subsidized and unsubsidized — is owned by individuals or small businesses that own relatively few rental properties. To preserve the affordability of unsubsidized rental homes, several cities have worked with nonprofit lending institutions to help smaller property owners access affordable capital to modernize their properties in order to run them profitably and maintain the supply of affordable rental homes.
Notable examples of nonprofit lending institutions with a specific focus on rental home preservation are the following:
New York, N.Y. The Community Preservation Corporation (CPC) is a nonprofit organization sponsored by prominent banks and insurance companies that provides loans to support the construction and rehabilitation of multifamily homes — both for rent and for sale. CPC functions as a one-stop shop for owners and developers seeking to build or rehabilitate properties, providing both technical assistance and attractively priced financing. In its 34 years, CPC has financed more than 130,000 new or rehabilitated units, providing or facilitating some $7 billion in investment. CPC works closely with New York City’s Housing Preservation and Development (HPD) and Housing Development Corporation (a local housing finance agency) to advance their shared goals of stronger communities and more affordable homes.
Chicago, Ill. Community Investment Corporation (CIC) is a nonprofit mortgage lender sponsored by more than 45 banks as well as Fannie Mae, the United Methodist Pension Fund and Peoples Energy. These investors have pledged in excess of $550 million through 2010 for CIC’s revolving loan pool, which CIC uses to fund reasonably priced loans to support the rehabilitation of older multifamily and other homes. Since 1984, CIC has made 1,405 loans totaling $820 million for the rehabilitation of 39,000 units of quality affordable homes for about 110,000 Chicago area residents.
CIC also administers:
- A property management training program to provide landlords with the knowledge to better market, manage and maintain residential property;
- The Troubled Buildings Initiative, which targets the worst buildings in a neighborhood for transfer to a new owner who will rehabilitate them with CIC funds;
- Technical assistance to support rehabilitation activity by borrowers; and
- A variety of other grant and loan programs.
- CIC works closely with the city on many aspects of its operations, including the Troubled Buildings Initiative and a subsidy program that CIC administers in targeted areas.
Some cities and states have adopted similar programs themselves, without partnering with an outside lending institution. Examples include North Dakota’s Rural Housing Rehabilitation Loan program (provides low-cost financing for rehab in small communities), West Virginia’s Mini-Mod Rehabilitation Program (a “no-nonsense” lending program that provides low-interest loans with streamlined access to funds) and Wyoming’s Small Project Opportunities Program (which uses a set-aside of HOME funds for rehabilitation of existing small properties).
Federal financing for rental preservation
Since 1965, project-based federal rental assistance, administered through project-based Section 8 and a series of mortgage subsidy programs, has helped to make over 1 million privately owned units affordable to low- and moderate-income families. Beginning in the late 1980s and mid-90s, the long-term affordability covenants included in the initial contracts between the federal government and the private owners began to expire, giving owners the opportunity to opt out of the federal subsidy programs or to prepay their federally insured mortgages.
In many cases, the financial incentives to take these actions were strong, as owners could then raise rents to market rates or convert their buildings to other uses. In response to the potential loss of hundreds of thousands of affordable rental units, the U.S. Department of Housing and Urban Development (HUD) enacted several programs, including Mark-to-Market, Mark-up-to-Market, and Section 236 Decoupling, described below. These programs, while voluntary, are intended to offer adequate incentives and flexibility to encourage the continued participation of private owners in providing affordable rental homes. They are an important tool for preservation, in addition to the policies described earlier.
The table below, reproduced with permission from the National Housing Trust, describes several federal programs that play an important role in preserving the existing stock of affordable homes. The National Housing Trust is a national nonprofit dedicated to safeguarding affordable housing through public policy initiatives, lending and real estate development.
|Preservation Tool||Applicable Properties||Description of Tool|
|Mark-to-Market Debt Restructuring||Project-based Section 8 properties with an FHA-insured or HUD-held mortgage and where Section 8 contract rents are above market rate.||
The HUD-insured mortgage is bifurcated into two mortgages. The first is sized to an amount that is supportable at market-rate rents. The remaining unpaid principal balance is structured as a HUD-held note that is serviced with 75 percent of surplus cash.
The restructuring allows owners to finance rehabilitation needs and cover operating expenses. Repair escrows are provided for immediate capital needs, and increased deposits to reserve accounts are made to address long-term physical needs. In addition to cash flow, owners receive fees based on operating performance and a return on investments required by the program.
|Mark-Up-to-Market||Project-based Section 8 properties owned by a for-profit or limited dividend entity with Section 8 contract rents that are below market rents but in excess of 100 percent of HUD’s published fair market rent.||Provides incentives for owners with below-market rents to remain in the Section 8 program. Owners are permitted to increase rents up to the lesser of market rate levels or 150 percent of HUD’s published fair market rent. The increased cash flow resulting from the higher rents may be used to recapitalize the property and increase distributions to owners of limited-dividend projects.|
|Mark-Up-to-Market for a Nonprofit Transfer||Project-based Section 8 properties being transferred to a nonprofit organization where Section 8 contract rents are below market rents.||Provides resources for nonprofit, mission-driven organizations to acquire and preserve Section 8 properties. Nonprofit buyers are permitted to increase rents up to the lesser of “post-rehab” market rents or 150 percent of HUD’s published fair market rent.|
|Mark-Up-to-Budget||Project-based Section 8 properties owned by no-profits where rents are below market.||Provides resources for nonprofit owners to recapitalize a Section 8 property. Nonprofit owners are permitted to increase below-market rents up to 150 percent of fair market rent (or higher if HUD permits) if project needs are justified. Higher rents allow nonprofit owners to support additional debt for rehabilitation or to increase contributions to the replacement reserve for future repairs.|
|FHA Risk Sharing Loans||All types of properties eligible provided the loan results in affordable housing.||Mortgage insurance for mortgages of multifamily housing projects with loans that are underwritten by a housing finance agency (HFA). HUD and HFAs share in the risk of the mortgage. HFAs may elect to share from 10 to 90 percent of the loss on a loan with HUD. The HFA reimburses HUD in the event of a claim pursuant to terms of the risk sharing agreement.|
|Section 236 IRP Decoupling||Properties with mortgages subsidized through the Section 236 program.||Original 236 financing provides ongoing interest reduction payments (“IRP”) in amounts that reduce the effective interest rate on the mortgage to 1 percent. In a Decoupling transaction, the 236 mortgage is pre-paid and the previously budgeted IRP’s are retained. The anticipated flow of funds from the IRP can be leveraged to support debt in addition to what can be supported by the net operating income, providing additional funds for rehabilitation needs.|
|HOME and CDBG Grants||States and localities administer these programs and determine eligible properties.||These are federal block grant programs that provide state and localities a source of funding to meet their community development and affordable housing needs. Rehabilitation of subsidized rental housing is an eligible activity but competes with other types of uses.|
|Project-Based Vouchers||Rental units assisted under certain federal housing programs (e.g., rental rehabilitation, public housing) cannot be assisted with project-based voucher assistance.||Project-based vouchers are a component of a public housing agencies’ (PHAs) housing choice voucher program.|