Appeared in the Housing Facts & Findings online journal from the Fannie Mae Foundation, Volume 4, Issue 4, 2002

The Increasing Shortage of Affordable Rental Housing in America: Action Items for Preservation

By Michael Bodaken

The original article is located at the Fannie Mae Foundation website:
 Providing Affordable Housing
The full-text of the article is provided here for convenience:

What do we mean by preservation? The term "preservation" has different meanings for different people. To some, it connotes preservation of historically significant homes or structures. To others, it means restoring artifacts from a time long ago.

In this article, I define preservation as the activity that maintains affordable, multifamily rental homes. While I am acutely aware of the potential loss of affordability of federally regulated apartments, I include in the definition of preservation any apartment subject to increasing rent hikes or conversion to nonrental use, as well as deteriorated homes that are uninhabitable.

Why preserve affordable apartments? After all, despite the shallow recession, homeownership hit a record high last year. According to sources as diverse as the Federal Reserve and Harvard's Joint Center for Housing Studies, the strong housing market actually helped keep the recent recession from deepening. Record low interest rates kept families buying homes, and refinancing mortgages puts cash in their pockets for other purchases. The Joint Center predicts that over 1 million new households will be added annually to the nation's homeownership rolls over the next two decades.

Fundamentally, the reason to preserve affordable housing is that we don't have enough affordable, available housing to serve the majority of poor and near-poor households who live and work and rent in the United States. By way of background:

  • The lack of affordable housing is widespread. In no housing market in the nation—not Baltimore, not Iowa, not Texas, nowhere—can a household earning today's minimum wage reasonably afford a modest two-bedroom rental. While the rest of our nation is relatively well sheltered, the poor and elderly often reside in overcrowded or dilapidated housing or are spending a very large percentage of their discretionary income on shelter, placing rent in competition with other essentials, like food or health care. According to the U.S. Department of Housing and Urban Development (HUD), more than 5.4 million renter families and elderly pay more than half their incomes for housing or live in severely distressed housing.
  • 57 percent of all renters, or 20 million households, earn less than $30,000 annually. That means an affordable rent is $750/month or less. By contrast, the median asking rent for a new apartment is $920, well out of reach for these renters. According to the Joint Center, lower-skilled workers such as retail salespeople and janitors cannot afford average rents in most urban centers. Teachers in Washington, DC don't earn enough to afford a basic two-bedroom unit. The same is true of nurses.
  • New multifamily housing construction slowed down in the 1990s—despite a population increase—dropping from just over 5 million units in the 1970s to just half that number in the 1990s.
  • The rental stock is aging. Two-thirds of renters reside in units built before 1975.
  • Rising real estate markets translate into rapidly increasing rents. The affordable housing loss is compounded by the imminent expiration of the subsidies and contracts on much of this nation's regulated housing supply. One in ten apartments affordable to low-income renters is federally subsidized. Many owners of HUD-assisted affordable housing are actively choosing to exit government-sponsored programs. According to data gathered by the National Housing Trust, private owners have already "taken to market" more than 150,000 previously HUD-assisted or -insured apartments. We are losing affordability on about 2,000 of these apartments monthly. The average rent hike associated with conversion from "regulated affordable" to market rate is 45 percent.
  • Contracts governing 1.5 million federally insured apartments with project-based Section 8 assistance will expire over the next five years.

In short, structural changes that impact the availability of affordable housing are profoundly affecting the lives of those who need it. Perhaps the National Low Income Housing Coalition gave the most vivid picture of the life these low-income families lead: "Like a high stakes game of musical chairs, the number of poor renters remains the same and they must compete for a diminishing number of affordable places to live."

Housing at Risk of Loss

The figure reflects the current risk of loss of affordable rental housing over the next decade.

Note that large numbers of non-assisted housing are at risk of loss from the inventory. While federally regulated apartments, such as the HUD and Low-Income Housing Tax Credit stock, are definitely worth preserving, the risk of loss of affordability is real in both the subsidized and unsubsidized segments of the rental market.

Gaps in the Preservation Field

What are the most urgent tactical and strategic steps we must take to address the preservation dilemma? To my mind, resources must be targeted to the following, immediate objectives:

  1. Expand funding for research, education, data gathering, and advocacy in the public policy arena.
  2. Increase government and foundation below-market investments and grants to develop the capacity of "business like" preservation owners.
  3. Create targeted preservation financing tools.

Preservation Public Policy Issues

Several critical public policy issues have emerged in the field over the past decade. Two among many are:

  1. The effective barrier to transfer of affordable, multifamily properties is the stiff tax on non-cash capital gain triggered by the sale. Because the tax is difficult to finance, owners of these properties are essentially trapped in their present position. The government should relieve sellers of affordable, multifamily, assisted housing of their tax obligations if they transfer the property to an owner who agrees to properly maintain it and keep it affordable over the long haul. The Millennial Housing Commission formally made this recommendation in its July, 2002 report to Congress.
  2. State governments should be encouraged to target resources to preserve affordable, multifamily housing. The National Housing Trust conducted an informal survey of state housing finance agencies to determine how they are allocating their precious Low-Income Housing Tax Credits. More than 30 state agencies have some form of tax credit priority or reservation for preservation. The need for preservation is universal. We need to make more state and local housing agencies aware of what is at stake when affordable housing is lost.

Housing Acquisition: Building and Maintaining Sustainable, Nonspeculative Preservation Organizations

"In the end, a vision without the ability to execute is probably a hallucination." (The Mind of the CEO, Basic Books, 2001).

The case for creating capacity is an easy one. During the next five years, tens of thousands of apartments will be placed on the market by owners of governmentally assisted and/or -insured housing, in particular housing now assisted by HUD or the Rural Housing Service, and/or properties with expiring Low-Income Housing Tax Credits. Moreover, portfolios of unsubsidized, but affordable, properties are coming on the market in increasing numbers.

Strong, business-minded/socially motivated, preservation entities (either nonprofit or for profit, but always nonspeculative) are essential to the preservation and improvement of affordable housing. Indeed, any business model for sustainability requires the presence of such entities. Put another way, we can't save affordable housing unless there are capable stewards willing to take on this important responsibility.

A core national policy objective should be the assembly of a new group of interested, vigorous owners willing to invest new resources into this housing. Below-market investments and grants are needed to sustain these new entities. Toward this end, the National Housing Trust and the Enterprise Foundation created the NHT/Enterprise Preservation Corporation ("NHT/Enterprise"), a 501(c)(3) acquisition entity with the sole purpose of preserving affordable multifamily housing that serves low-income households. The response to NHT/Enterprise has been overwhelming. In just over two years, the nonprofit has preserved and improved more than 2,600 apartments with a total net worth of over $100 million.

Creation of Preservation Products

Financing preservation transactions can get complicated. But, in the end, it comes down to three simple figures:

  1. Pay for the purchase of the property.
  2. Pay for the renovation of the property
  3. Pay for the soft costs associated with the transaction.

Intelligent investment in bridge or permanent financing can facilitate efficient preservation. Consider the following preservation tools:

  • Bridge Finance: NHT/Enterprise and other nonprofits often want to purchase properties through a short-term "bridge loan." For example, NHT/Enterprise recently purchased a well-maintained 208-unit community located in Kissimmee, Florida. In that case, the bridge loan of approximately $8 million, provided by Bank of America, gave us the six months we needed to pursue a permanent loan (see below). The rehabilitation costs will come out of the bond.
Woodside Apartments - Sidebar (click)
  • Permanent Financing: A permanent loan is the long-term loan on the property, typically 30 years or more in length. Sometimes, the same lender who provides the purchaser the short-term loan (e.g., Bank of America or SunTrust) can provide the permanent loan. Because the bank knows the property, the nonprofit purchaser should be able to obtain low-cost financing. To the extent these efficiencies are realized in the marketplace, lower-cost financing should translate into a more affordable multifamily housing product in the form of lower rents.
  • Letters of Credit: Some lenders are already providing standby letters of credit to help "stand behind" the credit rating of tax-exempt debt. This is particularly useful when combined with so-called "Lower Floater" type bonds where the interest rate of the bonds varies over time, somewhat like a single-family adjustable rate mortgage. The letter of credit can help reduce the long-term interest rate, ultimately reducing the cost of permanent financing and making the transaction more economically feasible. For example, at a recent closing, Sun Trust Bank provided a five-year Letter of Credit that backed a short-term low-floater rate of less than 3 percent!
  • Direct Purchase of 501(c)(3) Bonds: Some financial institutions privately purchase tax-exempt bonds for their own portfolios, lowering transaction costs. Tax-exempt rates (exempt from federal income tax and state tax) for 30-year 501(c)(3) bonds are currently 5.9 percent. For example, Fannie Mae directly purchased 501(c)(3) bonds in a $80 million transaction involving NHT/Enterprise's purchase of more than 1,700 apartments in Dallas and Houston, Texas.
  • Purchase of Tax Credits: Low-Income Housing Tax Credits are increasingly being used to help purchase and renovate existing multifamily housing. The same lender that provides the bridge loan and the permanent financing can purchase the property's tax credits. For example, NHT/Enterprise is currently using tax credits to purchase and rehabilitate federally assisted properties in Washington, DC; Anderson, South Carolina (see sidebar); Charlottesville, Virginia; and Chicago.
Anderson Gardens - Sidebar (click)

Conclusion

At bottom, our nation's need for affordable housing is increasing. Unless and until we produce tens of thousands more new affordable apartments, the preservation imperative is obvious. Fortunately, preservation policy issues are discrete. Scalable financing products are available. New, nonspeculative owners are beginning to develop preservation ownership businesses. The question is not how. Will we devote the time and energy to save an increasingly precious resource?