According to Marc Jarh, of Community Development Futures LLC and former president of the New York City Housing Development Corporation "the math of affordable housing finance is cruel". So how, in the midst of a housing affordability crisis, can we make the numbers stack up? In this edited extract of Marc's presentation to the Transforming Housing Affordable Housing Summit he explores the institutions and policies that makes the US affordable housing finance system work.
Ultimately, in affordable housing and real estate in general, if you can’t finance it you can’t build it. No matter how compelling, how sweet the deal is, if it doesn’t pencil out, it won’t get built. So, I’m going to talk about some of the tools we use in New York City (and the United States) that allow us to finance affordable housing, including Direct Government Funding, Social Investment and Philanthropic Options, and the Use of Government Land.
These are forms of subsidy that allow the public to satisfy the need for affordable housing and community development and developers, lenders and investors to achieve adequate returns while sufficiently mitigating the risks associated with this undertaking.
But, prior to talking about these tools, I want to put these remarks into some historical context, because I think it’s important to understand that the financing tools have changed over time, dictated by changing politics and evolving policy.
Moreover, it’s important to note that it’s always difficult to talk about affordable housing with folks from other countries. Things don’t travel well. There are different historical traditions, cultures, economies, including real estate markets, laws and regulations and policies. It’s easy for us to misunderstand each other or to mistakenly assume things. And that’s why it’s important to situate these financing instruments in some context. It’s important to acknowledge that what might work in New York City may not quite work within the context of Melbourne or be of limited application to your efforts. A sense of humility is required.
Regardless of whether we’re in New York or Melbourne the math of affordable housing is cruel. Given finite resources to address a “wicked problem”, difficult trade-offs must constantly be made—principally between the scale and type of units and the depth of affordability, but also between the ambitions of housing plans and lending programs and the ambitions of architects and planners.
In the United States, while there has always been a vibrant, private housing market—in recent times, in fact, the market was much too frothy (indeed it took down the U.S. economy and, to some extent, the global economy)--affordable housing development has migrated over the past five decades from a point where much of it was built as Public Housing entirely funded by the Federal government, to where, under the auspices of the Federal government, private participation was encouraged and supported through interest rate subsidies and guarantees, to the point where over the last two decades, Federal law has been structured to more actively encourage Public-Private partnerships at the State and local level. The ecology of affordable housing has dramatically changed over the past five decades, and as its evolved new organizational forms have emerged as well as new financial structures to create a complex industry.
As an aside, while this has gone on federal support for public housing has precipitously declined putting that already depleted housing stock at even greater risk of crippling disrepair. Nonetheless, these partnerships are designed to leverage the private capital of financial institutions and the skills and capital of private for-profit and nonprofit developers. These developers may have different motives—nonprofits are more “mission driven” as they attempt to meet pressing social needs--but both must profit from the venture either/or through developer fees, cash flow in the deal, management fees, and if they’re the general contractor, overhead and profit. Nobody in these deals is in them to lose money; and, while the margins in these deals are less than what they’d be in a pure market rate deal, they’re still sufficient to meet the financial expectations of the developers, and, at least in New York City, in recent times, perhaps counter-intuitively, they have been less risky deals.
Intersecting with this shift in financing models has been a process of what we call “devolution,” the movement of decision-making I previously described from the Federal government down to State and local governments. In effect, the Federal government through its legislative and regulatory powers helps establish the playing field, and supplies some important resources, whether in the form of tax advantages, including tax exempt financing and tax credits, as well as rental vouchers, and capital grants to localities, but the game is “refereed” by local officials, who also may supply local resources.
All this takes place within a legislative and regulatory framework which can’t be ignored: the Community Reinvestment Act, enacted in 1977.Because if the current affordable housing effort is premised upon leveraging private capital, incentives have to be provided for private financial institutions to participate.CRA was designed to put an end to the discriminatory lending practices of financial institutions which through a practice called “redlining” essentially starved low and moderate income communities of capital. CRA established the framework which has driven financial institutions to lend and invest in low and moderate income communities in a consistent manner. And, coincidentally, it has helped foster a set of what are called “Intermediaries”, designed to serve as bridges between nonprofit community-based organizations, financial institutions and public agencies, and a tapestry of public-private relationships that didn’t exist before. The intermediaries—most prominent nationally the Local Initiatives Support Corporation or “LISC”, which received its original seed funding from The Ford Foundation, Enterprise Community Partners, the Low Income Investment Fund, the Corporation for Supportive Housing, and the Nonprofit Finance Fund—provide predevelopment and construction loans, philanthropic grants, and private equity to nonprofit groups involved in community development and the creation and/or preservation of affordable housing. They are indispensable players in the affordable housing ecosystem. CRA also led more directly to the emergence of local bank consortia like New YorkCity’s “Community Preservation Corporation”. Affordable housing lending is a labor intensive niche industry characterized by complicated layers of sometimes arcane federal, state, and local laws and regulations. All depository financial institutions are subject to CRA, but not all have the appetite or capacity to master that niche. Bank consortia focused on this arena are able to develop the refined skills, expertise, and relationships with developers, government, and communities that are needed to efficiently and prudently navigate this terrain.
The fundamental challenge confronting New York City and, undoubtedly Melbourne—the reason why HDC’s work is so important--is the fact that it’s extremely expensive to build, maintain and operate housing, yet even many middle income families, let alone working class or poor families don’t make enough money to pay the rents required to support the debt service, and maintenance and operating costs of the development, as well as provide the owner with a reasonable rate of return. For instance, the median two bedroom rent on an apartment in Manhattan is $2,900, while the rent on a two bedroom apartment in many affordable housing developments is around $1,165.
The only way to bridge this gap in New York City and in Melbourne, sometimes it’s an abyss between what it costs to build and maintain housing, and what people can afford to pay for it, is for government to intervene with different types of subsidy—and the housing agencies have tool kits or menus of ingredients that are mixed and matched to create financing packages that work for developers, public agencies, lenders and investors.
This post is an edited extract of the presentation by Marc Jarh to the Affordable Housing Summit, as part of the Transforming Housing project at the University of Melbourne. To read the full presentation visit the Transforming Housing website.
Posted by Sarah Toohey