On December 11, 2012, ULI New York hosted a panel discussion on Financing Affordable Housing at Shearman & Sterling. Moderated by Terri Gumula, Vice President of Workouts and Dispositions at Citibank, the panel comprised of Maurice Coleman, Senior Vice President of Community Development Banking at Bank of America; Alan Bell, Principal of Bell Urban LLC and founding principal of Hudson Companies; and Richard Roberts, Director of Business Development for Red Stone Equity Partners. Respectively, they represented the distinct perspectives of lender, developer and investor.
The panel began by asking the question – what is affordable housing? To answer this, a bit of context is needed. New York City has a long tradition of promoting affordable housing due to its 8 million residents and only 3 million dwellings. The city has the highest rent burden in the country, as determined by percentage of gross income spent on housing. Generally, a rent burden less than 30% is considered “affordable”. However, New York City is increasingly in the 40-50% burden range. Adding to this existing burden, Hurricane Sandy eliminated several thousand units of housing.
Another metric used in the housing affordability discussion is Percentage of Area Median Income. Incomes below 50-80% of AMI are considered “low income”. In New York City, AMI per household is $80,000 per annum. 50% AMI, the threshold for “very low income” is still more than many workers make in a year. Often the threshold used for low income is 60% of AMI or $48,000, which correlates with the cutoff for federal tax credits.
Affordable housing is often opposed on philosophical grounds rooted in the free market. As Mr. Bell explains, affordable housing is not simply about compassion, but has a practical economic benefit by creating a diverse labor supply at multiple price points. Although housing affordability is the most often debated concerning low income levels, the issue of housing affordability is really about workforce affordability for the middle-income ranks. Mr. Roberts added that when discussing affordable housing, the question needs to be asked, “Affordable to whom?” Those in the 100-120% AMI are typically considered “workforce”. But in places such as New York, the line between low income and workforce is relatively blurred. Housing programs can serve even up to 130% AMI, which at $105,000 per year in New York still leaves few affordable options for a family of four.
In the past, affordable housing was synonymous with drab 60’s and 70’s era architecture. The projects were often non-contextual brick buildings that towered above and isolated away from nearby neighborhoods. Today’s developments are much more integrated with their surroundings, using mixed-income buildings with base level retail to prevent isolated housing projects. Furthermore these developments now include units within bands of affordability at 20%, 40%, and 60% of AMI, in addition to having units reserved for special needs. The panel discussed this special needs housing as an antidote to homelessness, by providing permanent housing with social services onsite. These projects are often operated with both separate development and social services budgets.
Mr. Coleman provided the perspective of a lender, which he states are involved in affordable housing not out of charity, but because the business is profitable. The 1977 Community Reinvestment Act helped spur lending activity in communities in which banks often took deposits, but didn’t lend back to. These days most new housing product being developed is affordable, as opposed to the pre-financial crisis focus on higher-end condo developments. Mr. Bell reaffirmed this by stating that despite spending 25 years as a housing developer across all price points, his business now concentrates 100% on affordable housing.
Today, affordable housing is an $8 billion national market, with Low Income Housing Credits responsible for 50% of new multifamily housing starts. Investor appetite for tax credits, which perform at the level of AAA corporate bonds, has also spurred development activity. But despite tremendous demand and support, development to this market is nonetheless challenging. Mr. Bell comments that in addition to the typical challenges of any real estate development, affordable housing is complicated by regulatory scrutiny, complicated tax credits, and tenancy requirements and qualifications. Although market risk is minimized because of a seemingly endless demand for affordable housing, execution risk is enhanced. For that reason, the builder/developers have often done better because of their ability to more tightly manage projects and budgets.
A question from the audience asked whether the low capital requirements constituted a low barrier to entry market and attractive opportunity for entrepreneurs. The panel’s response was that permanent financing remains difficult to obtain, and like any development activity, minimum net worth, liquidity, and track record are still needed. But more importantly, the political capital required represents a very high barrier to entry. Cities are often reluctant to work with new entrants because public agencies involved with related subsidies have pressure to meet fiscal targets and budgets. This scrutiny gets passed down to the developer, which makes the developer’s prior track record and relationship with housing authorities especially important.