USA: Affordable Rental Housing Development in the For-Profit Sector
Introduction:
Despite the private for-profit sector’s importance in affordable housing development, there has been relatively little research on the sector. This working paper explores one of the country’s leading for-profit affordable housing developers, McCormack Baron Salazar (MBS) and provides some insights into their successful business model. The paper uses the “Quadruple Bottom Line,” to both review the literature on for-profit affordable housing developers and to assess the operation of MBS.
With a strong commitment to low-income housing and community revitalization, MBS focuses on converting large, deteriorated housing developments into new mixed-income communities. Also discussed are the “essential ingredients,” that need to be in place for MBS to make a commitment to do a specific project. Nevertheless, even a project that incorporates all of these factors may still face significant challenges, largely due to external constraints and the complexity of developing and managing high quality affordable housing.
Affordable Housing Development:
A number of studies have examined differences in the ways in which for-profit and nonprofit developers carry out various affordable housing development tasks. For-profit developers were more likely than their nonprofit counterparts to use conventional loans to finance a larger share of their affordable housing development cost, and they were able to secure mortgages covering a larger portion of development costs. As a result, compared with nonprofits, for-profit developers have a smaller financing gap to fill between mortgage proceeds and equity generated from the sale of tax credits and they may be more adept than nonprofits in raising equity for their LIHTC projects.
Financial Viability of Developments:
The first component of the “Quadruple Bottom Line” pertains to the need for developments to be financially viable, while also providing a high quality of housing over the life of the project. What do we know about the long-term viability of projects developed by for profit sponsors, and how does this compare to the experience of nonprofits? As with other comparative findings discussed above, the answers to this question are not conclusive.
Social and Economic Needs of Residents:
There is only limited research that directly compares the extent or availability of resident services provided by for-profit and nonprofit-owned developments, or that focuses on just the former. One study noted that developers of mixed-income housing may perceive higher costs and risk associated with the provision of on-site social services, with some developers and property managers possibly “reluctant to offer some needed services on-site for fear of advertising the low incomes of many tenants and alienating the higher-income tenants”
Preserving affordability:
The public-private partnership programs of the 1960s and the Section 8 NC/SR program all encountered the “expiring use” problem. This refers to publicly assisted housing developments ceasing to be affordable to lower-income households as regulatory agreements with HUD expire. Hundreds of thousands of affordable units have been lost due to developments reverting to market-rate housing, with hundreds of thousands of additional units still at risk. Multifamily properties with project-based subsidies can also leave the assisted stock through repayment of mortgages or through opting-out of expiring contracts.
Strong belief in mixed-income housing:
One concern about mixed-income housing, encountered by MBS in several cities, is that these developments may attract a narrower band of residents, in terms of incomes, thereby undermining a truly mixed-income concept. In St. Louis, for example, home prices are much lower than in “hot market” areas and the spread between LIHTC and market rate rentals is only about $150/month. In such a market, if a household can afford the market rate cost, it may forego the LIHTC unit, preferring a marginally higher rent over the added paperwork and intrusiveness of annual re-certifications.
Conclusion:
Racial issues have not been a central focus of this Working Paper. Yet we know that housing problems in the U.S. are inextricably tied to race. Neighborhoods across the country are still often highly segregated, with the corresponding inequalities in educational and employment opportunities. Compliance with fair housing laws, overseeing banks to assure that they are not engaging in discriminatory lending practices, and continuing the national dialogue about race are all part of the housing challenge in the U.S.