Affordable Rental Housing Development in the For-Profit Sector: A Case Study of McCormack Baron Salazar
Introduction
This working paper, prepared by Rachel G. Bratt for the Harvard Joint Centre for Housing Studies, explores the role of for-profit developers in creating affordable rental housing, using McCormack Baron Salazar (MBS) as a case study. Despite the private sector’s importance, there is limited research on for-profit affordable housing development. This paper uses the “Quadruple Bottom Line” to assess MBS, which is committed to low-income housing and community revitalisation by transforming deteriorated housing developments into mixed-income communities.
McCormack Baron Salazar (MBS): Background and Approach
MBS was founded in 1973 with the aim to rebuild low-income communities by providing quality housing. The company focuses on large-scale projects, often involving the demolition of old buildings and construction of new mixed-income housing. MBS seeks to transform run-down areas into vibrant communities that are safe and well-managed6. They work with residents, government agencies, and other stakeholders to create a community-shaped revitalisation plan. MBS is committed to improving the quality of life for residents by connecting them with jobs and economic opportunities, and addressing safety and security concerns.
Essential Ingredients for a Desirable Project for Rental Housing
MBS has identified key elements that must be in place for them to commit to a project. These include a strong local partner, such as a local government, philanthropic investor, or a large non-profit institution that is willing to contribute financial and in-kind resources. A close relationship with community residents, usually facilitated by their non-profit partner Urban Strategies, is also essential. Additionally, the local partner must cover most or all soft costs of launching the development, which reduces the financial burden on MBS. The developer fee needs to be adequate, with a target of 10%. Finally, MBS focuses on large-scale projects with significant development challenges that require creative problem-solving.
The Role of Urban Strategies
Urban Strategies, a non-profit organisation, was created in 1978 and works with residents on a range of programmes. Though it is a separate entity, it is closely affiliated with MBS through Richard Baron, the founder of MBS who also serves as the chair of the Urban Strategies Board. Urban Strategies works with people only on a housing platform and aims to empower residents in distressed urban areas through human development and community engagement. They orchestrate local providers to deliver needed services and do not usually provide direct services themselves. Funding comes from the owner’s budget, donations, and city, state, and federal grants.
MBS Business Model: How Profit Is Achieved in Rental Housing
MBS’s profit model does not rely significantly on operating cash flow. The developer fee is designed to cover up-front costs as well as risks and deficits. Management fees are a key component of MBS’s profits and are calculated before cash flow. MBS’s management company, McCormack Baron Management (MBM), manages properties, maintaining high standards of upkeep. The company aims to maximise efficiencies through projects with around 1,000 units to reduce per-unit management costs.
MBS and the Quadruple Bottom Line
The Quadruple Bottom Line considers financial viability, social and economic needs of residents, neighbourhood contributions, and environmental sustainability. MBS developments are designed to be financially viable by leveraging public and private resources, including the Low Income Housing Tax Credit (LIHTC). MBS seeks to address social and economic needs of residents, however, some residents may be displaced in the process. MBS focuses on mixed-income housing, a strategy that promotes social integration. Their goal is to improve the neighbourhood’s image and attract higher-income residents. Also, around 25% of all MBS developments have received some form of green certification, demonstrating attention to environmental sustainability.
Key Findings and Policy Recommendations
The report highlights the importance of public-private partnerships and a strong federal role in supporting affordable housing. It recommends deeper housing subsidies, less reliance on multiple funders, and more collaboration between for-profit and non-profit developers. Long-term affordability should be a priority in affordable housing development. The paper also suggests developing a typology of for-profit affordable housing developers. The author suggests that policy changes should enhance the work of all affordable housing developers. This case study of MBS offers a unique opportunity to better understand how for-profit developers can contribute to affordable housing.
Challenges and Considerations for Rental Housing
The report acknowledges challenges such as the complexity of managing high-quality affordable housing and insufficient public housing authority reserves. There is also concern about the potential for gentrification and displacement of long-term residents. However, MBS typically works in depopulated neighbourhoods and seeks to retain existing residents while attracting moderate- and middle-income households. The long-term financial viability of MBS projects and the ability to maintain affordability depend on federal funding. The report calls for a deeper commitment to the federal role in housing and a simpler and more efficient system for producing affordable housing.
Conclusion
This working paper provides valuable insights into the operations of a successful for-profit affordable housing developer and stresses the need for collaborative approaches and strong public policies to address the ongoing challenge of providing quality, affordable housing.
For further reading:
Affordable Rental Housing Development in the U.S. For …