NOVEMBER 2018 SOCIAL IMPACT CAPITAL VEHICLES AND TOOLS TO PRESERVE MIDDLE-INCOME HOUSING

Transcription

1 NOVEMBER 2018 SOCIAL IMPACT CAPITAL VEHICLES AND TOOLS TO PRESERVE MIDDLE-INCOME HOUSING Savanah at Southport Apartments, West Sacramento, CA

2 ABOUT HOUSING PARTNERSHIP NETWORK HPN is an award winning business collaborative of 95 of the nation s leading affordable housing and community development nonprofits, and a top-rated CDFI What we do Promote innovation and best practices through senior level peer exchange Capital Vehicles Twenty years of creating mission-driven businesses 1 Build Opportunity Fund Design and Incubate social enterprises with members to address system gaps and other opportunities Other Businesses Advocate for practitioner based policy solutions at federal and state levels 1 1. Depicts selected HPN-sponsored social enterprises since the launch of HPN s first venture in 1998, with capital businesses above the timeline and others below.

3 SCALING INNOVATION AND IMPACT Creating private sector partnerships and enterprises that achieve ambitious social missions, HPN and its member organizations work together to scale innovation and impact, helping millions of people gain access to affordable homes and thriving communities that offer economic opportunity and an enhanced quality of life HPN and its Members Have a Significant Impact 35,400 people employed by HPN members $112+ billion of communityinvestment 425,700 affordable homes developed, rehabilitated or preserved 705,000 single family and multifamily homesfinanced 12.2 million people assisted through housing, community facilities, and services Awards and Recognitions 2

4 THE CHALLENGE: HOUSING CRISIS IS WORSENING Millions of families face chronic instability due to the shortage of affordable housing Supply of affordable housing is falling short of growing demand in communities across the U.S. Growing demand and supply shortage As homeownership becomes increasingly undesirable or unattainable, demand from higher-income renters continues to grow. This entices market-rate developers to buy and reposition NOAH properties, putting the nation s existing inventory of affordable housing at risk Simultaneously, market pressure is making it hard for affordable housing developers to acquire sites, necessitating nonprofits to be more commercial and move much faster to tie up sites and properties A UC Berkeley Terner Center for Housing Innovation study found that from 2010 to 2016 the Bay Area created 9,500 LIHTC properties, but at the same time lost 188,000 naturally occurring affording units 1 Since the Great Recession, the supply of Class A rental units increased more than 25%, while the stock of Class B and C units is virtually unchanged. Lower and middle income households have been left with fewer housing options 2, meaning millions of Americans live in a state of housing instability 3 1. Reid, C. K. (2018). The Links Between Affordable Housing and Economic Mobility (Publication).; 2. Joint Center for Housing Studies, The State of the Nation s Housing 2017.

5 THE CHALLENGE: HOUSING CRISIS IS WORSENING Affordable housing not only gives people a safe and stable home, but also serves a platform for improved education, health, and economic well-being A longstanding challenge for low-income renters, cost burdens have become an increasing concern for households across the income spectrum Severe cost burdens and rising rates of homelessness With one-third of all U.S. households spending more than 30% of their income on housing, families and individuals are forced to spend significantly less on other necessities, such as food, health, and education 1 Towns and cities across the country have experienced rising rents that have not been matched by wage increases. For middle-class renters who cannot qualify for subsidized housing, finding affordable apartments on the market becomes more challenging by the year Homelessness in high-cost U.S. cities is rapidly escalating. In 2017, for the first time in 7 years, homelessness in coastal cities drove an increase in the total number of homeless people nationwide. Between 2016 and 2017, Los Angeles reported a dramatic 26% increase in homelessness Joint Center for Housing Studies, The State of the Nation s Housing ; 2. U.S. Department if Housing and Urban Development, The 2017 Annual Homeless Assessment Report to Congress

6 Current situation TODAY S REAL ESTATE MARKET NOAH properties are being converted to market-rate and luxury units at alarming rates The current real estate market is hypercompetitive HPN members and sophisticated mission-driven organizations have proven their ability to create successful outcomes for families and communities by building partnerships and weaving together resources Despite these success, public resources are limited and insufficient to address the growing housing challenges Implications Existing affordable housing is disappearing faster than new stock can be built Nonprofits struggle to preserve existing unsubsidized market affordable properties and secure sites for new development as they compete with for-profit developers who have easy access to enterprise-level capital There is a lack of scalable, flexible, and accessible capital resources beyond traditional subsidy programs that are designed to help nonprofits broaden their impact and operate more effectively in the competitive private marketplace 5

7 HOUSING PARTNERSHIP EQUITY TRUST: A SOCIAL PURPOSE REIT Housing Partnership Equity Trust works collaboratively with 14 Nonprofit Partners to preserve the stock of affordable and sustainable rental housing to positively impact the lives of residents and communities. Today HPET owns 15 properties with 2,955 units, representing $298 million in acquisition value. Through this mission we are providing investors with a triple bottom line return Economic Return By creating and realizing value from acquiring, improving, operating and, in some cases, selling real estate Mission Return By preserving affordable and workforce housing that improves social outcomes Environmental Return By purchasing energy efficient properties and making energy efficiency improvements to older properties 6

8 CASE STUDY: INNOVATIVE MODEL TO PRESERVE WORKFORCE OR NOAH HOUSING o A social purpose REIT created and sponsored by HPN in 2013 and owned by 14 HPN members with social investment from the MacArthur and Ford Foundations, Citibank, Morgan Stanley, Prudential and Schwab. o HPET invests in markets across the U.S. with high demand for affordable housing, sets rents at a level affordable to the target residents (50-80% of area media income) and puts in place mission driven institutional quality management that focuses on the needs of the residents o Invests in both naturally occurring affordable housing (NOAH) and subsidized housing at the end of its restricted use period that are in danger of being lost from the affordable markets o Primary mission is to positively impact lives of residents and the communities in which it operates by preserving the stock of affordable and sustainable rental housing o 2017 accomplishments: 1) Received over $4.5 million in cash distributions from property operations. 2) Served nearly 3,000 families at 15 properties across 7 states. 3) Allocated 95% of called capital to property level investments ($83 million) 4) Exceeded affordability target the average rent on the portfolio was below the rent affordable to a family earning 60% of AMI 1, New Properties Acquired (# of units) 2, $ $ Collective Transaction Value Under Management ($MM) 6

9 PORTFOLIO OVERVIEW EDEN Woodside Court Fairfield, CA EDEN Quail Run San Leandro, CA EDEN Savannah at Southport West Sacramento, CA LINC Pacific Villas Stockton, CA NEVADA HAND Meadow Ridge Las Vegas, NV CPLC Courtyards at Encanto Phoenix, AZ HISPANIC HOUSING Mallard Point Channahon, IL MERCY 2000 Illinois Aurora, IL HFA/NHT Bradford Hagerstown, MD CPDC Woodmere Trace Norfolk, VA AEON Goldenstar Maplewood, MN AEON Sun Place Roseville, MN AHC Dunfield Townhomes Nottingham, MD CPDC Dove Landing Virginia Beach, VA AHC The Birches Silver Spring, MD 8

10 Housing Partnership Network (HPN) (12.5% common) New Holders of Class E Units Up to 200 Class E Common Units (100.0% Class E) CORPORATE STRUCTURE Common Equity Interests 14 Nonprofit Members (Nonprofit Partners) (87.5% common) Housing Partnership Equity Trust, LLC (HPET LLC) 100 Class B Common Units (90% Class B) Class E Common Class B Common Housing Partnership Equity Trust REIT I, LLC (The Company or HPET) Preferred Equity Interests Preferred Units The Ford Foundation (33.3% preferred) John D. and Catherine T. MacArthur Foundation (66.6% preferred) Prudential Impact Investments Private Equity, LLC 170 Class A Preferred Units (100% Class A) 11 Class B Common Units (10% Class B) 125 Holders 125 Class C Units (100% Class C) Citibank, N.A., Morgan Stanley Bank, N.A., and Charles Schwab Bank 500 Class D Preferred Units (100% Class D) 9

11 CASE STUDY: BUILD OPPORTUNITY FUND Today, with most affordable housing funded project-by-project from a variety of sources 1, the limited supply of long-term, flexible capital remains a key barrier to addressing the housing crisis 2 HPN and a select group of it members are seeking to establish the Build Opportunity Fund to provide long-term debt at the enterprise-level to high-performing, nonprofit developers to enable them to scale their capacity to acquire, develop and preserve affordable housing and other community assets Enterprise-level capital can be catalytic for growth by supporting a developer s needs such as acquisition and site control and pre-development costs, providing the time and space to carefully assemble a more permanent capital structure that may include enterprise-level capital as developer s equity The Fund intends to transform the system of funding for affordable housing by demonstrating the creditworthiness and investability of nonprofit developers at the enterprise level Joint Center for Housing Studies, Organizational Capital: A New Approach to Lending in Nonprofit Affordable Housing, FRBSF, Getting to Scale: The Need for a New Model in Affordable Housing, 2012.

12 ENTERPRISE-LEVEL CAPITAL TO DRIVE GROWTH & EFFICIENCY Benefits of enterprise-level capital Nonprofit developers need enterprise-level capital at competitive rates to move quickly to secure and preserve at-risk properties, gain site control for property development, and to provide long-term equity for mixed income and market rate affordable housing Nonprofit developers can increase production to grow earned revenues, build capital reserves and reinvest profits, leading to stronger balance sheets and enhanced long-term financial sustainability 1 Access to enterprise-level capital gives nonprofit developers flexibility to act quickly in competitive market to tie up development sites and preserve NOAH apartments. Current situation Today, nonprofit developers primary source of internally generated capital is net earned revenues, which are inherently variable and pressured by 25 years of stagnant developer fee growth 2 Nonprofit developers must continuously search for outside funding, and subsidized projects can only move ahead once layers of capital are compiled Availability of third-party sources of enterprise funding (e.g., PRIs and EQ2s) is limited 3 and corporate bank finance is typically short-term, restraining the growth and efficacy of nonprofit developer portfolios Strength Matters, Celebrating Ten Years of Strength Matters, FRBSF, Getting to Scale: The Need for a New Model in Affordable Housing, Equity Equivalent Investments (EQ2s) are low-interest loans that act as quasi-equity for CDFIs and other nonprofits.

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