Growing a Stronger Nonprofit Housing Sector
High-capacity nonprofit housing enterprises that can achieve efficiencies of scale have an important role to play in addressing the affordable housing crisis and policy makers should help them do so.
By Nancy Rase and Paul Weech Posted on July 17, 2013
The affordable housing environment is extremely daunting and growing more challenging. Our nation has long confronted a structural affordability crisis with only limited public resources available to meet the housing needs of low-income people. Add to these unrelenting unmet needs the additional pressures of an aging affordable housing inventory, the continuous expiration of subsidy contracts and use restrictions, and the disproportionate impact of single-family foreclosures on low-income communities. Policy makers face stark questions around how to recapitalize aging properties and extend their affordability, how to stabilize neighborhoods hard hit by foreclosures, and how to create better social and economic outcomes for low-income families.
Over the last several decades, nonprofits have played a particularly important role in the provision of affordable housing, a role that has been growing in importance as other players in the system look to work with capable partners to address increasingly complex development, preservation, and neighborhood stabilization problems.
Within the nonprofit sector, a class of high-capacity nonprofit developers has emerged that make particularly compelling partners to the public sector in addressing critical affordable housing and community development needs at this time. This new high-capacity nonprofit model starts with a social enterprise ethos. These organizations mix a deep commitment to mission with sound business practices, strong management and organizational capacity, public-private partnerships, and large-scale impact.
Homes for America, Inc. is an example of this breed of high-capacity nonprofit housing social enterprises. Founded in 1994, Homes for America creates and preserves multifamily and single-family affordable housing in Maryland, Virginia, Delaware, and Pennsylvania. Since its founding, Homes for America has developed nearly 5,400 units of rental housing. The organization is committed to its affordable housing mission, but is also business-oriented and pragmatic in its approach. It supports its operations totally on development fees and distributions from operating properties and is not dependent on charitable contributions. As a self-sustaining organization, it has greater flexibility in the types of projects it takes on.
Homes for America is also a strong partner with local nonprofits, for-profit companies, and local communities. It embraces green and energy-efficient construction standards and uses highly durable, high-performance materials. It works hard to find sites in good neighborhoods with opportunities for the people who live in its properties. And it oversees services in all of its developments, including afterschool programs and summer camps, nutrition programs and meals, and health care programs in communities serving senior citizens.
Scale and Sustainability
Strong nonprofit housing enterprises understand that following fundamental real estate principles is a significant element in the success of affordable housing and community development activities. One of these principles is that real estate benefits from economies of scale. With scale, an affordable housing enterprise has a greater ability to raise capital and greater flexibility to deploy that capital. Property managers achieve efficiencies as the number of units under management grows. When these economies and efficiencies are harnessed by nonprofit, mission-oriented social enterprises, it strengthens the organization and gives it greater management and financial capability to focus on the needs of its customers—the residents. With increased capacity, strong nonprofits can better access and interface with other systems—health care, education, workforce development—that improve resident outcomes.
Homes for America and many of its cohort believe that there is very little difference in the way they should develop and manage affordable housing and the way a for-profit would develop and manage market-rate housing. The differences that do exist are critical, however. Nonprofit housing enterprises are willing to work through the tortuous financing approaches required to assemble capital for affordable housing and the extensive compliance and reporting that comes with utilizing public funds and rental assistance. And they are committed to the long-term stewardship of the affordable housing assets and to providing a high level of services to customers.
Affordable housing done correctly requires a long-term ability to maintain the property for the benefit of its residents. If the government is to enter into long-term affordability contracts, it must assess the long-term prospects of its counterparties. Nonprofit developers must therefore create high-quality housing that is physically and financially sustainable and the organizations themselves must be built to last, with the organizational and financial capacity to manage and preserve these important community assets over a long time horizon. To achieve sustainability, a nonprofit organization must have strong leadership, established operating systems, and a reliable source of revenue; it must diversify its revenue base, and manage its exposure to economic downturns and changes in governmental policy.
Their organizational strength allows larger nonprofit social enterprises to compete for the best talent in the industry by providing competitive employment packages coupled with the subjective benefits of working in the nonprofit sector. These organizations have built strong management teams, with the added benefit of succession planning and continuity planning not as readily available to smaller enterprises.
Diversification of revenues is important for organizational sustainability. In 2003, Homes for America had been operating for nine years and had a great development track record, but it realized that relying on development fees as its primary source of income was not a sustainable model. With the help of a program related investment from the John D. and Catherine T. MacArthur Foundation, the organization was able to grow and broaden its scope into housing preservation, acquiring, refinancing, and rehabilitating older affordable housing properties. Today, development fees and income from property operations support the organization equally. Development staff and overhead are supported by fee revenue. Asset management, resident service staff, and overhead are supported by income from the portfolio.
The diversification of its revenue sources has increased the longer-term sustainability of Homes for America. In the current environment, with fewer resources for new projects and significantly reduced income from development fees, Homes for America would have struggled if it had to support the entire organization based on new development activities. With its shift to preservation businesses, Homes for America is acquiring and rehabilitating older rental housing communities with existing Section 8 contracts. It takes advantage of the very low interest rate environment to refinance the debt on its properties and focuses on lowering operating costs in order to increase cash flow to the organization. This extends the affordability of the developments and provides cash flow over the long term.
Other similar nonprofit housing enterprises have chosen to diversify revenue streams by building up their property management capabilities, creating new business lines, moving into new markets, or dropping activities that are cash drains on the organization. An organization’s breadth of expertise, financial capacity, and relationships will affect how successfully it can carry out strategies like these.
Another approach to organizational sustainability is geographic diversity. There are significant advantages for housing nonprofits that are able to work across larger geographies and multiple markets. On the development side, the ability to work in multiple jurisdictions has become crucial as federal budget cuts have affected many local housing resources and the equity proceeds from Low Income Housing Tax Credits (LIHTC) have become more unpredictable. If an organization is tied to a limited geography, changes in allocations or fund availability can starve it of development proceeds. If a local organization relies on a project every couple of years to generate that burst of cash into the organization, these funding losses are significant. Under a multijurisdictional approach a nonprofit has the ability to manage a development pipeline, to move on those projects where resources become available, and to nurture those projects moving more slowly until resources are available.
On the preservation and property management side, nonprofit organizations working in several different markets have the ability to balance their portfolios and diversify their risks and returns. A geographically dispersed portfolio is less susceptible to market swings. If an organization’s entire portfolio is located in one market area, new competitive housing, population migration, or loss of a major employer all can have a devastating effect on the properties and residents. An organization with properties in multiple locations can support properties in weaker locations without undermining the strength of the entire portfolio.
The ability to work across multiple jurisdictions in a metropolitan region also improves a nonprofit housing provider’s ability to connect residents to services, employment opportunities, and housing choice. Service resources often flow through the states to the communities throughout the region. A regional housing provider can work more effectively with the service provider community, wherever they are located. A nonprofit housing provider with the ability to locate properties in multiple jurisdictions can also better link residents to job opportunities through regional public transit resources.
The value of geographic scope has seemed particularly relevant as the nonprofit sector has tried to find scaled responses to the foreclosure crisis, which presented across entire metropolitan areas. Housing Partnership Network members have attempted to replicate neighborhood stabilization interventions in multiple communities and continue to innovate to create effective scattered site single-family rental or lease-to-own models to help communities to recover. The ability of a nonprofit to operate over multiple political jurisdictions in a metropolitan area opens up the possibility of accumulating a sufficient number of properties to achieve the economies necessary for management success.
Reaching for scale and geographic scope to create economically stable organizations, better management capacity, and diversified risks does not obviate the need to ensure a local presence and to remain sensitive to the community. A well-managed nonprofit working throughout a region, like Homes for America, builds strong relationships with local jurisdictions and partners with local nonprofits where this ensures the best ties to the communities. Strong nonprofits have good ties to the residents through their property management presence and their resident services programs.
At a time of enormous pressure on federal affordable housing resources, there are some things policy makers could do to increase the effectiveness of their nonprofit housing enterprise partners, and also to make better use of the capacity that those enterprises bring to the table.
- Encourage Flexible Portfolio Management. Policy makers could increase the ability of nonprofit housing providers to achieve better outcomes for residents and communities by allowing and encouraging portfolio level management strategies. Under the current affordable housing system, property owners are forced to manage their properties separately, each with its own financing, subsidy contracts, reporting requirements, and compliance systems. Portfolio-level flexibility would allow an owner to raise private capital with lower transaction costs and create operating efficiencies by combining these activities for multiple properties. Portfolio-level management would also make it easier to apply technology more efficiently, reduce operating costs (for example through energy conservation investments), and lower compliance costs. For example, ACTION Housing in Pittsburgh pays $6,200 per property annually to purchase audits on each of its 12 developments for people with disabilities. ACTION’s accountant could do a single audit for all 12 properties for $18,000. A portfolio approach could potentially save $56,000 a year, or $1.7 million over the life of the HUD contracts.
Similarly, Housing Development Corporation MidAtlantic of Lancaster, Pa., recently refinanced seven tax credit properties with a single bond issue. The transaction allowed HDC to aggregate seven cash flows into one, reduce the audit requirements from seven to one, and invest in solar energy and high-efficiency heating systems that will sustain the properties for another 30 years. Across the entire HUD-subsidized and LIHTC portfolios, the opportunities for savings and efficiencies are enormous. With greater flexibility, mission-focused owners could redeploy savings to extend the affordability of the developments in their portfolios and increase the services available to their residents.
- Identify Strong Preservation Partners. As the current owners of aging single-asset portfolios look for new owners and new sources of capital, a high-capacity nonprofit is the ideal purchaser. Many Section 202 properties for seniors developed years ago by local nonprofit sponsors now need new management and new capital. The same is true for some properties owned by public housing agencies that are increasingly strained as that system changes. A strong nonprofit organization like Homes for America can partner effectively with the current owners to recapitalize that housing and bring new management capacity. As the HUD-assisted stock reaches the end of its assistance contracts and LIHTC properties mature into the 15th year of their compliance periods, the country will want to ensure that these properties are preserved as affordable housing.
With the potential advantages for both the properties and the residents, policymakers should look to create an environment that encourages the acquisition of troubled, aging affordable housing portfolios by well-managed, sustainable nonprofit organizations that can recapitalize the stock and manage it well over the long term for the benefit of residents and the community.
- Strengthen Balance Sheets to Leverage Capital. Policy should encourage stronger nonprofit balance sheets as they increasingly play important affordable housing preservation and stewardship roles. Homes for America was able to expand and increase its impact in the communities it serves following a program related investment from a foundation. The Capital Magnet Fund is a public program that could play that role of increasing nonprofit balance sheet strength and provide a platform for nonprofits to increase capacity. Authorized in the Housing and Economic Recovery Act of 2008, the Capital Magnet Fund is a particularly powerful source of balance sheet equity designed to leverage significant amounts of new private capital for affordable housing.
The opportunity to create better resident and community outcomes through better organization of the affordable housing inventory is palpable—and would be worthwhile in any economic and policy environment. Given the pronounced pressures on HUD and state and local government resources, policy makers need to focus on strategies that grow stronger mission-oriented housing developers, owners, and managers and to help this class of providers take advantage of the economies of scale available in the real estate sector and the efficiencies and capacities available to high-capacity, diversified organizations.
Nancy Rase is president and CEO of Homes for America. Paul Weech is the executive vice president for policy and external affairs with the Housing Partnership Network.
- Homes for America.
- Housing Partnership Network.
- United States Department of the Treasury, Capital Magnet Fund.