EVALUATING UNSUBSIDIZED AFFORDABLE SMMF PROPERTIES
Unlike subsidized housing, the affordability of unsubsidized affordable SMMF properties occurs in a largely unregulated environment, meaning there are few systems focused on this market segment to guide decision making. In terms of property identification, many national frameworks for affordable housing preservation do not focus on SMMF as a distinct market segment, even though they make up 54 percent of the national rental housing stock.xiii These gaps reinforce uncertainty about working with this property type, along with the inherent uncertainty associated with an affordable, yet unregulated property.
For many developers, opportunity tends to drive preservation of unsubsidized affordable SMMF properties, although what “opportunity” means varies by the developers’ experience in a given market and their overall mission or interest in preserving these properties. For instance, to some developers, “opportunity” means a willing seller in a rapidly changing neighborhood. To others, “opportunity” means a property where moderate improvements will extend the useful life of a property without increasing rents significantly.
Four key factors should be used to evaluate opportunities for unsubsidized affordable SMMF preservation:xiv
1. PROPERTY CHARACTERISTICS – This factor focuses on the overall condition of the property, its size, and who the property serves today. Common criteria include building size, physical condition, reputation of current property management, and household income of existing tenants.
2. PROJECT FEASIBILITY – This factor focuses on a project’s ability to meet basic regulatory requirements, including compliance with land-use standards and building codes. This factor also considers a project’s eligibility for financing and public subsidies. Common criteria include whether rezoning, variance, or other land-use exemption is required; ability to meet all applicable building codes; ability to meet all infrastructure requirements (e.g., water, sewer, road capacity); funding eligibility; and existing relationships.
3. NEIGHBORHOOD MARKET CONDITIONS – This factor focuses on how neighborhood market conditions are changing or may change, based on indicators of market activity. Market activity serves as a proxy for financial feasibility and risk of displacement or loss of unsubsidized affordable SMMF properties. Common criteria for this factor include different dimensions of increased or anticipated market activity and neighborhood change.
4. NEIGHBORHOOD ACCESS – This factor focuses on access to basic amenities and common destinations. This factor highlights surrounding conditions that may make the property appealing. Preserving properties in areas with stronger access to opportunity promotes economic mobility and addresses long-standing disparities. Common criteria include access to employment centers; access to transit service; access to healthy foods; and access to quality schools.
Download evaluation scorecards for Atlanta and Miami, which will guide you through this analysis.
EVALUATING UNSUBSIDIZED AFFORDABLE SMMF OPPORTUNITIES IN STRONGER OR EMERGING MARKETS
In the national literature about unsubsidized affordable properties, the most commonly cited goal for preservation is to safeguard the property’s inherent affordability before it is lost. Unsubsidized affordable SMMF properties in stronger or emerging real estate markets are typically seen as top preservation priorities since they are the most susceptible to market-rate conversion or demolition, and preserving their affordability can help to foster vibrant, mixed-income communities.xv
Broader affordable housing goals in Atlanta and Miami mirror the national focus on desirable locations and preserving this property type is gaining attention in both cities. Each city’s housing affordability goals demonstrate a preference for preserving affordability in neighborhoods with stronger market conditions or critical assets, such as quality schools and transit service.xvi One Miami-based developer described their ideal unsubsidized affordable SMMF property as one in a neighborhood with an active Community Redevelopment Agency, designated as an Opportunity Zone, on high ground, and close to transit service.
In stronger or emerging markets, preserving unsubsidized affordable SMMF properties necessitates quick action and often faces fierce competition. For opportunities in this type of market, property identification factors such as project feasibility—relationships to pull together an offer quickly, access to nimble financing, and limited or no regulatory constraints—may be more important than in neighborhoods with stable or weaker housing markets.
EVALUATING UNSUBSIDIZED AFFORDABLE SMMF OPPORTUNITIES IN STABLE OR WEAKER MARKETS
It is equally important to consider the loss of unsubsidized affordable SMMF in stable or weaker markets, as it is in rapidly changing neighborhoods. In stable or weaker markets, maintaining or improving habitability staves off loss due to property deterioration and preserves affordability in lower-cost areas.
In stable or weaker markets, the calculus around unsubsidized affordable SMMF preservation is somewhat different than in stronger or emerging real estate markets. For instance, preserving unsubsidized affordable SMMF properties necessitates a longer commitment to the neighborhood. Due to neglect or age of the properties, the overall rehabilitation costs may be higher, resulting in the need for a larger per unit investment or higher contingency (although these costs are typically offset by lower land costs).
On the other hand, some barriers to entry may be lower. Due to less interest from outside investors, accessing properties in stable or weaker submarkets may be easier, avoiding the high upfront acquisition costs in stronger markets.
For opportunities in this type of market, property identification factors such as property characteristics—the building’s age and condition— may be more important than in neighborhoods with stronger or emerging housing markets.
TIPS FOR IDENTIFYING AN UNSUBSIDIZED AFFORDABLE SMMF PROPERTY
CONSIDER UNSUBSIDIZED AFFORDABLE SMMF OPPORTUNITIES IN NEIGHBORHOODS WHERE YOU ALREADY WORK.
Avoid the need to create economies of scale in a new market or neighborhood by looking for unsubsidized affordable SMMF opportunities in neighborhoods where you already own or operate properties.
LOOK FOR OFF-MARKET OPPORTUNITIES.
Off-market opportunities do not face as much (if any) competition from other buyers helping to lower acquisition costs, especially in stronger markets with more interest in unsubsidized affordable SMMF properties from investors. To identify them, use real estate data, such as CoStar, that classifies property condition, experience working in a specific neighborhood, and relationships with property owners and brokers.
BUILD RELATIONSHIPS WITH LENDERS TO VET POTENTIAL OPPORTUNITIES.
Lenders can provide upfront advice about potential unsubsidized affordable SMMF opportunities and share their willingness or ability to be involved in a project, which assists with understanding broader project feasibility.
IDENTIFY ANY REGULATORY CONSTRAINTS.
In many places, unsubsidized affordable SMMF properties are a “nonconforming structure” (i.e., do not meet the current zoning requirements in their current area) and may require a rezoning or other land-use exemption before a sale can proceed. In other instances, unsubsidized affordable SMMF properties may not maximize the full development potential on their site, making them more valuable to competing buyers.
FINDING THE RIGHT BROKER-PARTNER
Your relationship with a broker (or brokers) affects your ability to identify off-market opportunities, quickly acquire properties, and the price you may pay.
Questions to consider when evaluating potential brokers for partnership:
- How well does their expertise align with my preservation goals?
- Do they understand the rehabilitation process for multifamily units?
- Do they have experience with SMMF properties?
- Do they have experience and relationships in the geography where the property is located?
- Are they comfortable with the financing sources I plan to use for acquisition?
DEALBREAKERS FOR UNSUBSIDIZED AFFORDABLE SMMF PROPERTIES
NEED FOR TENANT RELOCATION
The time, costs and requirements associated with tenant relocation may deter developers from unsubsidized affordable SMMF opportunities. Read more about the considerations around tenant relocation in the Rehabilitation section.
NEED FOR SIGNIFICANT REPAIRS
Preservation of unsubsidized affordable SMMF properties, especially without subsidy, require a “repair, not replace” type mindset. To ensure financial feasibility, focusing on properties with light or moderate capital needs is recommended; organizations interviewed for this toolkit estimated that they would not want to spend more than $5,000–$10,000 per unit on rehabilitation costs, especially when completing preservation without public subsidy. While choosing properties with light or moderate capital needs is ideal, more subsidy makes properties with more substantial rehabilitation needs feasible (albeit more complex). Some organizations conduct rigorous capital needs assessments to understand immediate needs, as well as to plan for medium- and long-term needs prior to purchase, while others conduct visual surveys of a property. To ensure all capital needs are taken into consideration, a more detail capital needs assessment is recommended, as is having resources available to assist with these assessments either prior to preservation or on an ongoing basis.
LACK OF PUBLIC SUPPORT
Support among neighborhood residents, local decision makers and public-sector staff are all critical to the success of preserving an unsubsidized affordable SMMF property. Elected leaders and public-sector staff often need to make decisions about regulatory changes or funding quickly, as buyers are competing in the private market for these properties. Smaller, affordable properties may garner neighborhood support more easily than a large-scale affordable housing development.
WORKING WITH PROPERTY OWNERS
Even when using a commercial real estate brokerage, having a strong relationship with property owners can help increase your access to potential deals and the deal’s success.
Two key dimensions that may affect sellers’ behavior are:
Portfolio size (i.e., how many properties do they own?)
Proximity (i.e., how far from the property is the owner based?)
Generally, an owner is less likely to engage in affordable housing preservation activities when they own a large portfolio of properties and those properties are located farther away from them, unless there is a strong economic case or if they have a distinct focus on mission over profit.
Potential seller motivationsxvii
Increasing and maintaining a steady cash flow
Maximizing return on investment
Alleviating the burden of property maintenance
Inability to access capital for necessary rehabilitation
Alleviating the cost of rising property taxes
Retirement or estate planning
Mission or public benefits may motivate a property owner, but the extent will vary. Research has found that part-time or smaller- scale owners with local interests are the most willing to prioritize mission and community investment over other motivations, particularly when they are not tied to a larger organization’s bottom-line.xviii
Considerations for building and maintaining strong relationships with sellers
Demonstrating sufficient capital, or an expedient timeline for assembling the necessary capital, is important for successfully engaging sellers. In such situations, bridge financing or a line of credit can be critical, particularly when competing with cash offers. See the Securing Financing section for tips on relationship building with financial institutions, who can help assemble these resources.
Agreeing on project goals and terms upfront, including the long-term relationship between both parties and the property. This agreement is particularly important if sellers plan to stay involved with the property after its preservation. For instance, mission-oriented sellers may want to be involved with property operations, such as resident services or other onsite activities.xixTreskon, M. and Sara McTarnaghan. (2016). Anatomy of a Preservation Deal: Innovations in Preserving Affordable Housing from around the United States. Report prepared for the Urban Institute. Available at www.urban.org/research/publication/anatomy-preservation-deal-innovations....
ATLANTA, GA PRESERVING UNSUBSIDIZED AFFORDABLE SMMF PROPERTIES
LOCAL CONDITIONS AFFECTING UNSUBSIDIZED AFFORDABLE SMMF PROPERTIES:
- Strong economic growth fueling investor interest in real estate, especially for higher income households and in Atlanta’s urban core
- Poor physical quality of properties or obsolescence
- Loss of “missing middle” properties, which includes unsubsidized affordable SMMF properties
- Disparities across Atlanta neighborhoods in terms of housing cost-burden and access to opportunity
LOCAL PRIORITIES FOR HOUSING AFFORDABILITY AND DIVERSITY
In Atlanta, the preservation of unsubsidized affordable SMMF fits into a broader housing framework focused on increasing housing diversity, especially “missing middle” housing types; meeting diverse households’ needs, including workers such as first responders and teachers; and minimizing increased pressure on legacy residents due to increasing housing costs.
The importance of preserving unsubsidized affordable SMMF is well- documented across plans and studies for the City of Atlanta. It also reinforces the broader strategies of One Atlanta: Housing Affordability Action Plan and HouseATL to build capacity, especially among nonprofits, and catalyze innovation and new ideas for affordable housing development.
MIAMI, FL PRESERVING UNSUBSIDIZED AFFORDABLE SMMF PROPERTIES
LOCAL CONDITIONS AFFECTING UNSUBSIDIZED AFFORDABLE SMMF PROPERTIES
- Loss of affordability on the cultural fabric of communities
- High costs associated with housing (construction and land/acquisition costs)
- Impacts of sea level rise and climate change
- Neighborhood change due to increasing market pressure
- Areas of historic disinvestment and lower land costs
- Regulatory environment, including building standards around hurricane and natural disasters
LOCAL PRIORITIES FOR RESILIENT PEOPLE, HOMES AND PLACES
In Miami, the preservation of unsubsidized affordable SMMF fits into a broader housing framework focused on supporting resilient people, places and buildings; promoting connectivity and mobility; and increasing the supply of high- quality affordable homes for all income groups. The importance of preserving unsubsidized affordable SMMF properties is well-documented across plans and studies for Miami-Dade County, including the Miami-Dade County Affordable Housing Preservation Plan, Miami Housing Policy Toolkit, and Connect Capital Miami. For instance, Connect Capital Miami specifically cites unsubsidized affordable multifamily housing as a critical part of the pipeline intended to meet the city’s goal of creating or preserving 12,000 affordable homes by 2024.xx Part of increasing Miami’s affordable housing supply depends on not losing the affordable homes that already serve Miami residents.