Solutions to the severe and seemingly intractable shortage of affordable housing, particularly for extremely low-income households and those at risk of homelessness, are scant. A 2024 report from the National Low Income Housing Coalition identified a shortage of 7.3 million affordable rental homes in the United States. One promising option: converting market-rate multifamily properties to affordable housing.
“Taking the approach of converting market-rate housing to affordable housing could double the availability of housing for homeless individuals or those at risk of homelessness every year,” says David Foster, president of BDP Impact Real Estate Fund, headquartered in Philadelphia. The fund launched in 2022, and it has supported the conversion of more than 1,300 units of market-rate housing to affordable housing. It also manages a social impact private equity fund affiliated with Community Solutions, a provider of housing resources to low- and middle-income individuals and individuals exiting homelessness.
BRIDGE Housing, the West Coast’s largest nonprofit housing developer and manager, anticipates adding 2,700 affordable housing units through acquisitions in the next two years, primarily in its region. That represents about 50 percent of the company’s plans for additional affordable housing, the rest of which will come from ground-up development.
“We have the capital and liquidity available for deposits, and the speed in our due diligence to be thorough and accurate without it taking six months,” says Ken Lombard, president and CEO of Los Angeles–based BRIDGE Housing. “We’re able to compete to acquire properties.”
Avanath Capital Management, launched in 2008 as one of the first institutional funds to invest in affordable housing, currently has $4 billion in assets under management. Of its 110 properties nationwide—primarily on the East and West coasts—85 percent are affordable.
“The idea of converting market-rate multifamily developments to affordable housing is that we want these homes to fit into the neighborhood,” says John R. Williams, president and chief operating officer of Avanath Capital Management, headquartered in Irvine, California. “We acquire properties that have been built to the highest code possible—with amenities [including] pools, gyms, and classrooms—that look like B or B-plus communities in an A location. We’re vertically integrated and manage them ourselves, from top to bottom, including compliance with local housing authorities.”
The primary benefits of converting existing units to affordable housing include their cost-effectiveness, with a simpler financing process compared to ground-up development, as well as speed.
“A tipping point for Community Solutions came in 2017, when we opened a new affordable housing development in Washington, D.C.,” Foster says. “We were getting accolades for developing a 121-unit building, but it took us seven years to complete . . . . With a conversion project, we can get residents moving in within 60 days and have a much higher impact.”
Financing market-rate to affordable conversions
Ground-up development of affordable housing typically requires financial support from multiple sources such as tax abatements, low-income housing tax credits (LIHTC), state or local funds, and partnerships with nonprofit social services organizations, says Jonathan Fore, managing partner for Fore Property’s western region.
“You have to put together a public/private partnership with state and federal agencies to build the capital stack to make it work,” says Fore, who is based in Santa Barbara, California. “Those deals have four to 10 different sources of capital.”
Redeveloping an existing building can be simpler and less costly, but doing so requires a source of capital ready to deploy.
“In southern California, ground-up development of affordable housing can cost as much as $600,000 to $700,000 per door,” Lombard says. “Our average acquisition cost is $300,000 per door in that market.”
In 2022, working with Morgan Stanley and the National Equity Fund (NEF), BRIDGE Housing secured a $250 million revolving credit facility to support the acquisition and preservation of affordable housing units.
“The relationships we have with banks for conventional financing are extremely important alongside the support from Morgan Stanley, the NEF program, and municipal GO [general obligation] bonds,” Lombard says. “We’re able to acquire these buildings with simple conventional debt and equity instead of working with the tax credits, debt, and government agencies required with ground-up development.”
Community Solutions first raised $3 million from family offices in 2017 as an experiment to buy a market-rate building and gradually turn it into a mixed-income property with 50 percent affordable housing units, Foster says.
“We explained to investors that we could give them a slightly below-market rate return on their investment, and it worked great,” Foster says. “In 2021, we were awarded $100 million from the MacArthur Foundation because of the impact our work had towards ending homelessness. We used $10 million of that as seed capital for our impact fund.”
The Community Solutions Large Cities Housing Fund has $185 million—$150 million raised from investors and $35 million in local capital.
“To scale programs like ours, we need to continue to educate an even wider investor audience, in addition to our first investors, who included banks, foundations, health care organizations, and impact investors [whom] we can provide a healthy return on their investments while addressing the affordable housing crisis,” Foster says.
Acquiring market-rate buildings rather than building them can offer the benefit of a lower cost of capital, Foster says, because they can use Fannie Mae and Freddie Mac loans for debt.
About half of Avanath’s capital comes from overseas investors, Williams says. “These investors like investing in something that is durable, stable, and sustainable,” he says. “Our properties are 100 percent occupied, with 100 percent of our rent paid, and a waiting list. Low turnover and high rent collections are key to attracting investors.”
Typically, Avanath identifies buildings that are not actively managed, with rents that are not in line with the market.
“We buy assets that are not full, and are not charging the right rent. Then we do a rigorous process to qualify residents, based on their income,” Williams says. “Before we buy, we vet everyone to make sure they still qualify to live there when we convert it to affordable housing, plus we vet all new applicants. In some states, we can apply to be exempt from real estate taxes for an affordable building.”
Avanath buys property in locations with a strong job market and rising incomes. “We can raise the rent as AMI increases,” Williams says. “Our rents are generally about 30 percent below like-kind properties.”
Strategies for successful market-to-affordable conversions
BRIDGE Housing focuses on increasing the availability of rentals to households earning 60 percent to 80 percent of area median income (AMI), often in mixed-income communities.
“We acquired a 195-unit market-rate apartment from AvalonBay in the Bay Area and converted it to 80 percent affordable units for residents earning up to 80 percent AMI and 20 percent market-rate units,” Lombard says. “This was naturally occurring affordable workforce housing without income restrictions, and we’ll preserve at least half of the units as affordable in perpetuity.”
Occasionally, a few tenants or community leaders will push back on converting market-rate to affordable housing, Lombard says, but typically BRIDGE researches the resident base to make sure many of the people in it can benefit from the conversion.
Community Solutions’ strategy is to focus on gradually transitioning the buildings they acquire to be 50 percent workforce affordable housing and 50 percent permanently available to people exiting homelessness. “Nothing happens day one when we take ownership,” Foster says. “We rely on natural attrition to turn over the units.”
After investors’ capital is returned, the properties will transition to nonprofit ownership to ensure they continue to serve the mission of addressing homelessness and preserving affordable housing. Community Solutions acquires buildings that need limited renovations for efficiency and a quicker turnaround.
“After we buy a building, we convert units as they become available and offer them to veterans exiting homelessness,” Foster says. “We’ve focused on veterans because most communities want to start by helping homeless veterans. Once we demonstrate success with them, we translate that success to other categories.”
Avanath’s strategy is to buy buildings in areas with high incomes and convert them into affordable housing for people with varied levels of AMI. “We’re providing housing for teachers, health care workers, and firefighters in areas with a high cost of living,” Williams says. “We serve some veterans with disability income and seniors with pensions, but otherwise 95 percent of our residents have jobs.”
At a mixed-income Avanath development in New York City, residents have incomes ranging from 40 percent to 140 percent AMI, Williams says.
In Los Angeles, Avanath bought Baldwin Village and converted 70 percent of approximately 700 units to housing affordable to households with 80 percent AMI for the next 90 years.
“The community was ripe for gentrification, but we went to the housing authority, and we were able to negotiate a $2 million tax abatement,” Williams says. “To build that much affordable housing would have taken five to seven years.”
Partnerships key to success
Community Solutions works with 140 communities throughout the country to eliminate homelessness. “We start with data and tracking tools that identify the level of the challenge in that area and the causes, along with the resources available, such as nonprofit organizations, shelters, the mayor’s office, housing agencies, and the local [Department of Veterans Affairs office],” Foster says. “We go through a coaching process and make connections between these groups. Our main job is to help communities use their existing resources to connect and address homelessness.”
Part of Community Solutions’ strategy is also to operate its properties with support for their residents from their property managers. “Our mantra is that eviction is the intervention of last resort, so our property management–plus program addresses behavioral issues and rent payment issues proactively,” Foster says. “We have a resident services consultant or tenant wellness employee at the properties who serves as a bridge between resources.”
At Avanath, services for residents are tailored to the community, such as computer labs and homework help for students in buildings with many families. “Part of our mission and our secret sauce is that we want happy and satisfied residents, not just people who pay rent,” says Dhara Patel, director of investor relations for Avanath. “We bring in partners who teach financial literacy and ESL as needed, plus we have staff members who make sure each resident gets what they need.”
BRIDGE Housing also focuses on connecting residents to resources. “One of the most important components of our success is our ability to understand the needs of our residents and to provide relevant services,” Lombard says. “We have a department that focuses on bringing in outside services as needed. We’ve also invested $3.9 million since 2001 in a scholarship program for post-secondary education for students of any age. We also invested in a program called Harbor Freight Tools for Schools that provides construction job training for teens in the Jordan Downs affordable housing community in Los Angeles.”
Preserving affordable housing
In addition to converting market-rate buildings to affordable units or building new affordable housing, BRIDGE Housing, Fore Property, and Avanath also preserve existing affordable housing nearing the end of its restrictions.
“Sellers on the affordable housing side want to sell to someone who will extend the affordability restrictions and keep up the inventory of affordable units,” Lombard says.
Avanath purchased a Florida development designed for households with 60 percent AMI that had a 100 percent tax abatement.
“The affordability regulation was about to expire, so we negotiated to raise the AMI to 80 percent, which we will phase in over three years,” Williams says. “We were able to keep the tax abatement in place and preserve the affordable housing units.”
Fore Property has rehabilitated a few already affordable properties to preserve them for low-income households.
“We’ve bought existing affordable buildings and taken them down to the studs to redevelop them,” says Alison Burk, a Las Vegas–based partner and vice president of development for Fore Property’s Nevada region. “Those were developed as affordable housing, but their mandated affordable period was ending, so we were able to get them re-entitled and extend their affordability for another 30 years.”
A multifaceted approach to build new affordable housing, preserve existing affordable housing, and convert market-rate buildings to affordable housing is required to address the continuing crisis faced by low-income households and ones at risk of homelessness. UL
Editor’s Note: This article is part of an ongoing series supported by ULI’s Homeless to Housed Initiative, exploring innovative finance strategies for providing more deeply affordable supportive housing.
