A panel of top experts shares innovative programming and latest strategies to fund development.
The housing crisis facing the real estate industry and cities continues to grow, with a national housing underproduction of 3.8 million units annually (as of 2019). Addressing and resolving this issue will require collective ingenuity and collaboration of public and private participants at every level.
Urban Land magazine, with Faron A. Hill, chair of the ULI Foundation and president of commercial real estate advisory firm Peregrine Oak in Atlanta, convened a roundtable of top developers, lenders, and other thought leaders so they could share best practices and concepts that are working and that might transfer across markets. From corporate and institutional approaches to public policy changes, this group of ULI members shines a light on the latest innovative funding sources and strategies to combat the affordable housing crisis in the United States.
Moderated by Hill, the roundtable included Catherine Buell, former director, Amazon Housing Equity Fund, Amazon in the Community, at Amazon in Washington, D.C.; Matthew Kwatinetz, director of New York University’s Urban Lab at the Schack Institute of Real Estate in New York City; Lionel Lynch, director of community development banking capital solutions, JPMorgan Chase, in D.C.; T.J. McElroy, senior vice president, capital markets, Dominium, in Dallas; and Michael Zukerman, managing director, Greystone, in Chicago/New York.
Faron A. Hill: Can you share a highlight of the market segment that you’re in and what’s most important to you with respect to the affordable/attainable housing spectrum?
Catherine Buell: As we started to look at the challenge, we found that there are very few solutions for everyday working families. Our customers are [at] 30 percent to 80 percent of the area’s median income [AMI], which means low- to moderate-income families. The reason I’m so excited to participate in today’s conversation is that it takes our collective expertise to fully solve the housing affordability challenges. It can’t just be one person, one group, and one approach. It’s important to appreciate how we’re collectively addressing housing issues from various sectors and perspectives.
Hill: Catherine, is affordable housing or workforce housing associated with the markets where Amazon has a presence, or is it more of an altruistic approach across markets all together?
Buell: Many people ask if the Amazon Housing Equity Fund is focused on creating housing for Amazon employees only. The answer is no. We are focused on the community at large. We used a data-informed approach that is informed by community need. One of the things that we benefited from is that there are a lot of studies put out there by housing experts about what is happening in the housing market that identifies where housing is most needed and the resources that are needed to help people alleviate housing cost burden. We intentionally worked to deepen our cost savings for low- to moderate-income families by focusing on transit-oriented solutions. Our work was well informed by experts who shared their knowledge years before Amazon Housing Equity Fund came along, allowing us to build on the groundwork laid by thought leaders, local transit agencies, and others.
Hill: TJ, what is Dominium’s focus? What markets and asset types drive your business?
TJ McElroy: We’re focused on LIHTC [Low-Income Housing Tax Credit] development in the Sun Belt states, and that’s driven by the population growth and AMI growth in those markets. Dominium was founded in Minneapolis and still has a presence there, but we recently opened offices in Phoenix, Atlanta, and Dallas.
I recently relocated to Dallas, and a lot of that is driven by where we’re doing business. We want to be in the markets that we’re developing new projects in.
In LIHTC development, rents by definition are capped. So, if we’re going to make a long-term investment today that we’re going to hold for 15 to 20 years, we want to make sure 10, 15, 20-plus years from now, we’re putting the stake down in an area we believe in long term. And the other side of it is we want to be somewhere that supports that housing politically.
There’s a lot going on right now around the country, where people are talking about rent caps and other restrictions that make it difficult to develop housing in those markets. We think of the affordability crisis as a supply issue and want to build in markets that support that view.
Hill: Michael and Lionel, as lenders, can you talk about where you focus your activities from a capital perspective?
Lionel Lynch: Within JPMorgan Chase in our Capital Solutions group, we recognize that the need and the growth of market opportunities—as well as the need for new options for individuals—require new sources of capital in the housing ecosystem.
We really are committed to bringing not just one tool and tweaking it; we’re approaching it from the perspective of leveraging and utilizing our deep expertise and understanding of how to put capital together, to bring new partners into the ecosystem like [the $2 billion Amazon Housing Equity Fund] and also institutions that have historically not been able to be part of this housing finance ecosystem.
In general, what we are financing is what you would define as “attainable,” but it could be workforce, new types of affordable, as well as a broader range of housing options that could be mixed income using new types of capital—for instance, higher education or health care systems that absolutely have a need but
have not historically been in the housing finance ecosystem.
There’s this enormous market opportunity.
Michael Zukerman: In terms of affordable and attainable housing, this has become a crisis. Every mayor in every town is dealing with an affordable housing crisis. And at Greystone we believe this requires a creative, ‘all of the above’ approach. And we undertake that all-of-the-above approach as a lender, as a developer, and as an owner.
In terms of the lending space, one of the areas that we’ve been focusing on is the mixed-income area, echoing some of what Lionel mentioned, as well. The mixed-income space provides for a broader impact and that, coupled with inclusionary zoning, enables for more affordable housing in areas that traditionally you may not see it. We’re providing a financing solution for mixed-income housing in Chicago, which dovetails nicely with their Affordable Housing Ordinance [AHO], as well as with their tax abatement [incentive program] to provide for mixed-income development in a high-rent area within the South Loop of Chicago. Greystone has unique, proprietary financing tools that enable creative mixed-income solutions.
Hill: For efforts to be successful, there has to be a positive and enabling environment. What positive factors have you all seen in your efforts delivering units that may cross markets?
Buell: Amazon is new to the affordable housing field, which means we get to look at it with fresh eyes and understand where a tool like the Amazon Housing Equity Fund is effective and where it’s not. In doing this work, we found that having a strong local enabling environment is critical to the success of our efforts. This means we are more successful where there is a supportive local policy environment, a range of financial tools—including local housing funds—and strong partners on the ground that can actually create quality affordable housing stock.
As an example, we’re seeing that in the Arlington, Virginia, region there’s almost three times as much funding going into affordable housing as there is even in a place like the Puget Sound.
We’re seeing a lot more local governments creating affordable housing trust funds, simplifying their entitlement processes and/or their tax assessments to encourage more affordability. This is multiplying affordable housing developers’ ability to actually do the good work that they’re doing.
We are also seeking investments in communities where there is cofunding for affordable housing because we’re seeing that it allows us to get to deeper levels of affordability—30 percent levels. Putting two and two together, the enabling environment coupled with multiple funding options is critical to scaling
the impact of new partners like us who want to do good in our communities.
Matthew Kwatinetz: Cities originally were the hubs of great labor markets because they offered housing opportunity that served people and households at all levels of income. The success of cities to serve this function hinged upon the ability to build densely.
But over the last few decades, cities have limited density in their central cores, leading to a vast reduction in housing production and a corresponding spike in gentrification. This problem is exacerbated by new labor entering the market, creating a false choice between affordability and jobs. Vastly more production is needed everywhere. For example, New York City has on average produced over 10,000 affordable units annually, but even at that production rate it would take over 65 years just to catch up to the existing backlog of needed housing today.
As Lionel mentioned, solutions will involve leveraging new sources of capital. In particular, we must harness the rising capital flows into ESG [environment, social, and governance factors] to develop affordable housing while considering more cross-subsidy options such as diverse mixed-income projects. In some critical areas, cities are running out of volume cap and therefore can’t qualify for LIHTC funding.
That’s a huge chilling effect to actively developing affordable housing. We need workarounds.
Lynch: There are fund managers like LISC Strategic Investments or Enterprise Community Investment who have a long track record in being able to [leverage new sources of capital], and those institutions can be very agile. They can craft both on a transaction-structuring perspective, and also the way in which they can aggregate a variety of forms of capital or commitments to go beyond this sense of, “we have to rely upon new forms of public programs.”
The sole vehicle [to build affordable housing] has largely been Low-Income Housing Tax Credits, which by definition means that the only individuals that can participate are those that have tax capacity, whereas, to the extent that you have even pension funds—the most savvy real estate investors—if they’re tax exempt, they haven’t been able to contribute to the ability and the need to solve moderate-income housing.
Or to the extent that you have health care systems, they may be the largest employers in their
region and their community, or even in their state. They have investable assets, they have balance sheets, they have endowments, and so forth. But again, they’re tax exempt.
As we’re thinking about how we can bring in new sources, new players, new individuals, what’s really important—and this is what we try to do at JPMorgan Chase—is actually be able to help these other institutions, these other partners, to be able to recognize that they don’t have to create the whole new thing themselves, that there are tried and tested partners. And the beauty of it is that they can be more market responsive, and they can also be faster than trying to rely on enabling legislation.
Hill: TJ, I know in your business model, you work a lot with local partners. What are some of the innovations that you’ve seen around finance in your practice?
McElroy: In the various states where we’re most active, the public side—the state and local governments—are looking at affordable housing as infrastructure. And they understand it’s needed. They want us there because at the ground level they see the issues and they see what’s coming with all the population growth. In those markets—Florida, Georgia, Texas, Arizona—there are incentives for us to partner with local nonprofits to gain real estate tax abatements or other incentives to help with the financial feasibility and promote development.
Dominium is also working to find ways to use our scale and our financial strength to help with the financial feasibility—to bring in new investors and innovate by financing things, not just one off, project by project, but to say, we have 25 developments in the pipeline around the country, that’s around 5,000 units, or $1.5 billion in construction financing and close to $800 million in LIHTC equity that we’re trying to place annually. Can we bring in larger institutions that would benefit from that scale and the efficiency of working with a vertically integrated developer like Dominium?
This year, we partnered with Blackstone on their first tax credit investment on a development project that we have in Phoenix. Blackstone has been amazing to work with. They’re very quick learners and they’re very smart. But I think their heart is also in the right place. They’re really looking at this in that same way that Dominium does—that this is a supply problem, and how to provide solutions to increase the supply of new housing and preserve the existing affordable housing stock. I think they’re doing the latter with their acquisition of the AIG portfolio, and then the former partnering with us as a new large institutional tax credit investor to create new affordable housing.
We’re doing the same thing with the banks like Deutsche Bank and others on the debt side. As rates went up last fall, we were able to shift gears and create a new private placement loan product that takes nine or 10 developments from our pipeline and pools them together. They’ll all be built, and as they stabilize will be put into a securitization. We’re able to lower our financing cost by 50 basis points or more on the debt side just by doing things at scale and using the financial strength of Dominium to back up our loans.
Lynch: To get housing supply, we need to be able to get effectively either new zoning or access to new land.
One of the things that’s really important is aligning with institutions that have historically not been part of the ecosystem. JPMorgan Chase banks with a large number of health care and higher-education institutions, so we’ve been having conversations with these institutions that do often control large amounts of land [to consider using some of it for new housing]. They haven’t historically thought of reserving [the land they own] for expanding their health care mission in that context. To the extent that now they view housing as a critical need and component for operating and fulfilling their mission, it’s now possible to get effectively new land by being able to connect [housing more directly] with their mission.
For example, we have conversations now with health care systems, and the folks in the room are the chief operating officer, the chief human resources officer, and also the chief finance officer and/or their real estate portfolio. Historically, you would have never had that group of people in a room to even talk about how we can create and better provide housing to a community. Now that we have that group, it doesn’t mean that the financing mechanisms need to be more “complex” or create new tools. It’s finding a way to make connections between the underlying mission of an entity and then how they can leverage resources that they may have not historically thought of as being accretive to the housing ecosystem.
Kwatinetz: These hospitals are an excellent example of a growing strategy we are seeing in markets as the scale of the crisis is recognized. Developers and cities are able to produce more affordable housing by unlocking underbuilt or “soft” sites, like these hospitals. In New York City, we have soft sites at schools, hospitals, and even homeless shelters: places that one wouldn’t have considered before as being sources of land have suddenly become economically relevant. In that vein, office conversions [are getting] much more support from local government than ever before. The trend I have been watching closely is corporate campuses for relocation and expansion. If they find in this cooling market that they have bitten off a little more space than they need to consume, there’s a real opportunity to partner in converting some of that FAR [floor/area ratio] to affordable housing.
One may ask how do we finance these innovative ideas? In almost every state, there are industrial development authorities—and/or land banks—that have the ability to create synthetic tax abatements for targeted development. While this is a replicable strategy that does not require legislation, it does require developers to engage with the locality and ask for public/private partnerships on different pieces of land. Effectively these partnerships would lower the capital and operating cost to develop.
In thinking about how to fund the capital stack, I would be remiss if I did not again mention the enormous rise of capital that is focused on ESG right now. Bloomberg has forecast ESG AUM [assets under management] to hit $53 trillion by 2025, or a third of global assets. As this capital searches for deal flow, the development of workforce and affordable housing could check the box for ESG as clearly as sustainability and climate resiliency work do already today.
Lynch: I also think we should recognize that [capital focused on sustainability or housing] is not necessarily a tradeoff, especially if we’re thinking about it from the long-term hold perspective. Integrating sustainability into affordable housing and thinking about operating costs over the long term could be accomplished from the design and from a retrofit to lower operating costs, which could help to increase the profitability or sustainability of an asset.
McElroy: There’s been some recent changes to solar tax credits that help pair them with LIHTC where you can get some of the benefits in your basis for the costs of adding solar to your project. There are ways we could provide more incentives to allow developers to put in those extra environmental efficiencies upfront—things like solar and water reduction that would help create both environmental and operating efficiencies.
Generally, because we are a long-term holder, we want to do everything we can to build and provide sustainable housing and in the context of the “E” of the ESG—environmental sustainability. But if we could find a way to quantify the “S” where investors and banks can get credit for the “S” in the same way they do for the “E,” I think there would probably be an influx of capital into affordable housing that we haven’t seen yet.
Dominium is working on that, trying to find metrics and to quantify the “S” and the social benefits to our residents, but it’s hard. That’s something that I think this group and others at ULI, in particular, would be great at coming together to find a way to solve that problem.
Zukerman: In some cases, PACE [property assessed clean energy programs] could be accretive to the capital stack.
We recently had a terrific LIHTC bond financing execution for a $75 million mixed-income senior housing development in Michigan. It had a $20 million gap that was filled by PACE. That’s one example of being able to provide affordable housing that is also sustainable.
I see two worlds that provide housing in our nation. One world is the affordable housing world—with a capital A—and the second is the market-rate housing world. The capital-A affordable world has grown very, very rapidly. I think that the total private activity bond issue just a few years ago or so was about $6 billion in 2015, and now that’s gone up to $16 [billion] or $17 billion. But that’s capped out. There are well over a dozen states that reached their bond caps—maybe north of 20 states—so that subsidy is limited.
Our focus is on how we can bring affordable housing solutions into the market-rate housing world, and that’s through mixed income. Mixed income requires an “all of the above” approach in which a leading role needs to be played by the municipalities in conjunction with their states. And they need to work together to provide for an optimized capital stack.
McElroy: I’d like to go back to Matthew’s comment earlier on private activity bond volume cap to qualify for LIHTC, because I think it’s important. There’s a lot of talk right now about reducing the 50 percent test to 25 percent that would further stretch and utilize that resource.
Some states, most notably California, have given a volume cap priority to multifamily housing before single-family housing or any other use of private activity bonds, realizing that doing so can boost the supply of housing by encouraging multifamily development, and maximize the federal subsidy that comes with that—the 4 percent Low-Income Housing Tax Credit.
And then in a number of other states there are tax abatements or exemptions for affordable housing. In some, Dominium often partners with a local nonprofit to help allow for real estate tax abatement, and that’s very attractive; that helps deals that would not otherwise be feasible get done.
There’s a lot of things that the local governments and state governments are doing that is helping. But on a national level, we could do a lot more.
Hill: What should a developer, investor, or someone who’s even considering getting into the space be aware of?
McElroy: Historically, where Dominium is focused in the tax credit space, there is a less than 1 percent loss or default rate. Investors can come into this space on the equity side and even lenders, but on the equity side, investors are achieving 7 percent, 8 percent–plus returns. When you look at the risk-adjusted return in affordable housing—through all the market cycles, through the Great Recession, through COVID, through everything—this is an incredibly resilient asset class, and they’re great returns, solid consistent returns for investors with very little downside. There is risk like with any investment, but if you’re working with quality sponsors, and you’re picking good locations, I think this is an asset class where there should be more activity.
Buell: Absolutely. I would also add that for corporations looking at housing affordability challenges, don’t be afraid to start small. Start looking around your community to see what’s going on in the housing market. Amazon started small and quietly. Most people don’t realize that because it’s Amazon; it’s a big name. But we started with a housing match of several million dollars. The success of the match showed that our employees were really interested and excited about housing. For employees, knowing that their company is giving back on issues that they care about is really important to their confidence in their employer, creating a dual benefit for corporate investments in affordable housing.
I would also encourage corporate partners to think creatively about the tools that they have at their disposal. The Amazon Housing Equity Fund was actually born in part out of our treasury office. Our treasurer understood that low-cost capital would allow us to have a positive impact on affordable housing. And for that reason, we’ve been able to leverage Amazon’s low-cost of capital to be able to invest and create affordable housing at scale.
Finally, for new partners, don’t be afraid to go bold. Prior to the Amazon Housing Equity Fund, one of our senior executives took a stand and decided to give one building on our main campus to a homeless shelter. It’s now called Mary’s Place and is a beautiful 200-bed family homeless shelter that opened during the pandemic. Mary’s Place was Amazon’s first big, bold investment in the homeless and housing space, and it taught us that going big actually has a meaningful impact. For nontraditional players—whether you’re a corporation, whether you’re a nonhousing agency that has land—leverage the resources you do have (even if different), and don’t shy away from going big.
We saw significant impact early on where we were able to increase the dedicated stock of affordable housing in Bellevue, Washington, and in Arlington, Virginia, by over 20 percent in less than one year.
Lynch: All the individuals who are here on this roundtable—through our collective thought leadership, as well as our own balance sheets and our ability to bring in our networks and partnerships—we actually can make an incredibly meaningful impact. There is absolutely optimism.
The pessimism is if we keep doing things the same way, then there is no way that we’ll be able to address the challenge in any meaningful scope or scale.
Zukerman: The message to developers would be, during a time that a lot of developments are not penciling for the reasons we discussed, mixed-income solutions offer compelling financial incentives that could make these projects feasible. For example, with Fannie Mae and Freddie Mac, their very best terms are reserved for mission-rich properties that have meaningful affordability. And the other area besides financial incentives, of course, would be municipal incentives, whether it be a meaningful tax abatement, a density bonus, and so on.
Kwatinetz: The emerging light on the horizon is the increased corporate involvement in housing production. Having Amazon in this conversation is a case in point. Their interest has recently seemed to evolve to a position of understanding that solving housing supply issues is not only a necessity from their employees’ perspective, but that it also is a persuasive investment case from the corporate treasury standpoint. For so long, tech companies have not predominantly looked at real estate as a smart investment in which their demand can control so much of the outcome. This can be the moment of the emergence of great master developers that are tech companies. How can we in the industry help leverage that, support them, make partnerships with them, and create an ecosystem that encourages capital inflows into affordable housing at a historic scale?
FARON A. HILL is chair of the ULI Foundation and president of Atlanta-based Peregrine Oak. SIBLEY FLEMING is editor in chief of Urban Land.