The Obama administration’s $350 million Preservation, Enhancement, and Transformation of Rental Assistance (PETRA) initiative, outlined in the Fiscal Year 2011 budget, is intended to preserve an estimated 300,000 publicly and privately owned affordable homes in the first year and more in subsequent years by converting them to a single type of project-based affordable housing contract. The new contracts would come with increased long-term subsidies and the ability to access private investment for repairs, renovations, or new construction. Many housing advocates worry that private capital could lead to fewer units and higher rents. HUD, however, estimates that in its first year PETRA would bring in an additional $7 billion to preserve a badly deteriorated affordable housing stock that is nearing the “tipping point” of habitability.
PETRA also makes other changes, including streamlining administration by combining several different rental assistance programs into one, consolidating waiting lists, encouraging housing authorities to regionalize, making eligibility rules consistent, and giving families with housing subsidies more of a choice to rent housing in an array of neighborhoods.
HUD Assistant Secretary for Public and Indian Housing Sandra Henriquez spoke with Shelterforce about the need for PETRA and some of its more controversial details.
Shelterforce: PETRA is a pretty bold initiative. What are some of the first steps, and where do you see this going?
Secretary Henriquez: This is the start of a multiyear program to phase this in across the 1.2 million public housing units in this country, followed by the 1.3 million multifamily [HUD-assisted] units. We think that this first tranche will get us converting 280,000 to 300,000 units for about $300 million, and it’s really a preservation strategy within a mobility feature. It’s important because if we don’t act now, given the capital needs of the public housing portfolio, we’re going to start losing hundreds of thousands of units a year just because the lack of capital infusion will render them uninhabitable.
We’re currently undergoing a capital needs study, but we have about a $20 billion capital backlog in the public housing portfolio alone, and we think $20 billion to $30 billion is where we’re pegging it right now. We will never get sufficient appropriations at one time to change the game, to really put a stake in the ground and prevent the loss of units. This mechanism will preserve units by giving a steadier, more predictable, stable, consistent income stream to the converted units. It will give housing authorities a chance to play in that market arena by allowing access to the financing tools available under PETRA such as going to the bank or to use other public- and private-sector market tools to leverage capital, whether they’re tax credits, commercial mortgages, bond financing, or other tools available in the marketplace.
We believe that ultimately PETRA will drive market discipline into the portfolio, as well. There’ll be more eyes and ears, both the property’s residents and its investors, as to the performance of the property. It will also then allow those housing authorities to do what every other real estate owner does: refinance one’s property, plow the refinancing into renewing the useful lives of the building systems and the units themselves, and continue to maintain and improve the property. This is something that we’ve never had in public housing before.
This will bring public housing out of isolation and put owners in this system in the same marketplace as other owners of affordable housing. Today, most families live in housing that is financed, developed, and managed in a way that can be integrated with the communities around them, while the 2.5 million families served by HUD’s oldest programs don’t. PETRA will put an end to the parallel universe in America’s housing system by encouraging a mix of uses and incomes that link public housing to investments in neighborhood schools, local businesses, and other community anchors.
Leveraging private resources is going to put a lot of debt burden on these developments. What happens to the PHAs that aren’t as robust or well managed as Boston’s or Atlanta’s?
It is something we’re talking about. It’s important to note that this is a voluntary program. We think there are a lot of smaller housing authorities, or rural housing authorities, that would like a change in the regulatory environment, and would like this additional infusion of cash to leverage debt.
Regarding the level of sophistication, we will look at issues of capacity, but I do believe that those agencies will eventually seek to regionalize or consolidate just to build economies of scale and capacity. I’m hoping that smaller housing authorities that are less sophisticated will participate in getting some technical assistance or reaching out to sister agencies where there is that capacity to help them do this program and come into this new way of operating their portfolio. In fact, about $10 million of the $350 million is specifically there to provide technical assistance.
It’s not that housing authorities will just come and say, “I want to do this.” We’re going to want to see from each housing authority that wants to participate sort of an appraisal or a capital needs study, what they’re looking to do with the money, how they’ve run their numbers, both on operating and what sustains the debt and their ability to repay.
It sounds like you’re asking them basically to put together business plans.
Exactly. Early on, when I came to the Boston Housing Authority, I used to joke with my colleagues about committing what I called “public housing heresy,” because people would always say, “But, we’re public housing and we’re different.” And I said, “It’s really the same.” We should be using real estate principles and practices: What are the indicators that we want to know on a routine basis? What’s our turnover rate? How long does it take us to get a unit made ready? Vacancy, occupancy issues, per-unit utility costs, on and on. We’re public housing, but we’re really real estate first and foremost.
[Under PETRA,] HUD would be the asset manager and housing authorities would be the property-based managers of the portfolio. But this is really an opportunity to embed the real meaning of “asset management” into the portfolio in its purest sense. This can provide regulatory relief from the onerous, burdensome public housing set of regulations and rules and requirements, [and create instead] something more streamlined, which has got to have value. While that value might be hard to quantify, it can give housing authorities a seat at the table in their communities, speaking the same language as multifamily for-profit and nonprofit owners in the marketplace. My vision is that the term “public housing” goes away. It’s just another stop on the affordable housing continuum.
It’s going to be a challenge.
This is an opportunity that we have to seize now. We will never get enough capital through appropriations. It’s just too big a number. Plus, we’re losing tens of thousands of affordable homes each year — over 150,000 in the last 15 years — through sale or demolition. But we think that this first wave could leverage as much as $7.5 billion in capital. That’s powerful.
Some feel it’s risky that PETRA includes no cap on interest rates being charged to housing authorities. One suggestion has been to make all loans to housing authorities subject to FHA guidelines. Would that be possible or desirable? If not, why not?
We agree that public housing authorities should have access to sustainable financing. That is why every converted property will be eligible to apply for FHA mortgage insurance. The challenge in placing a cap on interest rates is that we cannot predict where rates may be in another 20 to 30 years. While we’re hesitant to put capping language into the bill, we have been open to our stakeholders’ suggestions and ideas for helping PHAs manage this.
There are no criteria spelled out for when above market rents could be charged. How will you keep this option from becoming a large windfall from the taxpayers to private investors?
Actually, the legislation does outline criteria for charging above-market rents. The rent cap can be exceeded only when the Secretary determines that it is necessary in order to meet the financial and physical sustainability needs of the property and if the property meets our criteria for preservation. PHAs will not get above-market rents at their own discretion, only with HUD guidance and approval. However, in areas with low market rents due to a depressed local housing market, paying above market rents is important for preserving affordable housing.
How can HUD guarantee that it will be able to cover the gap between market rent and what the tenants can pay under future Congresses and administrations? What happens to this housing if HUD can’t make those payments? What happens to the tenants and the housing stock if the units leave public ownership through foreclosure?
What’s important to remember is that the current system has reached a tipping point. Public housing has not been fully funded in years and at the same time, we continue to lose an average of 10,000 public housing units each year through sale or demolition. Our goal in PETRA is to shift to a more reliable funding stream that will stem the loss of housing and put critical capital and operating funds within PHA reach for the future. Making this shift will actually put HUD in a better position than it is now to make those payments.
The question of foreclosures is one that we’ve heard several times; as we emerge from our ongoing housing crisis, there’s an understandable fear that allowing public housing properties to tap their existing equity value to meet their capital needs might put these affordable resources in jeopardy. To be clear: foreclosures happen very rarely to affordable housing properties — far less than the rate we are losing units from the current programs. We have seen in other affordable housing programs, particularly LIHTC, that foreclosure rates are less than 1/10 of 1 percent. Nevertheless, PETRA contains an unprecedented combination of policies to minimize the risk of foreclosures — putting in place strengthened tenant protections and requiring that the property continue to operate like public housing, with all leases, contracts, and use agreements remaining in effect and binding. In the unlikely event that ownership changes, the affordability mandates and use agreements will help us ensure that tenants are protected.
PETRA only requires continued affordability for 30 years. Thirty years is not actually that long and there has been a huge struggle not to lose units out of the HUD-assisted inventory as similar time frames expire. Public housing was permanent. PETRA is supposed to be about preservation of units, but won’t this lead to long-term attrition? (NLIHC has proposed that if the terms can’t be changed to “in perpetuity” that HUD be required to offer contract extensions and owners be required to accept them. Would this be a viable alternative?)
The fact is we are losing affordable housing units to attrition now. Without a tool to compel them to stay, PHAs and owners under the current system can opt out of the programs when their contract ends or by demolishing and disposing of units deemed obsolete. That’s exactly the situation we had in mind as we designed PETRA. The bill includes language that requires PHAs to accept contract extensions from HUD, staggers the terms for contracts and use agreements so that the property is always under at least one enforceable mandate, and provides access to capital that will stabilize current properties before even more units become obsolete.
Advocates have charged that the “one-for-one” replacement language in the proposal would actually allow for loss of up to 50 percent of public housing units. They argue that tenant-based vouchers are not sufficient replacements because they end up being more expensive and tenants can be screened out of market-rate housing. Can the administration ensure that there are no losses of hard units?
The majority of converted properties will be rehabbed without any demolition and will remain fully assisted, so the replacement policy will not affect most families.
However, an estimated 10 percent of our housing stock is in markets with an adequate supply of affordable rental housing in areas of low poverty — we define that as an area with a high vacancy rate where at least 80 percent of vouchers have been used in the previous two years in neighborhoods that are both geographically and class diverse. In those cases, 50 percent of the units can be replaced with tenant-based vouchers, which would help households move closer to immediate opportunities for better jobs, schools, proximity to family, and other important priorities. Again, most areas across the nation are not eligible for this exception. In all other cases, if an owner proposes to reduce the number of assisted apartments at a property, then they must submit to HUD a plan for the timely replacement of ALL units.
What regulatory or cultural changes need to be made to allow regionalization to happen? Can housing authorities actually merge?
The project-based subsidy stays with the property, but we’re trying to encourage that after two years some residents will choose to move and get a tenant-based voucher. We’ll encourage housing authorities that do covert to come tell us how they might pair up, in what groups they might do that.
Housing authorities can already merge, and some housing authorities have already. North Las Vegas and Las Vegas housing authorities, for example. We’re hoping to encourage more of this.
You said the goal is for PHAs to essentially become like for-profit or nonprofit housing developers. Up until now, PHAs were not competing for tax credits, HOME, or CDBG. Once you add a very big competitor to the marketplace, how will the market dynamics change?
I’m sympathetic to the issue of adding more people to the marketplace. I appreciate that more people will now be using what was heretofore thought of as private sector or nonprofit sector financing tools, but it’s either add more people into that pool or continue to lose an astounding number of rental units in the public housing portfolio every year. And if we don’t do it now, we never will. It will be just so far gone that it’ll take more and more and more money to try to stop the hemorrhaging.
Because financing will be coming from the market, it will be easier for properties in better shape to access the debt financing than those with actual pressing capital needs. What will be done to ensure that the program helps those PHAs with the largest need?
PETRA unlocks both private and public capital opportunities that are currently used by every class of affordable housing owners except PHAs. The bill will level the playing field. For the first time, these public property owners will have access to tools like the Low Income Housing Tax Credit and historic preservation credits in addition to taking on mortgages. These are generally mission-driven investments accustomed to funding properties with significant rehab needs.
Having said that, we believe that moving to market-based rents will help address this issue for property owners. Lenders will invest based on the property’s revenue stream in addition to its physical state. The property-based contract under PETRA will show that the owner has a reliable funding stream at a much higher rent that can secure the investment for the entire life of the property.
If you’re going to borrow money in the private sector you almost have to have a mixed-income product. Won’t there be a cost for the PHAs who are doing this?
Yes. It’s just that the devil is in the details, and we’re still trying to work some of this stuff out. I don’t know exactly what the deals will look like. We’re asking participating authorities to come to us on a voluntary basis with their ideas of what their deals will look like. And we expect that they will be different from each other. But, like the mark-to-market program, there will be, I think, some housing authorities whose capital needs will be such that they will come in with an appraisal.
We’re not saying that the conversion rental rates will be the fair market rate as with the Section 8 program and the voucher program. They could be less than that based on an appraisal and the capital needs for that particular property, if operating costs and debt payments can be supported by that lesser number.
It will dramatically change the way some PHAs work.
That’s right. This is not your grandparent’s public housing portfolio anymore. We can’t continue to exist in that world. It just doesn’t work anymore. And while the change may be difficult, I’ve had housing authority directors tell me they were kicking and screaming about not wanting to do asset management and yet once they went through it, they went, “Gee, this was the right thing to do.” I think we will have probably a similar reaction. Change is hard, but, if we don’t make this change, those housing authorities that over time don’t change I think will find it impossible to operate their portfolio.
In this conversion, you were saying PHAs need to think about themselves as real estate developers. Obviously they are, but with two big differences: they’re mission-driven and they have a backstop, the federal government. Is there a danger that we’ll lose units, not because they’re uninhabitable but because they’re going to higher income households? And second, is there any opportunity for reaching more of the people who are eligible?
First, these properties will stay publicly owned; housing authorities become their new owners. The rents will still be income-based; this is not a conversion that will lead to displacement or eviction.
PETRA would enable PHAs to produce units over time, so that if there is income mixing, it is not at the expense of people being displaced or evicted. So, there’s no driver that makes housing authorities want to totally abandon who they serve and how they serve them. PETRA would give them even more incentive to maintain their public housing stock.
Of all the things about our public housing system that need to change, the two things that should not change are the people it helps and the amount they are required to pay. PETRA will continue to target the neediest families by maintaining all the targeting and affordability requirements of the U.S. Housing Act. Residents will continue to pay no more than 30 percent of their income toward rent. What we’re still talking about is what the right set of tenant rights is and how those get exercised, but our guiding principle is that residents deserve a say over where they live and how their community is managed.
The Public Housing Heresy
“I used to joke with my colleagues about committing what I called ‘public housing heresy,’ because people would always say, ‘But, we’re public housing and we’re different.’ And I said, ‘It’s really the same. We’re public housing, but we’re really real estate first and foremost.”
“[Under PETRA,] HUD would be the asset manager and housing authorities would be the property-based managers of the portfolio. But this is really an opportunity to embed the real meaning of “asset management” into the portfolio in its purest sense.”
—Sandra Henriquez HUD Assistant Secretary for Public and Indian Housing, in the interview above
Heresy? But it’s a matter of history, not heresy. Public housing was created to be that part of the housing system in which housing is seen not as an asset, a piece of real estate to be owned and operated according to market principles, but to provide housing for those in need of it and unable to pay for it under conventional market principles. It was not intended to respond to “effective demand,” that is, to the desires of those with the money able to afford to buy that which they want; it was specifically structured not to compete in that market. It was not intended to be managed so as to return the greatest possible money reward as profit to its owner.
Public housing was intended to take part of the housing supply out of the market, to have it governed not by the principles of profit and loss but by the principles of service to human welfare. It should not be seen as a real state “asset,” any more than an emergency room is a health care “asset” or a police department is a security “asset,” or a street is a transportation “asset,” or a public school is an educational “asset,” let alone a “real estate asset.” It should be managed efficiently, of course, but the goal is not to reduce to the lowest possible level the amount of public subsidy used in the provision of housing. It is to use what is allocated so as to best provide for the decent satisfaction of those whose housing needs could not be otherwise met.
Public housing is provided by government as one of the rights to secure which “governments are instituted among men,” including the “inalienable rights to Life, Liberty, and the Pursuit of Happiness.” That is the ultimate purpose of public ownership. It is not the purpose for which private owners own and manage their assets in the private market. Private ownership of assets may also have public benefits, but their ownership, management, and disposition is in the first place to secure private profit, not public benefit. Each has its place, but they are different.
That does not mean that public housing should not be efficiently provided and efficiently run. Perhaps this is what the assistant secretary of HUD means when she compares it to private real estate. But those concerns, which affect all housing, have a different, non-market role in public housing. They should be handled so as to reduce the costs of housing as much as possible, without interfering with the fundamental purpose of that housing. For a real estate “asset,” that purpose is to produce the greatest return possible to the investment, measured in terms of dollars. For public housing, it is to procure the gratest quantity of housing, of the desired quality, and facilitate its occupation by those most in need of it, not those most able to pay for its costs of provision.
For example: if a housing development is located on land that has increased in value because of the growth of economic activity in the area in which it is located, the extent of economic activity in its surroundings, or because it has become more accessible to such areas, that is occasion for the owners of a well-run real estate asset to increase the rents asked for its use, and it enables its owners to use the asset to take out greater profit from its ownership by its use as collateral for loans that the higher rents can repay. The benefit of the increased value of the “asset” inures to its owners.
But it is a mistake to treat government simply as another owner of an asset called “public housing,” treating it just as any other owner of such an asset would treat it. The purpose private owners of housing seek, and properly, is profit; their bottom line is the difference between costs and revenues. That is not the case with public housing; the purpose its owner, the government of us all, seeks, is not profit but human welfare, and its bottom line has to be measured in terms of its contribution to human welfare, not the maximization of revenues or the minimization of costs or the spread between them.
Here are three other examples of the difference between public ownership and private for-profit ownership:
• The attitude towards resident participation: resident participation in public housing is not simply a means to an end of efficient management, but is at the heart of it very purpose: the provision of conditions of life that enhance human dignity and human welfare. In principle, the more the better. Every private owner and investor want to maximize his or her control of their property; as to resident participation, the less the better. It only interferes with the “rights of ownership.”
• Interest in improving quality: The better the housing and the greater the satisfaction of the residents, the better is the interest of public housing served. For private housing, the level of quality desired by the owner is that which will provide the greatest surplus of revenue over expense, the greatest profit margin. This is a big difference when it comes to planning rehabilitation, improving landscaping, or deciding the level of routine maintenance.
• Due process in eviction procedures: Due process, fairness in decision-making, is a constitutional requirement of all actions of government, for the protection of those it affects, and in the case of public housing, is a right of its residents. For private owners it is at best a nuisance, at worst something to be bitterly fought. If a tenant is not paying rent, out! No matter the cause, no matter the impact on the individual or the family. In public housing, multiple interests may have to be balanced, e.g. neighbors or nuisances, but not the profitability of the enterprise. In private housing, the key consideration is net profit, whether better with or without the offender.
As to financing and resident protection, a public housing project may be only put up as collateral for a private loan, but the private interest in making that loan is based on the security provided by the collateral, i.e., can the lender sell of the collateral if the “owner” fails to repay. You can’t have your cake and eat it too: either the development is collateral, in which case a lender will lend on it but want the right to take it over on default, or he doesn’t have that right, in which case it’s worthless collateral, and he won’t make the loan. If the deal is supposed to be “safe” for the new lender because government will stand behind the repayment of the loan, then why involve the development as collateral to begin with? Why not just go on the market and issue bonds the government insures, as has been the time-honored way of financing public housing? If such a government guarantee is included, it might indeed protect residents to some extent, although always leaving a dangerous conflict of interest around the protection of their rights—but then the whole thing only amounts to a sham, concealing off the government’s books what is really, and ought to be recognized as, a government obligation.
PETRA, if it should claim benefits from the involvement of the private sector in public housing, should not pretend these differences do not exist, or that injecting private profit motivations into the ownership and management of public housing is not a compromise with some fundamental principles. The hope that private sector involvement can be had without a compromise of quality and in public housing is an illusion.
It is quite possible that we are in such a desperate plight, so poor and politically so incapable of distributing our resources as to meet the needs of our people that we have no choice but to mortgage or sell off some of what is and should be publicly owned, rather than raise our taxes a reasonable amount to pay for what we needs to be done. It is a sad case if that is our situation today. If it is, we should at least be honest in recognizing what we are doing.