In a recent post on my website, I wrote about the need for a new affordable housing policy—one that targets the 99 percent of housing already built and operating, rather than focusing exclusively on new construction, which represents only about 1 percent of the total housing stock in a given year. In that post, I suggested that nonprofit operated housing could accommodate tenants displaced from nearby properties, providing a safety net that mitigates the negative impacts of new housing construction.
This chart compares the amount of affordable housing created by new construction versus how much market-rate and affordable housing could be purchased and preserved with an acquisition-based program. While the acquisition-based program starts out slower it experiences exponential growth, whereas the construction program plateaus.
Then, a few weeks ago, I discussed the nexus between nonprofit housing and displacement in more detail, arguing that a policy that protects existing residents is essential to build political support for adding more housing in L.A.—something we desperately need in the midst of a historic housing shortage and a record-low vacancy rate around 3 percent.
I'd like to explore this idea a bit further, looking specifically at the role of nonprofit housing and how a limited mission of serving tenants evicted by the Ellis Act would be a great, low-risk place for such an organization to begin its work.
To set this up a bit: Now when a rent-stabilized tenant is evicted to make way for redevelopment (usually through the Ellis Act), they can end up paying much more for rent in their next unit, living in a considerably lower-quality one, or leaving the city altogether. Each household usually gets a relocation payment between $7,800 and $19,500 depending on their income and how long they've lived in the unit, but this can run out very quickly when you're paying $500-plus in extra rent every month. The relocation payment is not an adequate solution and there's probably no realistic amount of money that would be. The issue is one of stability and when tenants are evicted from rent-stabilized units, that stability is lost.
This irrevocable decline in quality of life is why tenants fight back against redevelopment, and why they're justified in doing so. They deserve better and it's not their responsibility to sacrifice so much for someone else's benefit. If we're going to push for increasing the pace of new housing development (which we should), we also need to be fighting to ensure that the benefits of that development are shared by existing community members. It can't be the pro-housing people arguing for more housing versus the anti-displacement people arguing for preservation, each pursuing their separate, contradictory aims. It has to be both groups working together to create and enact changes that increase development and reduce displacement—win-win solutions.
An Acquisition-Based Model
By shifting some affordable housing resources away from new construction and into acquiring existing multifamily buildings, we get a lot more for our money and can own properties in virtually every neighborhood in Los Angeles—no need to worry about NIMBY politics in certain upscale 'hoods because the buildings are already there. By renting most of the units at market rates, about 20 percent of every building could be subsidized with no need for ongoing financial support, and unlike most affordable housing built today, the units could be made available to low-income residents not for 30 or 55 years, but permanently. The many, many benefits are outlined in greater detail here and complement the argument made by Alan Mallach on the Shelterforce blog.
The downside to this policy is that it's almost completely novel. Although we're already spending a lot of money on affordable housing construction, switching to acquisition, even partially, would be a big shift. Getting policymakers to change the way they do things will be difficult, and getting the money lined up will be a major hurdle, especially before the model is proven.
To quell the naysayers and skeptics, a nonprofit with a more limited mission might be the best way to get started—specifically, a nonprofit focused on maintaining a stock of multifamily housing that would serve those displaced by Ellis Act evictions. Most of the tenants in the nonprofit's buildings would be people paying market-rate rents, but when residents from a demolished or converted building were evicted, the nonprofit would reach out to them and offer a unit in one of its buildings—a unit in the same general vicinity, with similar features, at the same rental rate, and rent-stabilized, just like the home they came from.
How would the nonprofit afford this subsidy without financial support? A few ways: First, since the organization wouldn't be seeking a profit on its investment, but would still be operating most units at market rate, the rent surplus could be used to subsidize tenants relocated from Ellis Act properties. Second, the nonprofit could require that participating residents hand over a large share of their relocation payment. Out of the $7,800 to $19,500 they received from the property owner, perhaps they could keep $3,000 for moving expenses and incidentals, and the rest would go to the nonprofit to fund their mission. (If the tenant left the nonprofit early or for any reason, they could have a prorated share of the payment returned to them. To be clear though, the size of the relocation payment would have no relation to how long the tenant could stay in the nonprofit housing; once they moved in they could stay for as long as they like at their stabilized rate.)
Additionally, since the goal would be for the nonprofit to own thousands of units, with buildings throughout the city and within each neighborhood, the relatively small number of people evicted by the Ellis Act each year would not be a burden. About 1,300 rent-stabilized units have been lost each year since 2001, not all of them as a result of the Ellis Act, and not all evicted tenants requiring support when moving to their next home. Further, even some who would benefit from support would only require a subsidy worth a few hundred dollars a month, perhaps allowing them to pay $1,200, for example, rather than a market rate of $1,400.
About 20,000 rent-stabilized units have gone off the market since 2001, but only a few thousand since 2008. Source: Los Angeles Times.
How to Pay For It
This all begs the question: “Who pays?” Multifamily rental housing is a pretty safe investment, but it still requires some initial capital investment, even if you can cover 80 or 90 percent of the cost of acquisition with a bank loan or other form of debt. Whoever invests that remaining 10 percent to 20 percent of equity will expect a return on their money, so the whole “stop giving away profits and turn them into subsidies” idea doesn't quite hold up without a different approach.
Here are a few potential options:
1. Private Capital: One option is to simply go the traditional route and partner with an equity investor who expects a relatively high percentage return on their investment. The nonprofit would hold the property and operate essentially exactly the same as a for-profit owner during its first several years, paying the expected returns to the investor. Since the nonprofit isn't relying on public or philanthropic dollars, it doesn't really have any obligation to do otherwise until its financially feasible to do so. After a few years, as property values increase and loan principal declines, the nonprofit can cash out its equity and buy out the investor. At that point, they can begin offering subsidized rents to some tenants.
This is the least desirable option because it delays the efficacy of the organization (though only temporarily), but even if subsidies are not available right off the bat, it protects the acquired buildings from “value-add” improvements that raise rents or leads to condo or hotel room conversions.
2. Ellis Act Relocation Payments: Following up on the idea introduced above, relocation payments made through the Ellis Act could help support the equity portion of the multifamily acquisition. Displaced tenants would turn over between about $5,000 and $15,000 from their relocation payment, which could then be used for future acquisitions or to buy out the high-cost private capital (that is, the part of the investment that expects a large return).
3. Philanthropy: Although philanthropy would most likely not be a good long-term source of funding, it could help seed initial acquisitions that would help prove the model. Even participating as an equity partner with limited returns (rather than a purely philanthropic contribution) would be beneficial since it would still allow the nonprofit to start on its mission of serving displaced residents immediately.
4. Social Impact Investment: Right here in Los Angeles there's a firm called Turner Impact Capital that's working to acquire and preserve workforce housing in the city. While they still expect returns of 6 percent to 12 percent on their investments, their goal is to keep the housing they acquire affordable to low- and moderate-income households. In some ways, their goals align closely with what I'm discussing, only without the specific focus on re-housing displaced residents. Identifying individuals or organizations willing to accept a lower return on their investment in return for positive press, or plain ol' good vibes, could be a way to fund acquisitions that would still leave some wiggle room for these kinds of subsidies.
5. Corporate / Limited-Return Investment: Somewhat related to the option above is the idea of looking to large businesses for help. Given how much of a challenge it is for workers in expensive coastal cities to find affordable housing, business and tech firms in particular have begun turning their sights toward housing. In just the last few days, Facebook announced its intent to build 1,500 housing units in the Menlo Park area for the general public. Meanwhile, Apple has a $200 billion stockpile of cash, though most of it is overseas.
Businesses such as these could build a lot of goodwill by investing some of their money in partnership with a nonprofit housing acquisition organization, allowing the nonprofit to fulfill its mission and accept only a nominal 2 percent or 3 percent return on their investment—enough to cover inflation basically, but not really earn a profit. And unlike new construction, which is risky as well as politically contentious, investing in acquisition through a nonprofit would be financially and politically safe.
6. Public Support: In the long run, after proving that this model can work, a whole host of potential public funding sources and incentives could open up: property tax abatements on subsidized units, access to low-interest and/or tax-free loans, funding from the Affordable Housing Trust Fund or in-lieu affordable housing payments from market-rate developers, Low Income Housing Tax Credits (LIHTC), etc. When we talk about the public costs of affordable housing construction we often focus on the costs at the city level, which in L.A. are about $100,000 to $150,000 per unit. When we account for all the other different subsidies and funding sources at different levels of government, however, the number is probably closer to $300,000 per unit. Acquiring existing properties could be done at a public cost closer to $30K to $50K per unit.
We need to build a lot more housing in L.A., but right now we're doing a very poor job of creating it without hurting existing residents. Those meaningfully harmed through direct displacement may be limited in number, but their suffering is real and, more to the point of this post, it's avoidable. With respect to displacement, we need a development policy akin to the Hippocratic oath: “first do no harm.” (And no, losing your view doesn't count as harm. A lot of the complaints about new development amount to little more than “I've got mine, screw you,” but displacement is one of the few that cannot and should not be brushed aside.)
A nonprofit acquisition program like the one described above would address that harm as directly as possible: If you're displaced by new development, you can stay in your neighborhood and your rent won't go up. Yes, you'll need to relocate to a new unit, and yes, that's a hassle. Unfortunately, a policy that prevented redevelopment altogether would be disastrous for regional affordability, as well as our evolution toward a more walkable, transit-oriented, economically sustainable city. But you won't be forced to leave your community, and when new amenities arise from redevelopment, you'll get to share in them.
In the short term, a nonprofit with the limited mission of serving Ellis Act-evicted residents would place a foothold into the operating multifamily housing market. It would help those most visibly impacted by development and hopefully quell some of the most strident (and most legitimate) opposition, allowing more projects to be built and more market-rate and affordable housing to come onto the market.
In the long term, the nonprofit's foothold can grow to become a significant share of multifamily housing throughout the region. After proving its value with displaced residents and their allies, the program can begin drawing upon public funds and incentives. This in turn would allow it to expand its mission, acquire many more units, and offer lower rents to a larger share of its residents.
There is no principled reason that multifamily housing, once built, should primarily be operated for a profit. A nonprofit organization could do the job just as well, in most cases, and could weather the ups and downs of the housing market with far more stability. Crowding out private investment in existing housing and directing it toward new development should be a goal that we all share; placing an emphasis on protecting existing residents is the kind of win-win approach we'll need to get there.
(Photo credit: An ideal building for acquisition and preservation. Located in Koreatown, part of a 90-unit complex selling for $193,000 per unit, and high enough density that it is unlikely to be targeted for redevelopment in the future. Courtesy of the Better Institutions website).