Social Impact Investors Target Naturally Occurring Affordable Housing

The full article can be found here. 

By: Joe Gose

The struggle to provide an adequate amount of affordable housing to police officers, teachers, health-care workers and other low-to-middle-income workers has plagued communities for years.

Prior to the pandemic, 30 percent of U.S. households spent more than 30 percent of their income on housing, and nearly half of these cost-burdened households spent more than 50 percent of their income on housing, according to the Joint Center for Housing Studies of Harvard University.


A chronic shortfall of federal low-income housing tax credits along with lengthy and costly development timelines have contributed to the supply shortage. Meanwhile, conventional developers by and large have focused on building high-rent Class A and luxury projects to generate returns that justify lofty land and construction costs.

But value-add investors that renovate and raise rents at thousands of Class B and C apartment communities represent one of the biggest threats to the supply of workforce rental units, often referred to as naturally occurring affordable housing or “NOAH.” As a result, social impact funds have emerged to compete with value-add investors and preserve affordability for renters typically earning between 60 percent and 120 percent of area median income.

The funds have the ability to quickly strike deals and, in most cases, they generate annual returns of around 8 percent or higher over the long term. While that’s about half the return that investors in value-add funds expect to earn, it’s still competitive with core investment strategies, say proponents. What’s more, renter demand for workforce units is not correlated to economic conditions—a fundamental trait underscored by the pandemic.

“We’ve had three crises at once over the last year: a global pandemic, an economic crisis and a civil rights movement.,” said Bobby Turner, CEO of Santa Monica, Calif.-based Turner Impact Capital. “Any one of them alone would have been formidable but they have truly highlighted how impact investing can driver better risk-adjusted returns than other traditional investment strategies, if it is done well and done correctly.”

Turner Impact typically keeps rental rates affordable for residents earning from 60 percent to 100 percent of AMI, and other funds sponsored by the organization invest in charter schools and health-care facilities that support its tenants and surrounding communities. That approach drives renter satisfaction and helps maintain occupancy, Turner said. During the pandemic, it has collected 95 percent of its rental income across its portfolio, he added.

Turner Impact typically keeps rental rates affordable for residents earning from 60 percent to 100 percent of AMI, and other funds sponsored by the organization invest in charter schools and health care facilities that support its tenants and surrounding communities. That approach drives renter satisfaction and helps maintain occupancy, Turner said. During the pandemic, it has collected 95 percent of its rental income across its portfolio, he added.

OPPORTUNITIES IN PRESERVATION

To help preserve workforce housing in metro Washington, D.C. neighborhoods experiencing rapid rent increases, JBG Smith in 2018 launched the Washington Housing Initiative Impact Pool, a debt fund committed to NOAH preservation. The fund raised $114 million, and to date it has provided nearly $22 million in acquisition financing to preserve 1,151 affordable units.

In late 2020, the Impact Pool provided $6.7 million in subordinated debt to the non-profit Washington Housing Conservancy for the purchase of the Crystal House, an 825-unit property in Arlington, Va., near JBG Smith’s Amazon HQ2 development. Amazon, which has also made a commitment to affordable housing, provided the first mortgage. The deal features a 99-year covenant that requires 75 percent of units be available for residents earning 80 percent of AMI or less (about $90,000). Twenty percent of those are to be reserved for renters earning 50 percent of AMI or below.

“Preservation of the NOAH stock is important, but capital hasn’t been organized around it and people could not take a strike at it,” said AJ Jackson, executive vice president of social impact investing for Bethesda, Md.-based JBG Smith. “But these funds are the fastest and most effective way to preserve housing affordability because you can buy existing stock for somewhere between 50 percent and 75 percent of the cost of building new housing.”

NOAH Funds
The Austin Housing Conservancy purchased the 183-unit Melrose Trail in the city late last year. Photo courtesy of Austin Housing Conservancy Fund

High-net-worth individuals launched the Austin Housing Conservancy Fund in 2017 to address the growing housing burden on teachers, first responders, musicians and others amid the city’s booming economy and skyrocketing rental rates, said David Steinwedell, president and CEO of Affordability Central Texas, the fund’s sponsor. From 2012 to 2014 alone, some 7,000 NOAH units were taken off the market, according to the Austin Housing Conservancy.

The open-ended fund buys NOAH properties and stipulates that at least 51 percent of the units be reserved for renters earning 80 percent of AMI or less, he said. So far, Austin Housing has purchased four properties totaling 1,000 units for about $123 million. In its latest deal, the fund recapitalized a 183-unit complex, allowing the existing owner to retain some equity in return for preserving affordability.

Institutions and banks are now showing interest in the fund, as are corporations that are cognizant of how their success and growth in Austin is affecting affordability, Steinwedell said.

“I think people are seeing the NOAH strategy as a more secure investment when things go bad,” Steinwedell stated. “Our occupancy, tenant retention and collections have been above the market in the worst of times during this pandemic.”

In Twin Cities, some 1,300 NOAH units a year are losing their affordability due to value-add investment activity, according to Minnesota Housing, the state’s housing finance agency. To stem that loss, the Greater Minnesota Housing Fund created the NOAH Impact Fund in 2017 to provide equity to operators that buy and preserve workforce units. After deploying its capital to acquire more than 700 units in about two years, the organization launched a second fund, which is nearing $33 million in commitments, said John Errigo, acting manager of the NOAH Impact Fund.

The fund typically finances projects for 10 years and requires that owners reserve 75 percent of the units for renters earning 80 percent of AMI or less for 15 years. Because incomes are growing much slower than rental rates, however, the fund may lower the threshold to 60 percent of AMI, Errigo said. At the same time, the average price per NOAH unit in Twin Cities has increased to around $118,000, which is around $30,000 more than it was just a few years ago. That may require the fund to seek other capital sources, such as local government gap funding.

“That increase in prices certainly makes it challenging for buyers like the NOAH Impact Fund,” Errigo added. “Our secret sauce is that our lower cost of capital allowed us to compete on price without having to raise rents significantly, like value-add investors have to do. But as the price per unit goes up, the math doesn’t work as well.”

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