“Affordable and Sustainable Housing: oxy-morons in today’s

1. “Affordable and Sustainable Housing: oxy-morons in today’s environment? Using market forces to drive sustainability” NIFA 2005 Affordable Housing ConferenceJanuary 25, 2005Shekar NarasimhanManaging PartnerBeekman Advisors

2. Overview of Affordable Multifamily Housing • What’s Multifamily Housing? • What’s the stock? • Regulators & Providers of Allocations/Subsidies • Issues to Consider • Perhaps easier said than done: Sustainability • What does this mean to Housing Policy in 2005?

3. Housing Stock: Multifamily vs. Total U.S. Multifamily Rental Sources: Ann Schnare, Kent Colton et al. – adapted from the 1999 American Housing Survey

4. Who lives in Multifamily Housing?There are some surprises: • 3.5 mm renters earn 150% of area median income • 15% of renters remain 4+ years in same apartment • 16% of renters are >65 years of age • The fastest growing segment makes >$50k per year • Average apartment size in square feet grew in the ‘90s by 8% • Households pay 13-15% of their income on transportation • However, those making minimum wage pay 36%

5. What’s the Stock? 46 years 28 years Source: Ann Schnare and 1996 Property Owners & Managers Survey

6. What’s the Stock?Now let’s talk rural • Approximately 5.5 mm renter households: 24% of non-metro stock • Median household income for nonmetro renters is $20,500 (versus $36,800 for nonmetro owners) • We recently studied is the USDA Section 515 portfolio which encompassed 15,899 properties with 434,296 units (As of Nov. 1, 2003) • Existing tenant base is 58% Elderly or Disabled • Average property age is 23 years; 27 units per property • Average annual tenant income is $9,075 • 74% of the units have either RA or §8 assistance • 92% of the properties require additional capital improvements funding

7. What’s the Stock?Tax Credit Driven Units • Over the last 7 years, on average, we have been building 300,000 units of 5+ housing per year, however real new additions amount to 100,000 units per year. Total Units Built 300,000 Less: Condos for Sale 50,000 Luxury Apartment Units 150,000 Tax Credit Driven 100,000 Less: Demolitions and Conversions 150,000 Real New Rental Additions 100,000

8. per unit average $65k $100k $300k Tax credit per unit average (000’s) What’s the Stock? Construction Cost per Unit • Cost of Construction varies a great deal: range is $65,000 to $300,000 per unit. The average is close to $100,000 per unit, approximately the same as tax credit deals . • In some markets (LA, SF, DC, NY) it can take up to four years and $1.5 mm to get from the date of land option to the date you can start leasing the property.

9. Regulators and Providers/Allocators of Subsidies • Rife with Conflict? • Regulators and Providers/Allocators of Subsidies include: HUD, USDA, GNMA, FHA, GSEs, FHLBB, State HFAs, and PHAs. • Typical support: Grants, tax-credit equity, tax-exempt bonds, insurance on debt, tenant or project-based income subsidies • Other forms of support: tax abatements, density bonuses etc • Is the result confusion and duplication? • Is there a built-in bias to spread the resources unrelated to need?

10. HUD GSEs FHFB PHAs OFHEO Partnership FHLBBs Programs FANNIE & Private FREDDIE FHA Mortgagees Bond Issuer & Debt Provider IRS HFAs GNMA CDBG HOME Other Sec 42 Sec 8 Units LIHTC LIHTC Administrator Competitor Regulator Regulators and Providers/Allocators of Subsidies

11. Regulators and Providers/Allocators of Subsidies • Is this system inefficient and confusing? YES • What does it cost? A LOT • Could it be more rational? PROBABLY NOT • Does it lead to resource allocations unrelated to need? YES • While certain high-growth markets have gone begging, others are getting over-built

12. Issues to consider in Affordable Housing • Sec 42 LIHTC, the only real affordable rental housing production program of the last 17 years is working but is it serving all the need? Can it distort smaller markets? • Prices for Sec 42 credits have gone up as capital has entered the market but there is still a lack of buyers for small and rural projects: can consortia work? • What really happens in year 15 (2002 onwards) and what is the long-term impact of 30-40 year affordability restrictions and 100% targeted projects? • From prior experience we know you cannot adequately reserve for year 10/15/20 capital improvements from project cash flow.

13. Issues to consider in Affordable Housing (continued) • Should every subsidy production program have an automatic extension or expect new subsidies for replenishment? • What are viable exit or recapitalization strategies that can be built in up-front? • Is there a built in non-profit bias and is that good? • Subsidy/unit: Comparing single family and multifamily. Do we lose the consensus at $150k/unit? • Goal is Sustainability: Affordable in perpetuity

14. Perhaps easier said than done: SUSTAINABILITY Let’s try all the usual answers out Mixed-income Mixed-use Resident Ownership There are real 'discipline' advantages to a mixed-income deal (the market or close-to-market units have to be competitive and stay competitive), but it's also easy to delude yourself about feasibility. Everyone gets excited about how much better their deal will make the existing marginal neighborhood, and thus convinces themselves that unlikely good things will occur because of it. On balance, introducing mixed-income does not dramatically improves the odds that the deal will be sustainable but it is one way to approach the problem.

15. Perhaps easier said than done: SUSTAINABILITY Let’s try all the usual answers out Mixed-income Mixed-use Resident Ownership A mixed-use deal is higher risk in the first place, if only because two market judgments have to be right, instead of just one. Moreover, the residential component usuallyneeds to be in place before the retail or office component becomes viable. So it's not typical that you can do both residential and commercial at the same time and have it succeed. Mixed-use is not a panacea for sustainability.

16. Perhaps easier said than done: SUSTAINABILITY Let’s try all the usual answers out Mixed-income Mixed-use Resident Ownership Resident ownership, if you look at the history of converting rental to ownership, is possibly one of the worst possible ideas. If you want to do affordable ownership, do it from the get-go, with an appropriate physical product (detached, duplex, townhouse) and with a community land trust (or equivalent). "The American Dream is not a limited-equity co-op."

17. What does this mean to Housing Policy in 2005 and beyond? • We need more supply, particularly for those in the middle (60-120% of median income): working families with modest incomes. • This supply cannot be built without some subsidy because of cost. • In urban markets, we should focus on in-fill locations to lower transportation costs. • We MUST focus on rehabilitation and revitalization because of the aging of the current stock.

18. Short & Long-term Ideas on Affordability & Sustainability • Create a liquid market for the ownership and management of small projects • Allow for a broader band of tax credit allocations per project from 4-13% • Provide set-asides for rural and for preservation • Increase usage of FHA 221(d)4 and RHS 538 by financial institutions • More local/State control but less built-in conflict • More discipline overall. • USE MARKET FORCES

19. Sources • Joint Center for Housing Studies at Harvard University • National Multi Housing Council • Kent Colton, Kate Mulligan, Ann Schnare, Denise DiPasquale, Larry Dale • Freddie Mac • Federal Reserve Board • American Housing Survey 1999 and 2001 data • 2000 Census of Population and Housing

20. Conclusion • “Fundamental things apply as time goes by.” • -pianist in the film “Casablanca”

21. “Affordable and Sustainable Housing: oxy-morons in today’s environment? Using market forces to drive sustainability” NIFA 2005 Affordable Housing ConferenceShekar Narasimhan,Managing PartnerBeekman AdvisorsJanuary 25, 2005