It’s a health crisis unlike anything seen before. More than 3,000 people have died in the United States so far. A record 3.3 million people filed for unemployment benefits during the week ending March 21 with millions more expected to follow. And, much of the country remains under shelter-in-place orders, attempting to slow the spread of the virus but fearing the worst still to come.
While the situation continues to change, Affordable Housing Finance asked several industry leaders to share what they are seeing at this time and to look ahead at what may be coming.
The participants are:· Beverly Bates, senior vice president of development at The Community Builders, a leading nonprofit affordable housing organization;
· David Cooper Jr., managing director of Woda Cooper Cos., one of the nation’s most active affordable housing developers;
· Amy Glassman, a partner in the real estate practice at the Ballard Spahr law firm;
· Richard Price, partner in the affordable housing and real estate practice at the Nixon Peabody law firm;
· Janet Stearns, vice president of real estate development and asset management at Project HOME, a Philadelphia-based nonprofit; and
· Charles Werhane, president and CEO of Enterprise Community Investment, a leading provider of debt and equity for affordable housing and community development.
What are your initial thoughts on affordable housing at a time when we are struggling with the coronavirus outbreak?
Stearns: In a large city like Philadelphia, with many citizens living on incomes at or below the poverty level, the recognition of the need for affordable housing is critical and constant—ever present. During the coronavirus outbreak, the lack of enough affordable housing becomes even more urgent and visible to the community. This lack of an adequate supply of affordable housing adds exponentially to the challenge of responding to the virus outbreak. How does one who has no place to call home “shelter in place”? Project HOME has been working with other partners in Philadelphia to confront these challenges. In addition, many individuals with low incomes may be currently housed but not in stable affordable housing and, in times of crisis, are even more at risk of becoming homeless.
Bates: Times like these are a reminder that affordable housing is one of the most basic of human needs. The gap between need and supply is never more evident than when our collective well-being is threatened and those with limited resources find themselves least able to weather whatever the “storm” is. The homeless, those struggling to make ends meet, seniors, and others with fragile safety nets can fall through those nets if we don’t rally to protect them. The capacity of the staff of our affordable communities to support people who need extra help through rent and eviction relief, food support, information sharing, and service coordination will be severely tested but will also be an essential part of our ability to get through this together.
What has been the coronavirus’ effect on affordable housing and its finance markets, and how are syndicators, investors, and lenders reacting so far?
Cooper: The situation is highly fluid and changes at least daily. We have heard of some lenders leaving the lending market due to liquidity issues, but the vast majority remain committed to affordable housing—even those who have placed a hold on other real estate lending. We are hearing of construction rate debt floors in the 3% to 4% range.
Bates: The full impact is still unfolding, but to date we have seen the following:
· Slowdown of construction projects caused by increasing labor and materials shortages creating risk of meeting placed-in-service deadlines and potential cost overruns;· Shutdown of two construction projects due to government action and/or COVID-19 quarantine events;
· Staff challenges in traveling to and supporting construction sites while maintaining personal health safety;
· Unique challenges in maintaining safe space and “distancing” at occupied rehab sites;
· Inability of building department and lender/investor/funder inspectors to get to construction sites to inspect projects and approve requisitions;
· Slowdown in rent-up activity and traffic;
· Huge stress on property management and resident services staff to meet resident needs and manage/maintain properties while also observing shelter-in-place and other personal health safety measures;
· Delays in competitive funding rounds for pipeline projects;
· Delays in entitlement processes and other events requiring public approvals; and
· Potential financial exposure associated with lost or delayed rental income, capital calls to pay construction costs and developer’s fees, and potential delays in new closings.
Thus far, our investors/lenders/public funders have been extremely supportive and responsive to the need to keep funds flowing, inspections happening, and to try to maintain business-as-usual. We have not yet seen significant delay in funding existing deals nor moves to reprice equity on pipeline projects. It is important to keep communication with all team members open and to have a clear plan for assessing and managing the impact of delays and cost overruns.
Werhane: On the equity and financing side, Enterprise isn’t seeing a significant change in investor attitude, but obviously we’re watchful. The initial wave of impact is primarily being borne by developers and renters.
The construction pipeline has slowed as developers face delays and new impediments. Things like permitting and building inspections are harder to navigate as local governments are shutting down. The result is delayed timetables or missed deadlines to place properties in service.
On the resident side, hourly workers are being disproportionately affected. As hours are cut or jobs eliminated, low- and middle-income renters are concerned about making rent payments.
Developers are concerned that late or missed rents will impact their ability to make debt service payments. The government-sponsored enteprises (GSEs) recently announced a forbearance program for multifamily loans, which will help. We need other lenders to consider the same approach.
Glassman: This situation creates uncertainty for all of us, in many areas, and affordable housing development is no exception. We are seeing affordable housing deals continue to close and be scheduled to close in the coming weeks. However, some investors, syndicators, and lenders are rethinking financials and business terms so as to better insulate themselves and the deals against further uncertainty. For example, for one project we are working on, an investor is requiring additional contingency to address situations in which there is a construction stoppage or materials shortages. On other projects, developers are trying to push back first-year credit delivery.
What do you think will be the long-term effect of COVID-19 on affordable housing?
Werhane: We’re still at the front end of this, so it’s hard to assess the magnitude. But I think it’s safe to say we are going to see a paradigm shift in the way the industry thinks about delivering quality affordable housing and health care together. Research has shown the health and economic benefits of pairing housing and health. In situations where more vulnerable residents are unable to leave their homes, or don’t have transportation to see a doctor, the need to strengthen the linkage between health and housing becomes clearer. Last year, Enterprise announced a $250 million investment over five years to better integrate health into affordable housing. If there’s a silver lining, we hope this crisis incentivizes more investors and developers nationwide to make housing linked to health a priority.
Bates: Perhaps it will serve to underscore the importance of affordable housing to our national safety net and focus legislators on the need to increase production and operating support. If the government response is as we hope in terms of changes to the low-income housing tax credit (LIHTC) program and investment in affordable housing, we think that COVID-19 does not have to result in long-term damage to the industry or the people who rely on it.
Cooper: It is too early to say what the long-term impact will be, but in the short term, we are seeing an immediate rise in demand for units.
Price: No one knows the long-term effect just now, but what is clear is that the concerns in some portions of the industry about appropriation risk from federal subsidy programs are vanishing, just like they did after the events of 2008. The federal government is the lender and rent payer of last resort. We will see the trend that develops over the next 60 days as the CARES Act contains an eviction moratorium that reaches widely across the affordable housing industry but without any specific revenue help to owners to offset those effects. There is a wide mortgage forbearance provision, but it helps only a subset of the properties affected by the eviction moratorium and for a shorter time period. If unaddressed by policy makers this will drain capital from owners needed to pay mortgages and keep up with maintenance.
Glassman: There has been an increasing trend to recognize the intersection between health care and housing, and the need for both of the foregoing in order to create positive health outcomes. I hope that one favorable outcome of this pandemic is further recognition of this need for our most vulnerable low-income populations. Ideally, we also would see funding sources work better together to streamline service provision and housing and better allow for provision of health services in affordable housing developments. A negative outcome of this pandemic is one we are seeing already: shocking increases in unemployment. Unfortunately, the longer the pandemic lasts, the need for more affordable housing will only increase. Prior to the pandemic, only one in four households who needed affordable housing had access to it. I shudder to think about what the new statistic may be in a few months. However, if the government, the private market, and housers can respond quickly and meaningfully to this crisis, maybe we can actually create more affordable units and start to make a dent in the vast need for housing.
What is the biggest threat to the industry?
Werhane: The biggest threat right now is industry capitalization. To the extent there’s a slowdown, whatever is delayed or lost in production is kicking an existing problem down the road. The housing affordability crisis still exists in the United States. A slowdown in production or capital as a result of COVID-19 is only going to exacerbate the housing affordability challenges that communities were already facing.
Bates: Uncertainty is always a problem for our and many industries. If that uncertainty is responded to by an unwillingness of government/ investors/lenders/funders to keep the pipeline moving than production will come to a halt just when we need new affordable units most. Thus far, government seems to be acting responsibility in terms of maintaining rental subsidy support and encouraging non-eviction measures to protect vulnerable families, but the threat to the operational viability of our developments is still a major concern.
Cooper: Lack of capital.
Price: The same threat to small and medium businesses is the same threat to affordable housing. In the end, housing providers are for-profit, limited dividend, and nonprofit entities delivering services and housing to residents. In the near term, widespread concern among residents about the ability to pay rent is the biggest threat.
Glassman: The near-term need for more affordable housing is only going to increase and could overwhelm the industry. As investors and lenders try to prepare for some of the unknown, pipeline deals may be delayed, and we will likely need to find additional sources to cover financing gaps created by lower LIHTC pricing or similar adjustments. In 2008, the government stepped up to help fill those gaps. I suspect we will need a similar intervention now if we are to try to even preserve the status quo of affordable housing; a more significant intervention will be needed if we try to increase the supply of affordable housing to address the growing need.
Do you think affordable housing production will be affected? Why or why not?
Bates: Yes, for all the reasons described above.
Cooper: I think that the lack of sufficient affordable units will be exacerbated and additional resources for higher production will be made available.
Stearns: With emergency orders in place, the ability to visit and inspect projects and maintain the supply chain for projects in process is challenging. Similarly, with limits on the ability of boards of funding entities to meet to approve financing resolutions, the financial closing of new projects will be delayed. We are working to mitigate the impact of that delay and hope that if a project is still able to start construction with a month or two delay, that there will not be significant impact and that we are able to continue to comply with all LIHTC regulations and requirements.
Glassman: Yes and no. We are seeing, in many states with stay-at-home orders and similar government actions, that affordable housing construction is subject to various exemptions. As such, the government will not stop production. We are concerned about work stoppages and supply chain issues, which would obviously impact production in the short term. However, I am also hopeful that government will help prioritize affordable housing production, through increased capital funding and interventions to offset any decrease in LIHTC pricing, to help address the growing need for housing in the midst of the pandemic and a projected economic downturn.
Price: Yes, because concerns about liquidity in the wider market will make investors more cautious until it is clear that there is a bottom to this financial market.
What is your biggest concern at this time?
Stearns: Progress toward ending the cycle of poverty and homelessness is at risk—poverty and homelessness may become more severe as a result of the coronavirus crisis. Just as the consequences of the lack of sufficient medical supplies are severe in this crisis, so are the consequences of the lack of sufficient supply of affordable housing severe and contribute to the severity of the crisis.
How is Project HOME responding?
Stearns: Project HOME has one permanent supportive housing development that is in construction and nearing completion and additional projects preparing to close on financing and in the pipeline. We are working closely with our government partners to try to plan for safely continuing production and financing of affordable housing developments as soon as possible. While there may be some delay in production, we are working with all of our partners to continue to work to produce new affordable housing.
What lessons learned from the 2008 financial crisis or the LIHTC market shakeup in 2017 could apply now?
Werhane: We really don’t have a precedent for this. With so many variables at play, it’s hard to predict the extent to which the coronavirus will affect communities and the housing market. What we do know from dealing with crises in the past is that the speed and effectiveness of our collective response now will determine how severe the impact will be.
Cooper: I think that the situations are vastly different so it is hard to draw comparisons. The situation in 2008 was driven by a near collapse on the financing side. The COVID-19 crisis will be driven by an unprecedented and rapid increase in unemployment. Probably the main lesson to be remembered is to stay calm, make good strategic decisions, and remember that in some period of time this will be behind us.
Bates: Important for all players, particularly lenders and investors, is not to press the panic button and shut down funding until the full impacts of both the economic slowdown and the government response is fully known. While slower to arrive than many would have liked, the stimulus measures enacted post 2008 did generally have the desired effect and certainly helped to stabilize our industry. Proposals intended to strengthen the value of both the 4% and 9% LIHTC credit and to make significant capital/soft funding available to the industry could have significant positive effects in allowing us to minimize production interruptions and reduce development and operating deficits.
Price: Right now, the biggest lesson is that the federal government should continue to use its power to restore confidence to the markets and help people see a bottom to the market. The CARES Act, notwithstanding problematic provisions, as noted above, is a good start, but more should be done. People need to see that they have a bottom, they have money incoming. Individual tax payers should receive three more rounds of checks over the next three to six months. Businesses, and taxpayers who are owners of pass-through entities, should receive a broad-based tax credit based on the 2019 tax returns, say 40%, with two-thirds of that able to be exchanged for funds from the Treasury. This is not an affordable housing issue. Rather this is the issue of injecting capital into the economy to roughly make up for at least one lost fiscal quarter. The Washington Post published an article by Jared Bernstein on March 16 discussing a similar point.
Glassman: In 2017, the private market had to address the LIHTC market shakeup. For example, many developers deferred developer fee or tried to negotiate better construction contract deals to deal with address decreased pricing. But in 2008, the government had to step in with short-term programs to help move projects forward. This involved loans to projects that had funding gaps as a result of lower equity pricing as well as direct capital grants to public housing authorities for “shovel-ready” projects. We should not forget that affordable housing construction creates housing for low-income families, but it is also a jobs program that can help stimulate the economy. I am hopeful Congress will consider similar measures in the fourth stimulus bill.
What steps can developers take at this time to keep projects moving forward or otherwise help their businesses?
Werhane: Developers and property managers are focused on residents’ health and safety. Once those immediate needs are addressed, my advice is to keep in contact with lenders and syndicators to work together and come up with solutions. The affordable housing industry has always been creative, and we can weather these challenges together if we bring all parties to the table, including the public and private sector, philanthropy, and investors. The way we solved problems in 2008 and 2017 was by bringing everyone together to find solutions that worked. We need to do the same now.
Bates: We have employed a cross-functional (development, property management, asset management, resident services, HR) approach to evaluating and managing risks on a daily basis. We have respected all shelter-in-place and/or distancing and hygiene guidelines while continuing to provide essential staffing and support to residents of our communities and to those involved in our construction sites. This has required a rapid set of changes to daily work practices, use of technology, and communication across sites and functions. We are attempting to keep our businesses working while acknowledging that it is not business as usual for most of our employees and residents. We are also undertaking a review of every development in our active pipeline to identify risks, reforecast milestones and cash events, and contribute to policy and advocacy conversations about what government interventions would be most useful.
Cooper: Help governors understand the escalating need for affordable housing so that construction is permitted to commence and continue. Implement strong hygiene practices at construction sites to enhance workforce safety.
Stearns: It’s essential to work closely with your government and investment partners and other affordable housing developers and organizations. The Project HOME community, through our MPower Partnership, often reminds ourselves of the “power of we”—never has this been more important. Philadelphians are pulling together in this time of crisis and are mindful of how affordable housing is of fundamental importance to all of our citizens.
Price: Check with their capital providers, confirm their construction timelines and ability to complete construction, build in extra time to complete (might as well confront that reality now), and confirm with the title company the ability to get insurance and record (title companies have solutions but needs to be talked through).
Glassman: Ask Congress to intervene with loans and grants, similar to 2008. Since states are determining what essential businesses may continue even during stay-at-home orders, work with your executive branch to confirm that affordable housing construction is essential and may continue.
Be proactive with the various parties to transactions. Contact financing partners to determine how they are approaching COVID-19 issues. See if they will delay or defer fees to help projects move forward to closing. Build in some flexibility to account for uncertain times. Be proactive with relevant city officials who will need to inspect completed projects to issue certificates of occupancy; make sure you know when you will need them and that they will be available.
In the very near term, we are also looking into the practical challenges associated with closings amidst social distancing and stay-at-home orders: Are land records recording offices open? Will title companies insure gaps associated with delays? How will you coordinate original signatures and notaries for recorded documents? Will the parties to a transaction agree that original signature pages are not required except for recordable documents? These have all been resolvable issues in trying to move transactions to an April closing but will need to be carefully addressed in the coming months.
Werhane: This pandemic is challenging all aspects of the affordable housing industry, but our mission to serve low-income and vulnerable populations cannot change. The whole sector needs to draw on its collective experience and get creative in order to tackle these challenges and minimize the impacts on the communities we serve.