Identifying SMMF Properties for Preservation

Introduction

This brief discusses the identification and evaluation of small-to-medium multifamily (SMMF) properties for the purpose of rehabilitating and preserving their affordability. This is intended to provide guidance to existing owners of SMMF properties and those interested in acquiring existing SMMF properties for the purpose of preservation. The information may also be helpful for public agency staff and others in the real estate industry who are interested in understanding the factors that make some properties more or less feasible to preserve.

Considering Subsidized vs. Unsubsidized Properties

There are many uncertainties for SMMF properties, including what is deemed a good opportunity to developers or investors. Unsubsidized SMMF properties exist in a largely privately-owned and unregulated environment with few systems focused on supporting or tracking this market segment as it relates to affordability to guide decision making and public policy. SMMF properties, therefore, are typically traded between sellers and buyers who have adequate resources and who are motivated by profit more than preservation of a dwindling supply of affordable options for residents. Preservation activities for SMMF properties are therefore highly competitive and frequently driven by opportunity, requiring a willing seller who may have to wait longer for a transaction to close and a qualified buyer, often a community-based nonprofit, small local property owner, or other similarly mission-driven entity.

Subsidized properties are regulated and thus more easily tracked through national public databases, like the National Housing Preservation Database, or local databases such as Colorado’s Affordable Housing Preservation Database that is maintained by the Colorado Housing and Finance Authority. They also have defined affordability periods and expiration dates associated with the subsidies and typically carry specific requirements such as tenant relocation conditions and alignment with public policy priorities. They may also have more available information about the current residents, property conditions and operating and maintenance expenses. The greater level of information available, existing ties to a public interest, and the predictability of when a sale or repositioning is likely to occur (e.g., coinciding with a subsidy expiration) enables preservation activities to be more driven by strategy, policy and compliance on a thoughtful time frame compared to unsubsidized properties.

As a result, there’s a need for a common decision-making framework to help identify and evaluate both property types. These factors can be used by developers, local elected leaders, municipal staff, and housing advocates to identify properties at risk of loss, understand developer interest in them, and strategize to preserve them. There are tradeoffs with preserving both types of properties that can be vetted during the property identification phase. On one hand, subsidized properties come with more compliance requirements but also more opportunities to use mainstream housing resources (depending on overall size and ability to achieve economies of scale). On the other hand, unsubsidized properties have fewer compliance requirements, depending on their use of financing, but carry more risk and uncertainty because they are not as highly regulated.

Key Factors in Identifying and Evaluating Opportunities

This section discusses five key factors that can be used to identify and evaluate SMMF properties for the purposes of preservation – property characteristics, preservation feasibility, local market conditions, neighborhood access, and the potential to advance community and organizational goals. While the details and information available may vary somewhat between subsidized and unsubsidized properties, viewing properties through the lens of these five factors allows for a consistent evaluation process. Each of these factors is discussed in more detail below.

Factors for Property Evaluation and Example Considerations

The Impact of Market Conditions

Highly Competitive Markets

In competitive markets, affordability is a significant driver of preservation, and a key focus of the public sector and mission-aligned housing providers is to safeguard the current affordability before it is lost. This could be a concern across an entire jurisdiction or within a certain neighborhood or portion of a jurisdiction where the market is more competitive. In these markets, unsubsidized affordable properties are typically the highest priorities for preservation because they are the most susceptible to rent repositioning or demolition/redevelopment, resulting in the loss of affordability. However, those with expiring subsidies may also be susceptible to market-rate conversion and thus should be a priority.

Those operating in high-competition markets must be able to act quickly in acquiring properties, which for mission-aligned actors creates a need for robust capacity at multiple levels. The organization itself must be able to respond nimbly to opportunities, such as having the ability to quickly and accurately determine the feasibility and risks of preserving a property and understand key regulatory constraints when the opportunity arises. Similarly, system-level actors must create policy and financing vehicles, such as acquisition funds, to give mission-aligned transactions a reasonable chance in the face of competition. This also emphasizes the need for good working relationships between these system-level actors and those acquiring the properties for the purpose of preservation (see Key Stakeholders in the State of the Market Brief for your market for examples of the types of system-level actors you should seek to develop relationships with).

Looking for off-market opportunities that do not face the same degree of competition can be a key strategy in preserving especially unsubsidized SMMF properties in these markets. To identify them, use real estate data, such as CoStar, that classifies property condition, experience working in a specific neighborhood, and relationships with property owners and brokers. Place-based, mission-driven entities, in particular, are often well positioned to develop relationships with existing owners before properties come to market. Existing owners may have a preference for maintaining the affordability of the property and see the local focus and reputation of the organization as a positive factor for existing residents. Having a good relationship with a well-connected broker who sees the value in your mission can also provide good leads for off-market opportunities. See Working with Property Owners in this brief for more information.

Local public and community support is another key vehicle for giving mission-aligned actors a competitive edge. Leveraging local right of first refusal policies (such as the one in Prince George’s County, MD) can eliminate competition altogether from high priority properties (see the Enabling Environment brief for additional information). Similarly, support among elected leaders and public agency staff may be required to make regulatory changes or approvals needed. They may also be able to sway property owners who are deciding between multiple acquisition bids. Thus, a goal of preserving affordability in a neighborhood that aligns with public sector and community goals can improve the chances for successful acquisition where the public sector has discretion or influence.

Stable and Less Competitive Markets

In stable and less competitive markets, property condition typically drives preservation priorities more than affordability. A key focus for public sector actors and mission-aligned housing providers is to maintain and improve habitability and environmental quality that may be threatened by property deterioration.

The biggest challenges in these markets tend to be that properties may be in poor condition and rehabilitation needs are substantial, yet property values are frequently lower and offer lower financial returns. This impacts the financial feasibility of preservation that address the rehabilitation needs and may also make financing more difficult or expensive to attain.

On the other hand, these lower property values can also mean lower acquisition costs that, in some markets, can help to offset the higher rehabilitation costs. There may also be lower barriers to entry and less competition for organizations who want to take on preserving SMMF properties and providing high quality, affordable housing options for residents. While it may not be feasible to fully rehabilitate properties, high-importance improvements, such as those improving health and safety, can usually be accommodated to improve the condition of the property and resident quality of life.

It is important for those preserving SMMF properties in these markets to develop relationships with lenders, philanthropic funders, and other capital providers. While they will not face the same need for nimble acquisition funds as those operating in competitive markets, building these relationships will help organizations overcome stigmas associated with the market and help the capital providers develop a realistic sense of the needs and conditions in the community.

These markets also offer an opportunity for broader neighborhood revitalization strategies led by the public sector (or other system-level actors) that can, over time, increase the financial value and returns on the properties, which in turn enable more robust rehabilitation and property condition improvements.