preserve rental homes: overview » introduction » create policy environment

Despite the wealth of state and local policy innovations and success, the volume of affordable rental homes preserved still falls well short of what's needed to keep our existing affordable housing, much less add to it. On one hand, preservation efforts have been stymied by a lack of information and a tangle of overlapping federal, state, and local policies and practice. On the other hand, growing market pressures and the absence of coordinated funding strategies that are quick and robust enough to compete with market-rate capital have made it harder to put together viable preservation deals. At a basic level, there are three fundamental problems that create the need for a systematic, comprehensive approach to rental housing preservation:

1. Incentives are misaligned. Current resources, incentives, and requirements tied to affordable rental properties do not adequately encourage or require owners to preserve long-term affordability or to sell to another owner committed to that objective.

2. Policies undermine "strong ownership". Current regulatory policies limit the ability of preservation owners to recapitalize, earn sufficient cash flow, and build a sustainable capital base from which to successfully improve, manage, and operate quality properties affordable to low- and moderate-income renters.

3. Current policies lack coherence. Regulations and programs are fragmented, cumbersome, often unpredictable and inconsistently applied. As a result, buyers committed to preservation ownership find it difficult and sometimes impossible to acquire properties that are at risk of loss from expiring subsidies, market-rate conversion, or severe deterioration.

There are many policies that states and localities can put into place to increase the likelihood that rental housing preservation efforts will succeed over the long run. For example, by giving residents of subsidized (or any) rental properties a right of first refusal to purchase a property that an owner puts up for sale, communities can empower residents to negotiate with owners and potentially facilitate the transfer to an entity willing to maintain the property over the long-term. To the extent it prompts owners to better maintain their properties, code enforcement can also be a tool for rental housing preservation. Still another important area is the set of policies that states and localities put into place with respect to nonprofit owners of affordable rental homes; policies that allow these entities to generate a meaningful cash flow can help them weather tough times and build capacity to investigate the next preservation transaction.

Photo credit: Robert Schoen, courtesy of MHIC
Click on the links below to learn more about how cities and states can create a policy environment that supports long-term preservation:

Notice and right-of-first-refusal laws
that allow residents to plan how they will address a conversion or change in ownership

Policies that support long-term ownership
and maintenance of affordable rental housing

Code enforcement that ensures affordable rental homes are not lost as a result of poor maintenance

Or, click here to learn about key federal programs that support the preservation of affordable rental homes.

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Create a policy environment that supports long-term preservation
Streamline, coordinate, and align policies and administrative practices to increase the likelihood that affordable rental homes will be preserved and improved, develop more support for long-term preservation owners and make preservation transactions easier, faster and less costly.

Other pages in this section:

Enhance funding for preservation efforts
Stabilize and dedicate increased public funding to long-term preservation ownership, expand public-private financing sources for preservation transactions, and adopt innovative tax incentives to strengthen incentives for preservation.

Improve information collection and policy coordination efforts
Collect, standardize, and widely share information about the characteristics of existing affordable rental properties, their residents, and key factors that create a risk of loss, as well as innovative and successful preservation strategies.

Protect displaced residents
Help residents affected by displacement from affordable rental homes to understand their options, find other housing, and minimize disruption of schooling and social networks.

Click here to review case studies of successful preservation projects, or click here to view other resources on preserving affordable rental homes.

Notice and right-of-first-refusal laws

A number of states and localities have established policies that require owners of rental properties to give residents advance notice of any intention to sell the property or convert it to condominiums. The notice period gives residents a chance to plan how they will address the change in ownership. When combined with a right of first refusal allowing residents (or another qualifying entity) to match a legitimate offer to purchase the property, the notice provisions can set in motion a process that leads to the successful transfer of ownership either to the residents or to another entity willing to preserve the property as affordable over the long-term.

Right-of-first refusal laws vary in the length of time that they provide to tenants to make an offer to purchase, but typically range from 30 to 90 days. In some cases, existing residents can preserve the property as affordable by agreeing to waive their rights to purchase the property in exchange for a promise by the purchaser to keep some or all of the units affordable for a certain number of years. In other cases, the tenants either purchase the property themselves or transfer their rights to a non-profit or mission-driven for-profit company that agrees to maintain the property as affordable rental housing.

For a right of first refusal to be successfully exercised, two factors need to be put into

Photo credit: Marvin Jones, courtesy of NHT/Enterprise
place very quickly. First, the tenants need to be connected with an entity that has experience purchasing and operating rental housing. For example, organized tenant groups in the District of Columbia and Montgomery County have turned their rights over to Community Preservation Development Corporation and to NHT/Enterprise Preservation Corporation. Second, funding is needed to make the transaction work. Government funding programs that can respond quickly and flexibly to requests from nonprofits and tenant groups seeking to purchase and rehabilitate at-risk housing can enhance the effectiveness of notification and purchase rights laws.

Click here to view a policy brief prepared by Jim Grow, Deputy Director and Senior Staff Attorney at the National Housing Law Project, on State and Local Regulatory Initiatives to Preserve At-Risk Affordable Housing [PDF]. The brief, prepared for a 2007 MacArthur Foundation National Policy Forum on rental housing preservation, provides an overview of recently-adopted regulations related to improved notice and rights of first refusal and other purchase opportunity laws, among other things.

Solutions in Action
Condo Conversions

Chicago, Illinois -- Before converting a rental unit to condominiums, Chicago requires developers and property owners to give a 120-day notice to tenants. Expiring leases must be extended for the notice period. Tenants who are over 65 years old, blind, or unable to walk without assistance must be given a 180-day notice. Tenants have a right of first refusal to purchase their units.

Boston, Massachusetts -- Before converting a rental unit to condominiums, Boston requires developers and property owners to give a five-year notice to seniors, disabled, and low-to-moderate income tenants. If the lease expires within the notice period, the lease must be extended to allow the tenant to stay for the entire notice period.

Sale of Rental Units

Washington, D.C. -- The Tenant Opportunity to Purchase Act (TOPA) provides that, before any rental housing unit in the city may be sold, the owner must give notice to each tenant and to the mayor. The tenants then have a right of first refusal to purchase the property. The tenants may assign this right to a third party. The tenants have at least 120 days to negotiate a sale. This time period can be extended for another 120 days if a lending institution provides written notice that the tenant association has applied for financing. Some Washington D.C. affordable housing developers have partnered with tenant groups to arrange complex purchase and rehab deals, often involving LIHTC financing.

For example, Somerset Development and NHT/Enterprise Preservation Corporation worked with the tenants to acquire and rehabilitate Galen Terrace (pictured above), a federally subsidized 84-unit community in serious disrepair and threatened with sale. [1] The DC Housing Finance Agency provided $5.6 million in tax-exempt bonds and $4.65 million in tax credit equity toward the acquisition and renovation, while the Department of Housing and Community Development provided $3.25 million in CDBG funds. HUD renewed the complex's Section 8 contract for another 20 years. Click here to leave this site and read an analysis of the Tenant Opportunity to Purchase Act.

Under the laws of Montgomery County, MD, the county and its public housing/housing finance agency -- the Housing Opportunity Commission (HOC) -- have the right to match contracts on rental facilities built before 1981 or on rental buildings being sold for conversion to condominiums. Certified tenant associations also have the right to match the contract on rentals built prior to 1981. The right can be waived if the purchaser commits to preserving the building as a rental property for five years at rents acceptable to the county. The county, either through HOC or a designated nonprofit housing developer, has exercised the right of first refusal at least six times. For example, to preserve some naturally occurring affordable units and hard-to-find three-bedroom units, the HOC bought an unsubsidized 1950s apartment building and is renovating it for moderate-income tenants. Click here to leave this site and learn more about the Housing Opportunity Commission.

State Policies

The State of California requires owners of HUD-subsidized housing and expiring Section 8 projects who intend to terminate the subsidy for any reason or prepay their mortgages to give a year's notice to tenants, the state housing authority, the local housing authority, and local governments. The notification program is paired with a right of first refusal that allows state-registered preservation buyers to match offers from other parties under certain circumstances.

Other states with right-of-first-refusal and notification laws include Illinois, Maine, Maryland, Rhode Island, and Texas.

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Policies that support long-term ownership

In a world of limited funding for affordable housing, it makes sense to fund the strongest proposals. Taking their cue from federal policy, states and localities often create incentives to deliver projects with the lowest costs and the smallest margin of profitability (the more technical term is "cash flow"). In some cases this may be penny wise, but pound foolish.

While it is clearly sensible for states and localities to use competition to drive down development costs, it is also important to recognize that long-term ownership and maintenance of affordable rental housing requires financially strong entities that can sustain themselves over the long-term. Squeezing all cash flow out of a transaction may bring down initial costs, but can also starve non-profits and mission-driven for-profits of the capital they need to weather difficult rental markets, to keep up with changing rules and regulations, to support the management of their overall portfolio, and to
pursue additional preservation transactions without the need for costly predevelopment financing. It also creates an incentive for entities to focus on new deals so they can earn additional developer fees, sometimes to the detriment of the properties they are currently managing. Good ownership requires money for asset management and should itself be incentivized and rewarded, for the long-term benefit of properties and residents.

The following are some of the state and local policy reforms that participants in the Strength Matters group have identified that may impede cash flow for ongoing owners of affordable rental housing. Strength Matters is an initiative, funded by the John D. and Catherine T. MacArthur Foundation, to build the capacity of non-profits to successfully preserve affordable rental homes:
In 2010, the National Housing Conference hosted the Partners in Innovation preservation forums, a series of three regional forums focused on strengthening and supporting affordable rental housing preservation efforts through innovative partnerships, policy development, and legislative reform. The regional forums took place in Boston, MA; Portland, OR; and Denver, CO in 2010.

View the following presentation on rural preservation legislation  from Partners in Innovation: Financing the Preservation of Rural and Urban Affordable Rental Housing in Portland on May 17, 2010. 

  • Have state housing finance agencies review their policies with regard to the availability, timing, and amount of distributed cash flow, and seek reforms that strengthen ownership.
  • Eliminate soft-debt repayment policies that negatively impact a project's cash flow.
  • Remove cost caps that undermine a developer's ability to achieve economies of scale in development, finance and operations.
  • Eliminate award criteria in Qualified Application Plans that push applicants toward adopting unrealistic assumptions or "giving away" needed cash flow.
  • Revise debt service coverage ratios that are too low to handle increases in expenses relative to revenue.
  • Avoid expense assumptions and trending that are unrealistically low.
  • Find a balance between replacement reserve deposit levels that are too low (putting a property, especially a family property, in a position that it is likely to be in trouble in the first 15 years) or too high (precluding any cash flow).
  • Address the inconsistent treatment of the costs of service provision (e.g., included in operating costs, excluded from operating costs, funded from grants) despite service provision being mandated in scoring or identified by the owner to be a desirable component of the property.
For additional information on the Strength Matters initiative, contact NeighborWorks America, Stewards of Affordable Housing for the Future, and the Housing Partnership Network.

Washington/Seattle Guide for Affordable Housing Owners and Funders

Despite Washington State's commitment to preservation and its long-standing dedication to providing affordable housing, more than 25,000 low-income households in Seattle pay 50 percent or more of their income toward rent. Through the John D. and Catherine T. MacArthur Foundation's Window of Opportunity initiative, Washington and Seattle will receive a $1 million grant to help nonprofit owners and affordable housing funders implement best practices in asset management to ensure the long-term stewardship of affordable rental homes.

Learn more about the Window of Opportunity initiative or click here to learn more about Seattle and Washington State's program.

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Code Enforcement

Many high-quality affordable rental housing opportunities are being lost due to poor maintenance. Whether because of outright neglect or legitimate financial limitations on the ability of the owner to keep up the property, improperly maintained properties create ongoing problems for the building, its residents and the surrounding neighborhood. Without intervention, this situation can lead to poor housing conditions, foreclosure, abandonment, and, in the most severe cases, the need to demolish properties that have become abandoned and cost-prohibitive to restore.

Well-executed code enforcement programs help to maintain the quality and the safety of existing units, thereby supporting preservation efforts. Code enforcement alone typically will not prevent the loss of units. This tool works best when coupled with other rehabilitation tools and funding streams, including programs to help small property owners secure financing for repairs.

While the "stick" of code enforcement can be helpful in bringing difficult owners to the table, some communities have found it helpful to adopt a more facilitative attitude towards code enforcement. Taking the approach of an "educator" rather than a "policeman," inspectors work with building owners and developers to make redevelopment feasible, rather than just penalizing them for noncompliance.
Solutions in Action
Through its Systematic Code Enforcement Program (SCEP), the City of Los Angeles Housing Department inspects all rental properties with two or more units -- more than 760,000 buildings in total -- on a four-year cycle. In effect, the program requires owners to keep up their properties, preventing the deferred maintenance that can seriously undermine the condition of the housing stock. SCEP has identified 1.9 million violations which in turn spurred an estimated $1.7 billion in plumbing, heating, carpentry, and other repairs.

In addition to the regular inspections, the Housing Department responds to complaints about building conditions by tenants, owners, or other public agencies. Property owners who fail to comply with correction orders can be placed in the Rent Escrow Account Program (REAP). Under this program, tenants pay their rents into a rent escrow account until all ordered building repairs are completed.

Click here to leave this site and learn more about code enforcement in Los Angeles.

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[1] Grand Re-Opening: Galen Terrace Apartments Newly Rehabilitated, Resident Owned and Occupied. [PDF] Washington, DC: National Housing Trust.