Preserving Affordability Through Acquisition: Washington Housing Initiative

Preserving Affordability Through Acquisition: Washington Housing Initiative

By Brian Knudsen, Social Science Analyst, Office of Policy Development and Research

Between January 2020 and April 2024, the Washington Housing Initiative helped preserve more than 3,000 units of workforce rental housing at nine properties across the D.C. region, including the 245-unit Hamilton Manor in Hyattsville, Maryland. Photo credit: Washington Housing Conservancy

Preserving rental affordability by acquiring existing affordable housing — either subsidized or naturally occurring — in well-resourced neighborhoods is a useful strategy for states and local areas pursuing ways to enhance housing stability for low- and moderate-income families in areas close to jobs, transit, amenities, and high-performing schools. This article, the second in a series, highlights another example of a local opportunity acquisition model: the Washington Housing Initiative (WHI) in Washington, D.C. WHI adopts a market-based approach to acquiring naturally occurring affordable housing (NOAH) in the Washington D.C. region and preserving it for households earning incomes at or below 80 percent of AMI by combining the private capital and real-estate expertise of a social-impact investment vehicle with a mission-driven nonprofit.

Regional Conditions for a Market-Based Opportunity Acquisition Model

Conditions for low- and moderate-income renters in the Washington, D.C. region require varied approaches to preserving affordable housing, including the market-based strategies that WHI pursues. The region’s population has grown 13.1 percent from 2010 to 2020, outpacing the 7.4 percent growth rate for the United States as a whole during the same period. This rapid growth has imposed serious pressure on housing affordability in the region, which stems in part from a “mismatch between housing needs and the supply of affordable homes and apartments.” A 2019 analysis by the Metropolitan Washington Council of Governments concluded that the expanding workforce would require the D.C. region to add at least 320,000 housing units between 2020 and 2030, but only 245,000 units were forecast to be built, resulting in a shortfall of 75,000 units. Rental affordability is especially severe among the lowest-income households in the D.C. region. For example, 79 percent of households in the region earning incomes at or below 30 percent of HUD Area Median Family Income (HAMFI) are housing cost burdened (defined as having housing costs exceeding 30 percent of monthly income). Renters with more moderate incomes, however, are also experiencing housing unaffordability. More than half (54 percent) of regional households with incomes between 50 and 80 percent of HAMFI are housing cost burdened, and only 32 percent of rental units in the D.C. region have gross rents affordable for households earning incomes between 50 and 80 percent of HAMFI. These renter households — teachers, first responders, information technology specialists, healthcare workers, and many others — are those with incomes too high to qualify for housing assistance but not high enough to absorb rising regional rents.

Founded in 2018, WHI is a new market-driven model that addresses itself specifically to the rental affordability needs of households in the D.C. region earning moderate incomes (at or below 80 percent of AMI). To address concerns about the negative economic and social consequences of housing unaffordability, local real estate firm JBG Smith launched WHI in partnership with the Federal City Council, a nonprofit and nonpartisan civic organization. WHI raises and deploys private capital to acquire existing privately owned and unsubsidized rental apartment buildings in high-opportunity neighborhoods with rising property values and rents, preserves affordability for the moderate-income households living there, invests in the properties, and stabilizes the residents. A portion of units in each property rent at market rates, which creates mixed-income communities that foster interaction among residents with varied socioeconomic backgrounds. Between January 2020 and April 2024, WHI had helped preserve more than 3,000 units of workforce rental housing at 9 properties throughout the D.C. region.

WHI’s emphasis on housing for these moderate “missing middle” households complements policies that focus on providing deeper rental affordability for the lowest-income households. When moderate-income households can find quality rental units in their price range, it releases lower-cost units for the lowest-income households who need them. In addition, preserving housing for moderate-income families with private money allows governments to direct their limited resources toward subsidizing affordability for the lowest-income households.

According to AJ Jackson, executive vice president of social impact investing at JBG Smith, WHI focuses on preservation for several reasons. First, the D.C. region loses many NOAH units each year to demolition and redevelopment or to rent increases. Purchasing and preserving these properties maintains the supply of affordable housing in the D.C. region, keeping rents affordable and reducing displacement. In addition, by acquiring properties in high-opportunity areas, WHI preserves affordability in areas that are more socioeconomically advantageous for low- and moderate-income residents. Jackson notes that this focus on high-impact locations differentiates WHI from other preservation models. Finally, Jackson suggests that preservation is faster and more cost effective than new construction and that WHI’s unique business model generates returns for their investors.

Elements of the Washington Housing Initiative

WHI consists of three elements that work together to preserve affordable workforce housing in the D.C. region: the Impact Pool, an investment vehicle that provides financing below market rates for purchasing multifamily affordable properties; the Washington Housing Conservancy (WHC), a 501(c)(3) mission-driven nonprofit that receives loans from the Impact Pool to acquire and operate properties; and a Stakeholder Council that gathers regional leaders to discuss affordable housing and economic mobility issues.

Managed by LEO Impact Capital, a subsidiary of JBG Smith, the Impact Pool is a social impact investment fund that had raised $115 million from private investors as of April 2024. These investors include financial institutions motivated by Community Reinvestment Act requirements, high net worth individuals, and foundations. The Impact Pool provides subordinate financing for all acquired properties, replacing private equity and allowing WHC and other mission-driven nonprofits to compete with private developers for the acquisition of NOAH. Approximately 70 percent of the typical financing package for a WHI acquisition comes from a first mortgage; subordinate financing from the Impact Pool and an equity contribution from WHC or another mission-driven nonprofit owner make up approximately 20 percent and 10 percent, respectively, of the remainder. Because Impact Pool loans are structured to facilitate the long-term affordability of workforce rentals, this financing stack reduces WHC’s capital costs and allows their properties to charge below-market-rate rents in some of the units. One feature of the Impact Pool that helps control capital costs and promotes WHI’s affordability mission is that investors in the fund accept a lower rate of financial return — a 7 percent internal rate of return over the life of their investment — in exchange for the long-term social returns gained through promoting affordable workforce rentals in the region. LEO Impact Capital distributes cash received from WHC loan repayments to investors, but only up to the point at which their total return reaches 7 percent. As of April 2024, out of $115 million raised, the Impact Pool had committed approximately $78 million in financing and funded the acquisition and preservation of 9 properties and 3,018 units in the D.C. region.

WHC is a 501(c)(3) nonprofit that combines Impact Pool financing with its own equity contribution to acquire properties and operate them as mixed-income communities, with most units preserved over the long term as workforce affordable units. WHI’s innovative model achieves rental affordability by uniting the Impact Pool’s lower-cost investment capital and JBG Smith’s real estate expertise with WHC’s mission orientation. WHC describes itself as “a nonprofit organization that preserves affordable housing, prevents displacement, and promotes economic mobility, particularly for moderate to low-income people of color.” As of 2024, WHC owns 5 of the 9 properties that the Impact Pool financed, consisting of 1,636 total units that currently house nearly 2,800 residents. As of April 2024, WHC has raised nearly $30 million in philanthropic support, which it spends on property acquisition (WHC’s equity contribution), social impact implementation, and core operating support.

Once WHC or another nonprofit acquires a property, the Impact Pool requires a minimum 15-year covenant specifying that at least 51 percent of units remain affordable to households earning up to 80 percent of AMI. Jackson notes that all properties will exceed these requirements, with more than half of units income restricted and most including tranches that are affordable to individuals earning even lower incomes. Significantly, affordability is phased in over several years because the buildings acquired with Impact Pool financing are market-rate without income certification. Jackson explains that some progress toward affordability targets happens through attrition as market-rate leases expire and income-eligible residents move in. Kimberly Driggins, executive director at WHC, notes that WHC also meets the Impact Pool’s affordability goals by keeping current income-eligible tenants’ rents stable or reducing rents at lease renewal. WHC has set future affordability goals in which 76 percent of units would be affordable to households earning incomes at or below 80 percent of AMI, including 31 percent of units affordable to households earning incomes at or below 60 percent of AMI. As of 2023, 53 percent of WHC’s units have been phased in and are affordable to residents earning incomes at or below 80 percent of AMI, including 25 percent of units affordable to residents earning incomes at or below 60 percent of AMI. In addition, as of 2023, properties acquired with Impact Pool financing rent for an average of $325 per month below comparable market-rate rents in the submarket.

WHI intends to preserve affordability beyond the 15-year minimum by partnering the mezzanine debt structure of the Impact Pool with the mission orientation of WHC, which, Jackson explains, will “create long-term affordability with short-term capital.” During the investment period, WHI uses a portion of a property’s cash flow to hyperamortize the Impact Pool loan and pay it down more quickly. WHI refinances the property when the senior loan matures, generally after 10 years, repaying both the senior loan and the remaining balance to the fund. WHC then becomes the full owner of the property with a new mortgage and with enough equity to allow it to maintain the original number of workforce-affordable units indefinitely. In addition, WHI has negotiated property tax abatements from local government partners, which reduces operating expenses and creates longer affordability periods.

Identifying Properties To Acquire

WHI targets properties for acquisition in neighborhoods experiencing market pressure from growing demand and rising rents. By preventing private-sector developers from purchasing these properties, WHI mitigates displacement and allows current residents to remain in their units. Driggins notes that WHI targets well-maintained properties with 250 to 300 units that do not require redevelopment or rehabilitation.

Because neighborhood quality contributes to the well-being of residents and the life trajectories of children, WHC created a Social Impact Screening Tool to assess the attributes and potential social implications of high-opportunity neighborhoods with properties eligible for Impact Pool funding. The tool assesses an area’s health and social fabric by employing publicly available data across more than 30 indicators, including factors such as population growth, poverty rates, access to high-performing schools, public transportation, and employment proximity, to measure its status as an “impact area” and its suitability for property acquisition and workforce housing preservation. Driggins explains that “the catalyst for creating [the social impact tool]” is that it “helps quantify social impact in a way that [the WHC real estate committee] understands and that helps balance a conversation that can very much just be about dollars and cents."

Activating Mixed-Income Communities To Increase Upward Mobility

In 2020, WHC partnered with Case Western Reserve University’s National Initiative on Mixed-Income Communities (NIMC) to develop and implement strategies to build genuinely inclusive properties with economically and racially diverse residents interacting across lines of difference. Driggins notes that WHC intentionally maintains mixed-income properties, with shares of market-rate units alongside those affordable to households earning moderate and lower incomes, and it leverages that mix to the social and economic benefit of their residents.

Recent research finds that people living in places with higher levels of economic connectedness or more interaction among low-, moderate-, and high-income people experience higher levels of upward income mobility. That kind of resident-to-resident engagement, however, might not occur organically in mixed-income properties. As Driggins notes, “You can be living next to people [in a mixed-income community], but that doesn’t mean you are interacting with them.” WHC takes advantage of its lower cost of capital and leverages philanthropic contributions to fund its efforts with NIMC to “activate the resident mix” through four core components: community building, placemaking, inclusive property management, and human capacity and wealth building. Examples of community building activities at WHC properties include cultural celebrations to preserve community diversity and interest groups to organize residents around shared needs and interests. WHC also holds inclusive property management trainings to change the interactions between staff and residents from transactional to relational and ensure that all staff are invested in residents’ well-being and success. WHC partners with Esusu to help residents improve their credit scores. As of December 2023, 327 residents established credit for the first time, and 70 percent of residents had improved their credit scores.

Impact Pool Acquisition: Hamilton Manor

In a joint venture with NHT Communities, WHC purchased the 245-unit Hamilton Manor in Hyattsville, Maryland, for $39.5 million. Hyattsville is located near transit, major employers such as Kaiser Permanente and the University of Maryland, and retail amenities. Berkadia Commercial Mortgage provided senior mortgage financing for the purchase, and the WHI Impact Pool provided subordinate financing in the form of an $8.6 million mezzanine loan. The Department of Housing and Community Development (DHCD) for Prince George’s County also issued a $1 million loan. The transaction was also supported by a payment in lieu of taxes to reduce property taxes. WHC’s second property acquisition and its first in Maryland, the Hamilton Manor deal was finalized in August 2021. Through a 20-year covenant, the transaction guarantees that the nonprofit owners will maintain 184 units of affordable housing for those earning up to 80 percent of AMI. The purchase was made possible by a 2013 program that helps preserve the county’s affordable housing stock by granting the Prince George’s County government the right of first refusal (ROFR) when housing developments in the county are sold. Under the ROFR program, DHCD can exercise its authority to purchase multifamily buildings of 20 units or more or assign purchase rights to a third party, such as WHC, when it is notified that the property owner intends to sell. In August 2023, the Revenue Authority of Prince George’s County placed a $9.4 million tax-exempt bond on Hamilton Manor, replacing the Impact Pool mezzanine loan. Converting mezzanine loans into tax-exempt bonds increases the after-tax returns for Impact Pool investors and lowers WHC’s capital costs, allowing WHC to be competitive in acquiring assets and provide greater affordability.

WHC and NHT Communities have used several community and wealth-building tools and inclusive property management strategies to drive economic mobility for Hamilton Manor residents. Property management staff and consultants have led resident engagement pop-ups, activities, and seasonal celebrations to foster community. WHC also established an onsite library for residents. Hamilton Manor partners with Esusu to provide positive credit reporting and help residents increase their financial strength. As of 2023, 80 new credit scores had been established, and existing credit scores improved by 72 as percent.

Conclusion

WHI’s recent preservation successes demonstrate the benefits of a market-based acquisition model that unites philanthropic capital, commercial real estate expertise, and nonprofit service and entrepreneurship. Given the rental affordability challenges confronting many high-cost regions grappling with the pressures of growth, WHI’s model can serve as a blueprint for other organizations in the preservation space.