by Director of Community Real Estate Karoleen Feng
MEDA launched its Community Real Estate program just four years ago, as a proactive, aggressive response to the unprecedented gentrification and subsequent displacement occurring in San Francisco’s Mission District, long a welcoming neighborhood for Latino immigrants. We pivoted from being a 45-year-old direct-services agency to becoming an affordable-housing developer, now with a staff of 13 that has preserved or produced a pipeline of 1,159 homes and 100,000 square feet of affordable commercial space in a contracted period.
One of the main strategies we undertook to address the loss since the year 2000 of 8,000 Latinos — over 25 percent of this community — is the Small Sites Program, a City of San Francisco program that allows the opportunity for nonprofits, such as MEDA, to purchase and refurbish four- to -25-unit buildings, thereby taking them off from the private market and keeping the rent-controlled tenants in place. In just three years, we have bought 22 buildings comprising 160 households and 18 small businesses, in the Mission and adjacent neighborhoods with large Latino immigrant populations. Looking to achieve all-the-greater impact, we are currently focusing on buildings:
- That house families with children in Mission District schools;
- Along the Mission Street corridor, long the commercial lifeblood of the neighborhood; or
- Feature a legacy business that serves the low-income community.
What policy actions have been taken to get this housing acquisition work going?
MEDA can be aggressive in buying these four- to 25-unit buildings because of the City of San Francisco’s Small Sites Program. The genesis of this innovative program was legislation created in the height of the foreclosure crisis/Great Recession of 2009. At that time, when we saw many buildings up for sale, MEDA knew that in the next economic upturn these would be the same buildings where we would lose even more families. Given the impact of that economic downturn, coupled with the loss of redevelopment agencies in California, San Francisco was not in a position to fund this program until 2012, when we put a permanent carveout of our Affordable Housing Trust fund for the Small Sites Program. In 2014, when this program was fully launched as a pilot with just $3 million, the economy was back in full swing. Today, the program is now funded at about $25 million annually by using bond-measure infusions and increase allocations from neighborhood-level community benefits. As part of the cohort that abetted this program’s launch, MEDA helped shape the program’s underwriting. So, this has always been a program that was designed to address displacement. And, in the last four years, we have worked with the City to continually refine the program underwriting, as we have tested this in real time. There are few other City-funded programs that have included this amount of input from affordable-housing developers.
We increasingly hear the frame of “The 3 Ps” (Protection, Preservation, Production) for housing solutions. How is this acquisition work lifting up the Preservation component of the policy dialogue?
Solving the housing crisis relies on keeping residents in place while concurrently building more affordable-housing opportunities for residents who have been displaced. This acquisition work addresses the preservation of housing for low- to moderate-income residents, so that they are no longer at risk of a private market where upturns incentivize owners to raise the rents to market rate, thereby making tenants’ rents unaffordable. In San Francisco, rent control was that de facto control of preserving housing affordability on the private market; however, when the housing demand skyrocketed in 2014 — and as the incomes and numbers of jobseekers outstripped the housing in the region — landlords were further incentivised to remove their tenants to achieve the significantly higher rents that higher-income residents could pay. The acquisition of these buildings ensures that residents can have stable rents, plus a landlord that will properly manage the upkeep of their buildings. With publicly funded programs such as Small Sites, we can truly preserve the affordability of homes from the private market.
What are some lessons learned about the unique challenges of financing housing-acquisition projects?
- Tenant education and organizing. With each building, MEDA and our tenants’ rights organization allies prepare the residents to be part of the purchase process. The social underpinning for the Small Sites Program is the cultivating and strengthening of the tenants’ collective will toward saving their building. In developing a deeper relationship with their neighbors, the tenants become more responsible for the future of the property as their permanent home. MEDA also puts tenants on the path of financial well-being by connecting them to asset-building programs ranging from financial coaching and job training to small-business development and computer classes.
- Rents. By participating in the Small Sites Program, rents are adjusted to what is affordable for the residents at the time of our purchase. The tenants provide certified incomes, and if their rents are already at or above 30 percent of their income, they keep their existing rents. This is essential for many lower-income residents (e.g., those who rely solely on Social Security or families with kids, meaning they have additional monthly expenses). If a tenant’s rent is less than 30 percent of their income, the rent is adjusted toward the purchase and long-term sustainability of the building.
- Right-setting the community investment. The size of the community investment per apartment is market feasible and makes public policy sense. After the first pilot year, MEDA and allies in conjunction with the City evaluated our data on the market and developed a tiered structure for the level of community investment from the Small Sites Program. The current maximum per-unit Small Sites Program investment is at $350,000 for a property comprising fewer than 10 units, while for 10- to 25-unit properties the investment was set at $300,000 per unit. The City also agreed to increase the subsidy for buildings at risk of Ellis Act evictions to $400,000 per unit (Notices must have been given or residents must have proof that they have been threatened with such evictions.) Finally, the investment is $150,000 per bedroom for a group or single-room occupancy (SRO) housing. These are amounts that worked in 2016-2017 for the San Francisco market. By comparison, the City invests up to $450,000 per unit (for the land and the building) in the construction of new buildings. These properties are crucial to adding to the affordable-housing stock, but take three to five years to build, during which time hundreds of families will be displaced, with less likelihood of return to the neighborhoods in which they have built their lives. The size of the investment not only includes the purchase — it includes funds for at least 20 years of the life of the building.
- Up-front costs. Developer fees need to be set aside for MEDA’s staffing to acquire and rehabilitate the site, plus provide for upfront costs of such items as due diligence. These funds are critical for early cash flow, especially imperative for nonprofits.
Money, money, money is of course always what’s needed, but … What are some of the creative financing/funding approaches that this acquisition work can be explored?
- Financing is not one size fits all: We have been innovative in finding funds that get revolved for each stage of financing.
- Pre-acquisition financing includes a Neighbor-to-Neighbor Fund that was set up just to purchase buildings in the Mission, plus MEDA’s own equity and Program-Related Investment. Over the course of 2016, we found ourselves losing 15 to 25 percent of the properties on which we were ready to put an offer because of our necessary 90 days to close escrow or because we could not compete against an all-cash offer, the latter common in San Francisco. MEDA was limited by our bank account in terms of how quickly we could move. With local money, showcasing trust in MEDA’s expertise, we are now hoping to accelerate our speed of purchases. In 2017, we will continue seeking more of that money, be it from a Neighbor-to-Neighbor Fund to foundation investment loans from funders that believe in MEDA’s capacity to do this work in the community. It takes only $12,000 in downpayment funds to save a household.
- Acquisition financing from the San Francisco Housing Accelerator Fund (SFHAF) has been used Once we got the permanent financing going, MEDA quickly realized that the market needed a rapid-acquisition fund so that we could compete with all-cash buyers. We then pushed the Mayor at the time, the late Ed Lee, to create the SFHAF, which could move faster than City funding in underwriting, yet be backed by funds from the City for the takeout financing. In 2017, SFHAF showcased an upper-tier pool of $25 million from philanthropy and banks (the CIty was part of the initial investment.) With the more flexible and rapid SFHAF financing, MEDA was able to accelerate our own purchasing, doubling our acquisitions from the first to the second year.
- For perm financing, we work with smalls banks and CDFIs for a traditional first mortgage and the City of San Francisco for the deep soft loan. The soft loan with covenants for affordability is higher in San Francisco because of the high costs of buildings here.
Through advocacy efforts with allies, the City permanently set aside funds from their Inclusionary Housing program for the Small Sites Program. MEDA and allies documented the need and the successful deployment of the pilot funds. This led to additional funds allocated from Prop A, which was a $310 million affordable-housing bond passed by San Francisco voters in November 2015. The City is currently considering countering the displacement effects of market-rate properties by focusing in-lieu fees paid by small developers in neighborhoods where these high-end developments are built. Focusing these funds would have a significant impact on 50+ buildings and 1,000+ market-rate (read: luxury) apartments in the pipeline in the Mission to be built by 2020.
This is not the kind of work that can just easily piggyback off new-construction capacity and know-how. What are some lessons learned about the particular skills, relationships and organizational capacity-building needed?
- Tenant organizing built into the team is vital, as we cannot just purchase these buildings without a level of tenant buy-in. The more the tenants are bought into this as a solution, the more we will be successful in a Small Sites program purchase. Over time, we have developed tenant-engagement protocols and strategies to ensure that the relationships we build last well beyond the acquisition of the building.
- It is important to build up the entire support infrastructure from real estate development staffing to financing, to design and engineering consultants to general contractors, all from scratch. Private market-rate developers, architects, engineers and contractors are less familiar — and sometimes less willing — to deal with the extra paperwork and effort that comes with designing for buildings that have to meet higher City standards, from accessibility to local hire/contracting.
- We must develop disciplined processes for tracking the transaction from start to finish so that we can have robust asset management of the buildings.
What level of organizational commitment (i.e., risk/reward decision) is necessary to establish program capacity and take it to sufficient sustainable scale?
This starts first with vision/mission alignment. While preserving buildings seems like the right thing to do to directly impact displacement, it requires a huge investment in a new business model that organizations need to be prepared to implement with strong intention.
The financial risks that we had to consider was how we could sustain this program on MEDA’s bottomline while aggressively seeking sources that would be willing to be early financing to help us rapidly expand the acquisitions without overstraining MEDA’s financial position. Our organization has invested in the augmentation of staffing and in the direct funding for these property acquisitions. While we are still growing, we have seen the reward for MEDA, as we adjusted our business forecasting and the developer fee started paying for the early investment. As we continue to stabilize beyond startup of the program, we have to manage the risk of expansion with each acceleration of our growth.
The social risk is that MEDA has been one of the fiercest advocates for more money being directed toward the Mission District due to its being a neighborhood in advanced gentrification that is seeing reverse segregation. We have had to refine our response in the media and in the community so that our message for equity is clear. Building the case through data and proven solutions helped ameliorate the risk. The reward is that we are actually turning the trend of the loss of Latinos and will be able to reach our goals of keeping or bringing back 2,000 households by 2020 to reverse displacement to 2010 levels.
The physical risk is that as a portfolio the buildings that we are purchasing are often not maintained wells, and are sans plumbing and electrical upgrades. This takes team knowledge in making those decisions within a tight budget. The City of San Francisco has been willing to put in a higher level of funding to support these rehabilitations so that we can afford the repair and replacement over at least 10 years. The reward is that our careful decision-making in rehabilitating these buildings ensures that we are providing not just affordable housing, but also quality housing for our new residents.