“Big A” Affordable Housing: What is it and what do institutional investors need to know?

APRIL 2022

Interest in affordable housing has continued to increase over the last several years, especially amongst institutional investors. Capital is increasingly flowing to the sector, and at a rapid rate, making the term “affordable” somewhat of a buzzword.

But what does “affordable housing” actually mean, and how does it differ from other multifamily assets, including workforce, attainable and essential housing?

The fact is, there are important and significant distinctions between these different asset classes, yet they are often referred to under the same umbrella of the “affordable” buzzword.

Below are some of the key distinctions of “big A” affordable housing and what investors need to know.

Rents are Regulated based on AMI

One of the biggest differences between “big A” affordable housing and other multifamily asset classes is that rents are rent-regulated. This means that rents are tied to the Area Median Income (AMI) of a local region. Affordable properties are generally reserved for households with incomes less than 60% of AMI. While workforce housing is generally geared towards households making 60% to 120% of AMI, these communities are free to rent homes to households at all income levels.

Since they are rent-regulated based on AMI, “big A” affordable housing properties are truly affordable for residents in the communities in which they are located, resulting in extremely high demand. Many of our affordable communities have extremely long waiting lists and experience very little to no turnover. There is also a lack of development within the affordable housing space, limiting supply, as developers often are navigating complex financing structures such as low-income housing tax credits (LIHTC), which creates a barrier to entry.

Residents living in affordable housing communities are also paying no more than 30% of their household income towards rent. This is extremely important as it translates to high collection rates; residents are paying a much smaller percentage of their overall income towards rent compared to market-rate and other types of multifamily communities where they may be paying upwards of 50% of their income.

Many residents in affordable housing communities also utilize Section 8 housing vouchers. Section 8 authorizes payment of government-funded rental housing assistance to private landlords of low-income households. Therefore, Section 8 residents are less likely to default on their rental payments, further resulting in high collection rates. There are also a variety of other voucher and project-based subsidies and housing assistance payment (HAP) contracts that benefit affordable housing renters and owners. In fact, the collection rate across our national portfolio averages 95% and above.

This unique combination of extremely high demand, high collection rates and low turnover costs often make affordable housing investments attractive to investors based on the stability of this asset class. Market-rate and other multifamily asset classes typically experience higher turnover rates and lower collection rates as residents are overextended on income-to-rent ratios, and do not have long waitlists to quickly fill vacant space. This all impacts the long-term stability and profitability of a community.

Beyond this, the fact that “big A” affordable housing is rent-regulated and truly affordable to residents has a significant social impact, fulfilling ESG goals for many investors.

High-Quality Class A and B Properties

There is a common misconception that affordable housing communities are not high- quality assets. Often, these communities are Class A and Class B properties with top- tier amenities.

Our team is constantly keeping a pulse on the latest amenities residents are demanding and incorporate these within our communities. Many of our communities include high-quality community spaces, fitness and wellness centers and onsite social programming.

As an impact investor, we also provide our residents with a variety of social services, including financial literacy classes, after-school and mentorship programs for kids, and home down payment assistance programs, to name a few. We also place an emphasis on sustainability within our portfolio and look for ways to optimize water and utility usage and other sustainable measures. We are in the process of acquiring three new Class A properties that are LEED certified and located in strong in-fill Class A markets.

We have found that taking a holistic approach to investment, investing both in the brick-and-mortar of the asset by adding top amenities and investing in residents through social programming and services, translates directly to property performance.

In fact, affordable housing communities tend to perform on par and often better than market-rate and other multifamily asset classes that experience more volatility in performance.

Look for Experienced Operators

As demand for affordable housing increases, more capital is naturally flowing to the sector, and we are seeing more multifamily operators venture into affordable housing. That said, it is important for investors when evaluating affordable housing operators to look for those who have experience operating in this asset class.

“Big A” affordable properties that are rent-regulated are subject to a variety of regulations and regulatory agreements. It is important to work with operators who understand the complexities and nuances of these regulatory agreements.

For example, we have a 15-person compliance team that works consistently with more than 50+ housing authorities across the country, all of which have different rules and regulations. Our team understands how to navigate working with these entities and other governmental agencies across state, city, and county lines and how to do so efficiently.

Because affordable communities also adhere to income restrictions for residents, operators also need to know how to navigate these and ensure that all properties are adhering to the right guidelines.

This varies significantly from market-rate and other multifamily asset classes such as workforce, attainable or essential housing. These multifamily communities are not rent- regulated, and do not have to adhere to the same regulatory agreements and income restrictions. Therefore, multifamily operators of these asset classes do not often have the same internal infrastructure in-place to successfully operate “big A” affordable communities. Ultimately, the term “affordable” has increasingly been used interchangeably to describe multifamily assets that may be priced slightly lower than the market but are not truly affordable, so it is important for investors to clarify what type of affordable housing to which a sponsor is referring. Truly affordable housing is always rent regulated, based on area median income, with rents not exceeding more than 30% of a resident’s household income, and follows regulatory agreements to keep rents affordable. As affordable housing becomes increasingly more popular, it is important to understand these nuances and what an investment in truly affordable housing means and its long-term benefits compared to other multifamily asset classes in the market.

“Big A” Affordable vs. Other Multifamily Assets: A Snapshot

John R. Williams is President and Chief Investment Officer of Avanath Capital Management, a privately held, vertically integrated investment firm with a focus on affordable and workforce housing investments throughout the U.S. Contact him at jwilliams@avanath.com.