San Francisco - After a decade of solid progress in improving management and redeveloping their most distressed properties, public housing authorities (PHAs) face a new crisis, according to a roundtable discussion convened by Affordable Housing Finance magazine.

Many of the panelists lambasted the Department of Housing and Urban Development (HUD) for continuing to micromanage public housing, even though Congress passed the Quality Housing and Work Responsibility Act (QHWRA) to force HUD to give PHAs much more autonomy.

The panelists said they were very concerned about the impact of the federal government?s continued failure to appropriate 100 percent of the public housing operating subsidy requirement.

For fiscal 2007, the federal government will only provide 76 percent of what its own data shows is necessary to operate public housing, the fifth year in a row operating needs have been under funded.

?Housing authorities cannot sustain this funding level over any continued amount of time. At this funding level, some PHAs will be forced to look at selling off assets, reducing services, and basically shutting down units,? said Sunia Zaterman, executive director of the Council of Large Public Housing Authorities.

The panelists agreed that the HOPE VI program has been critical to the redevelopment of many deteriorated projects and the revitalization of entire urban neighborhoods. They expressed the hope that it would be reauthorized with restored funding.

Even without HOPE VI funding, PHAs are leveraging their federal capital fund grants and other resources to revamp older properties and create attractive, mixed-income communities. But progress is hampered by HUD?s failure to issue critical regulations on how PHAs can use public housing capital funds and operating subsidies with so-called ?mixed-finance? projects that include non-public housing units and private loans and investments. Steady reductions in public housing capital fund grants have also been a problem.

?We need HUD to really streamline the process, and we need stable levels of funding in the capital fund,? said Carl Greene, executive director of the Philadelphia Housing Authority.

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The panel convened by teleconference, and was chaired by Renee Glover, CEO of the Atlanta Housing Authority, and Robert Greer, president of Michaels Development.

Renee Glover: Here in Atlanta, we have been very successful with HOPE VI, working around two fundamental precepts. One, we wanted to end concentration of families in poverty; and two, we believe we are serving individuals who have unlimited human potential.

Through HOPE VI we are taking undervalued real estate and in some cases real estate that is detrimental to families and neighborhoods and creating something the private real estate market understands and that really empowers the families. We have learned to use private-market principles and market standards.

We have learned this effort must be comprehensive. Because of the blighting effect of large distressed communities, it must be done in conjunction with neighborhood schools and green spaces.

A revolution has been started around the notion of closing the affordability gap versus maintaining warehouses for the poor, which have been so detrimental. Affordable housing should not be a separate, segregated industry.

Robert Greer: We are a private developer and a partner in 17 HOPE VI programs, all but four of which are completed and occupied. This program has achieved great success. It?s probably the most effective revitalization program we?ve had in America. It is the single most critical program to achieve deconcentration of poverty.

Q HOPE VI funded many successful projects since 1992. What have we learned from those developments, and what lessons can be applied to future developments that may not have HOPE VI funding available to them?

Carl Greene: We?ve learned the importance of having the private sector as partners and the effective use of low-income housing tax credits (LIHTCs).

We?ve learned to combine federal dollars with private investment and to have private-market discipline over preservation and management of our assets, as well as how to create mixed-income communities, and to have homeownership and rental together.

We still need HOPE VI because we still need that substantial investment of a large sum of money that HOPE VI brings?that really helps jump-start a deal. I?m really hopeful that we can keep this program in place.

What we?ve learned to do without HOPE VI is to take the LIHTC program, have private-sector partners, and have private-sector discipline. We?ve learned a host of skills, and our staff now is better trained and better educated, and our partnership with the private sector grows stronger every day.

Ethan Handelman: HOPE VI is for major urban center redevelopment, but public housing is a lot more than that. There are a lot of public housing authorities with very old and capitally backlogged inventory that need assistance.

HOPE VI may be a model for that?especially in terms of bringing private-sector discipline and management to it?but whether we need a large-scale program or not is up in the air.

Sunia Zaterman: We have learned that we must take a comprehensive approach to revitalization and look at neighborhoods?not just buildings and developments. We?ve seen how housing authority operations have been transformed by the laboratory of HOPE VI, in terms of operations and management issues.

In terms of finance, having these tools available to housing authorities, where they marry their public housing funding with other real estate finance tools, like the tax credit and debt financing?all these things seem ordinary today, but over the last 10 to 15 years, making them available to housing authorities has been nothing short of revolutionary.

One thing HOPE VI teaches us is that the resources are absolutely critical. Having that first money in, the federal dollars catalyst, has been critical.

Kevin McCormack: We have developed 20 HOPE VI projects. Our first was in Atlanta, which we started in 1994 and closed in 1996. The real secret to doing mixed-income is building a quality development, a development that people who have choices want to come to. That?s the biggest mindset that?s different about the private-sector involvement in public housing: We are looking at low-income people, but we also have to look at people of moderate and middle incomes to be successful.

Noel Khalil: We?ve learned we need to have very clear guidelines about who can come back to the community, and the rules of engagement on coming back to a redeveloped project.

When you are doing a mixed-income community, you need to achieve common values throughout the income levels. You can have different people living with different incomes, but we must make sure people share the same values, and hold them accountable.

Q Has the mixed-income approach been a success? In what situations has it worked or not worked?

Greene: We?ve done $1.4 billion in development in the last six years, and it?s been really well received by the community. I can?t think of any case where it has not had a very positive impact.

Glover: Without question, it has been a great success. The biggest misconception is that people who have fewer resources are not going to be good neighbors. ? That?s just not the case. I think where we mess up is where we don?t have standards set appropriately, which invites the kinds of social problems that often occur when there?s a lack of clear expectations.

Greer: Some of the initial HOPE VI projects involved rehab versus neighborhood reconstruction?streets, sidewalks, and the rest?and in those situations where you have maintained an old architectural style, almost an obsolete architectural style, I don?t think the mixed-income approach was successful. They have maintained the fabric of a very high percentage of low-income residents.

In other cases, where a project was new construction involving garden apartments versus a door for every unit to the front street, that model for mixed-income just doesn?t work.

Q Is there any evidence that mixed-income projects encourage self-sufficiency on the part of public housing tenants?

Glover: We have had an economist take a look at the impact on families as a result of HOPE VI revitalization and without question, the assisted families who are living in mixed-income communities are participating at a significantly higher rate in the workforce, children are attending school and performing very well in school, people are moving on to homeownership.

Q What has been accomplished using mixed-finance techniques that use public housing capital fund grants to leverage private investment and securitize debt, and how will this fill the gap left by the elimination of HOPE VI grants?

Greene: Mixed finance has worked very well, and we have been able to do a number of bond deals, but we need stable levels of funding in the capital fund. The capital fund has been going down every year, and that fund, when combined with mixed-finance opportunities, allows us to do non-HOPE VI tax credit deals.

I think these tools are the types of tools we are able to efficiently and effectively use, we just need HUD to really streamline the process and we need stable levels of funding in the capital fund.

Handelman: What we need is sufficient capital funding. You have an aging public housing portfolio, which has in many cases far outlived its useful life, and under market pressures would long since have been replaced or rehabbed beyond recognition. We also need a sustainable rental-income stream. For public housing to keep serving its extremely low income vulnerable population, it needs more than the subsidy level that will come from, say, a tax credit. ... It needs ongoing funding. You also need the flexibility to portage, or separate, subsidy from old bricks, which are inadequate, to new bricks.

Zaterman: Mixed finance has been the saving grace for public housing because the appropriations on their own are not sufficient to meet capital needs. Even the level of leveraging that has been accomplished to date does not adequately address [the] need for capital investment, but without a marriage of public housing funding with other tools, we would be in an even worse situation. So, it?s critical that we move in that direction, of making the tools easier to use and increasing the number of tools.

PHAs have been very successful in using the LIHTC, but given the scale and scope of their revitalization and redevelopment efforts, we need some sort of dedicated or set-aside of tax credits to address this, so we are not competing with all the other worthy projects.

McCormack: We did our first deal combining mixed finance with public housing capital funds in 1996. We do them on a regular basis. From our point of view, the real challenge is successfully defining your project so it?s acceptable to the PHA and HUD and the rest of the stakeholders?including homeowners in the neighborhood, the city, and the state. If you can tap into the city and state funding, a lot of things are possible that would not otherwise be possible.

Greer: We have used mixed finance over and over again without HOPE VI, primarily with housing authorities that were not selected to receive HOPE VI grants and who wanted to move forward. It has worked because we had the state and city on board with us.

Glover: I think two things could help this mixed-finance revolution. One, the Moving to Work (MTW) deregulation will go a long way to help agencies be entrepreneurial. It?s one thing to talk about streamlining a process; it?s another thing to allow agencies?which MTW does?to design their own business processes looking at the real estate industry, so that things are more closely aligned.

I think what scares most private investors and private developers is what they don?t know.

There are so many things in all the rules and regulations and statutes. Deregulating will go a long way to attract private investment.

Also, there has to be better understanding on the part of HUD officials about the relationship between development and operation. There?s all this focus on having the communities developed, but no recognition that when these deals are underwritten, they are underwritten using pro formas, which means a certain level of rent must be achieved to meet debt service and other obligations, and to run a property that is competitive.

Q Congress passed QHWRA in 1998. What progress has been made to implement this law deregulating public housing? How much further is there to go?

Glover: I am an advocate for the MTW approach. The 1998 bill is being actualized through MTW. The question is whether these provisions, once adopted by Congress, are self-implementing. The department has taken the position that none of it is self-implementing, so therefore, there must be proliferated all these rules, regulations and guidelines, and therein lies the problem. In MTW, things are not prescribed by HUD through rules and regulations, but by agencies adopting their own policies and procedures.

Zaterman: One of most important parts of QHWRA is the preamble, which says that public housing has suffered considerably because it?s burdened with overregulation. The MTW approach is, instead of going through a long list of what does and doesn?t work in various cities, to allow housing authorities to make those decisions on a local level, and develop a plan with tenant protections, with income targeting, with affordability standards, that makes more sense in terms of meeting local housing needs.

We would like that approach to be more infused in all HUD?s operations, and to see that notion of stepping back from unnecessary regulation. We have a long way to go on that.

Q How do you view HUD?s implementation of project-based accounting, even as it is making more cuts in operating subsidies?

Handelman: Project-based accounting is an essential part of what?s needed for public housing, but on its own it only goes so far. It allows you to see if individual assets are viable, and allows PHAs to separate overhead out to the project level. It?s amazing what insights you gather just by allocating out your costs, including which are the drains and which are the workhorse assets, and where we should be reinvesting. All that insight is very valuable. But if the subsidy cuts continue, all the data is going to show you is that more funding is needed.

If you do both, if you have a reinvestment plan that provides sufficient capital funding and gives the PHAs the authority to assign subsidy streams to each asset, and force them to view each asset as a standalone proposal, it will make a big difference.

McCormack: Of course people can live within a budget, but what happens over a longer period of time? That is how a lot of public housing got into trouble in the ?70s and ?80s. They may not do a lot of deferred maintenance that needs to get done.

It?s a small problem today, but it?s a large problem in several years.

Project-based management is a good idea, but as far as we can tell there?s not adequate compensation for the PHAs to perform all the monitoring duties and reporting duties that HUD has assigned to them.

Glover: Project-based discipline is good, but there are a large number of prescriptions on how to do it. In some cases it?s not going to work. There is no recognition of mixed-income communities. My big concern is, one, that it will be overly proscriptive and two, the folks who will be looking to implement this won?t have the type of real estate expertise [needed]. It needs to be less proscriptive and more focused on outcomes so there is a better connection between development and operation.

Zaterman: [During consideration of QHWRA], the bargain that was struck was that we?d have a cost study, determine what the operating-cost needs are, and as part of the negotiation, there would be a move toward project-based management.

HUD is instituting asset management and has implemented the formula, but has not asked for the funding level that was part of the bargain. We have always supported asset management, but the other part of the bargain is still sitting at the table.