New executives have taken the helm at several AHF 50 companies during the past year.
The new leaders include Ismael Guerrero, president and CEO of Mercy Housing, a national nonprofit headquartered in Denver (No. 6 on the owners’ list and No. 15 on the developers’ list), and Sean Spear, president and CEO of Community HousingWorks in San Diego (No. 44 on the developers’ list).
The Retirement Housing Foundation (No. 22 on the owners’ list) also had a change at the top for the first time in more than three decades when Stuart Hartman was named president and CEO of the Long Beach, California-based organization. He has been with the nonprofit for 30 years, recently serving as senior vice president of operations, acquisitions, and development.
What is the best or biggest move you’ve made since taking office?
Guerrero: As the new head of a national organization, I thought it was critical to connect with staff and go see properties. We don’t just build housing, we are part of our communities. Even though it was challenging and maybe not totally advisable, during a lull in new cases during the summer and fall, I made two road trips, including a four-week driving trip from Los Angeles to Seattle, stopping at our communities along the way and working remotely in between. It was invaluable for me to see what we do, where we’re at, and meet the staff. Of course, we were socially distanced and followed the CDC guidelines.
Spear: Shortly after I joined, the board and I came up with the idea of creating a 100-day plan, surfacing challenges and opportunities for the organization in the near term. I arrived at three functional areas, primarily focused on our acquisition strategy, our fund development work, and beefing up our asset management framework. It gave us a chance to think creatively about how we address the immediate impacts of the COVID recession on our residents and the organization, as well as come up with new initiatives designed to deepen our impact and strengthen our long-term financial position. It ended up being a valuable exercise for us.
What issue have you spent the most time on this year?
Guerrero: We have almost 25,000 units that we own and manage. Our goal in the next five years is to add a little over 6,000 units, a 25% to 30% growth in that timeframe, plus we have another 3,000 that we want to recapitalize. We’ve been thinking about how to creatively finance all of that work. Most of the households we serve are earning less than 30% of the area median income. They need very low rent housing and supportive services. That’s our model. We rely on 9% and 4% low-income housing tax credits (LIHTCs) as well as a lot of gap financing and rent subsidies from local partners. That’s a lot of layers to the capital stack to get any one deal done. When you have an ambitious growth plan, you have to get creative about how to make that happen. We’ve been able to raise a $45 million gap fund to make sure when we are developing properties, especially in states that have less soft funding availability, that we have an internal fund where we can be a subordinate lender to a project. We’re also working on a land acquisition fund so we can be more proactive about acquiring sites. We’re also starting to work on modular housing initiatives.
Spear: It’s been our response to the COVID crisis. Our rent delinquencies have been substantially less than the average for the industry here in California. We were feeling good that our delinquencies were lower than that of many of our colleagues, but we soon realized that may not be such a good thing. Much of our portfolio is in the high-cost regions, along the coast in San Diego County and also in the Bay Area. Feedback from our services staff made us realize that there may be a hidden problem, namely that residents may be making challenging decisions about their money. In the high-cost areas, there’s just so few affordable housing resources, so having an affordable unit is like gold to them and they would want to hold on to it even for the sake of potentially foregoing on other basic needs. We opened an emergency rental assistance program and had a large number of residents identifying their desire to participate. That made us realize we needed to do something more than just be a conduit for rental assistance. We went from taking a landlord role through the emergency rental assistance programs to stepping up and creating our Housing and Hunger Relief Fund Campaign. Our goal was to raise $1 million in six weeks for our residents to get rental assistance, food, and access to financial coaching. We are within a hair of hitting our goal.
Hartman: For the past year, I’ve been deeply embedded in developing policies and procedures to keep residents and staff safe during a pandemic. We’re not just affordable housing operators. In addition to our affordable housing, we have market-rate, assisted-living, and skilled-nursing communities. With a variety of housing and service options for residents, it was key to keep everybody—residents and staff—safe. I’m grateful we are moving to a much better time with COVID-19, and we’ve been working hard to bring vaccine clinics to many of our sites. As a result, several thousand residents and staff members have been vaccinated. Because we’re not seeing an increase in COVID cases in our communities, it gives us reason for hope.
What advice do you have for other firms that may be going through a succession change?
Hartman: The support of the board of directors and having a transition team are key. I’m fortunate we have an exceptional board, and four members helped to form the transition team. Regular meetings with that team scheduled over the course of the first year have been extremely helpful. We’ve discussed what I as the new CEO see as the priorities for the organization. Having the support of not only the transition committee but the entire board has been invaluable.
What is the biggest challenge for affordable housing developers this year?
Guerrero: The one that keeps coming up in our pipeline has been construction costs, particularly materials. Lumber costs have gone up over 100% in the last year, and that creates uncertainty as we try to get projects to closing. Total development costs and construction costs continue to be a challenge.
Legislative reform is also important. We’ve done a lot of advocacy for reforms to the LIHTC program. The main one, the Affordable Housing Credit Improvement Act, has been reintroduced. In addition to important program reforms, the act would be a 50% increase to available credits, the economic engine behind affordable housing. It would make tax credit projects that much more feasible. If we don’t get Congress to act, it’s going to continue to be a challenge to increase the supply beyond the current levels.
Spear: I think everybody is reacting to COVID, of course, but, at least here in California, our colleagues are also dealing with the continuing scarcity of financing resources. While the locals and some other partners have stepped up to the plate and recognized that the feds are behind the curve, the lack of federal resources remains daunting. The 9% and bond and 4% programs are each heavily oversubscribed. I’m sure you’ve heard it from others that they have projects that are ready to go except for needing their allocation of housing tax credits. This results in longer hold periods, greater interim costs while they are holding on to properties, and not being able to start construction.
Hartman: From a developer perspective, one extremely challenging issue right now is runaway construction costs. The price of lumber has nearly doubled in the last couple of years for a variety for reasons, including the pandemic and the run on materials related to recent weather challenges. Another area has to deal with funding sources. In California, the bond application process is becoming more competitive. In addition, while the Department of Housing and Urban Development (HUD) is seemingly coming back to the table with some degree of funding for senior affordable housing transactions, the programs are not being funded to the same degree as the old Section 202 program. You used to be able to build a property with HUD 202 funds being your only source. Now, you have to cobble together multiple sources, making it more challenging to get a new community out of the ground.
From an operational perspective, we’re still dealing with a variety of guidance from the federal, state, and local health departments on managing COVID-19. Although a number of states have opened up, we are not out of the woods with COVID-19, yet.
What is the biggest opportunity for affordable housing developers this year?
Guerrero: We have housing resources that are starting to line up under the Biden administration. The American Recovery Act has over $25 billion, from rent relief to homeless funding to emergency vouchers. The American Jobs Act, if that goes through, will have billions more. The administration has also proposed a 15% increase in the HUD budget. If successful, there’s going to be a lot of dollars coming not just from federal agencies but funds that will flow through to the states. There may be a lot of money coming, and we need to be ready to deploy it and deploy it in a way that’s strategic and well thought out for maximum impact. There is also more of a focus on racial equity and equitable investment in communities of colors and communities that have been most disinvested in. Making sure that money gets deployed strategically but also equitably is something we have to keep our eyes on.
Spear: I’m reminded of the saying that necessity breeds innovation. We’re looking at ways to finance projects without housing tax credits, employing alternative building methods, and, at least for us, it’s been about developing partnerships with other industries like health and education to address what are connected challenges. More and more, high-quality affordable housing is seen as a benefit to other elements of a strong society. Numerous studies have shown that there are better health outcomes. There are better education outcomes. There’s more upward mobility for low-income people who have access to affordable housing.
An example is we are in partnership with San Ysidro Health around designing a new urban village that would feature not just affordable housing, but a health-focused urban campus. We will be doing 145 units of affordable housing alongside a federally qualified health care facility and a comprehensive senior center—right in the heart of National City. Partnerships like this are where we can have the opportunity the deepen the community impact of our affordable housing.
Hartman: People in Washington, D.C., are looking to put money out whether it’s in an infrastructure plan or another proposal. Part of the infrastructure plan includes things like broadband, which will be beneficial for existing residents in affordable housing. I’m hopeful that part of the infrastructure money may find its way to the development of new affordable housing. I view putting people in housing as an infrastructure issue. We may see opportunities down the road for more new construction to take place albeit we have challenges with construction materials cost and financing. But, I’m hopeful that we’re going to see a shift to where developers can get back to bringing more units out of the ground faster, especially when you look at the significant homeless problem that exists across the country. I believe some of our political leaders are recognizing the magnitude of that problem. It’s going to cause them to redirect resources to help solve the homeless challenge we have today.