Heraclitus’ Preservation

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No man ever steps in the same river twice, for it’s not the same river and he’s not the same man.

– Heraclitus, ~500 BC

 

How much can change and still be called preservation?

At the recent presentation by the National Affordable Housing Management Association of its Community of Quality awards, all five winners were preservation: two 42-year-old Section 236s undergoing rehab; a new-construction rising like a phoenix from razed public housing; a 1928 hotel on its second renovation (1995 and 2013); and the turnaround of a drug-infested eyesore. Among them, virtually everything that we normally consider a property attribute was changed.

The standards of market-quality housing in America are ever-rising, faster recently with the technology revolution. Whereas before a property had three utilities (water/sanitation, heat, electricity), we now count five (add air conditioning and broadband). Whereas once a single bathroom would do for a 3-BR, now it’s two or more, with plumbing retrofit inescapable. What two decades ago might have been the living-dining room has morphed into today’s media room/home office.

As the Red Queen said to Alice, “It takes all the running you can do to keep in the same place.” At a minimum, “preservation” means maintaining market parity, which usually means upgrading the following:

  1. Floor plans. Older floor plans are the exoskeleton and visual expression of a long-gone architect’s conception of family life. With today’s broader and varied definitions of family, old floor plans are outdated. Walls must move.
  2. Electricity. In the old days, load was limited to stove, refrigerator, and incandescent bulbs. Today’s apartments host central air conditioning, microwaves, flat-screen televisions, and computers, and the electrical system must handle 2x or 3x the amperage.
  3. Energy green. Green enough yesterday is too brown tomorrow. Green wins QAPs; brown doesn’t.
  4. Broadband. Every in-home device (television, telephone, computer) is converging on the necessity for ubiquitous instantaneous broadband coverage for everything.
  5. Capital stack. Financing is a suit of clothes, custom-tailored to serve a purpose. Virtually every preservation transaction remakes the existing capital stack, adding new discretionary resources and restructuring, extending, or paying off at a discount the old discretionary resources whose bill has now come due.
  6. Resident services all-you-can-eat buffet. Two decades ago, “resident service” meant responding to maintenance requests. Now it’s a custom-designed package of “housing plus” life-improving activities delivered by outside experts, and coordinated with resident/management schedules. All of that requires reconfiguring the property’s common spaces into services platforms.
  7. Ownership entity. Often the least functional thing about an aging property is its demotivated or anachronistic general partner; under-scaled property manager; un-motivated limited partners who have taken all their tax benefits; or excessive soft debt that creates utter misalignment between control and incentives.

So if all of the above elements are changed in a preservation transaction, what do we actually keep?

Working from most tangible to most abstract, we generally preserve the:

 

  1. Shell and exterior appearance. While not an absolute rule, a property’s structure or exterior shell is almost always kept, and certainly retained in all historic rehabs.
  2. Zoning, especially any grandfathering of non-conforming uses (like under-quota parking or height/lot line restrictions), because the project’s pro forma needs that density to remain viable.
  3. Tenancy, though often with a shift in income targeting. The latter typically gets more concentrated, as low-income gives way to LIHTC (60% of AMI), very low-income (50%), or extremely low-income (30%). Deeper or more specialized targeting stresses the NOI and necessitates additional income subsidy, less hard debt, or both.
  4. Current residents. If we cannot rehab around residents in place, they are generally guaranteed a right to return.
  5. Subsidy, even if repackaged. An existing property is a subsidy magnet; the property must keep every bit it has.
  6. Sense of community. Bad properties change their names; good properties don’t.

 

Three decades ago science fiction writer Rudy Rucker wrote, apropos of human cyber-evolution, preserve your software; the rest is meat.

When all is said and done, a preservation transaction preserves what is the essence of an affordable community – market-quality housing at an affordable price.

Preserve your affordable community. The rest is bricks.

David A. Smith is Chairman of Recap Real Estate Advisors, a Boston-based real estate services firm that optimizes the value of clients’ financial assets in multifamily residential properties, particularly affordable housing. He also writes Recap’s free monthly essay State of the Market, available by emailing dsmith@recapadvisors.com.

David A. Smith is founder and CEO of the Affordable Housing Institute, a Boston-based global nonprofit consultancy that works around the world (60 countries so far) accelerating affordable housing impact via program design, entity development and financial product innovations. Write him at dsmith@affordablehousinginstitute.org.