The Guru Is In

Preservation Freestyle

By David A. Smith
September 9, 2019 5 min read

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Thirty years ago, when I and others were inventing affordable housing preservation, it came in only two flavors (ELIHPA and LIHPRHA), just like Coke and Diet Coke. Since then, the Coca-Cola Company has found out for itself what many other industries (from airlines to hotels to personal computers and phones) have discovered: to please picky customers, offer product and flavor individual choice. Coke invented the giant fridge-like illuminated touch-screen dispenser, which could be loaded up with major and minor flavor variations. Now, upon arrival at your preferred burger joint, you can by pushing a few virtual buttons select from one fizzy fountain any of 127 different flavors. They call it Coke Freestyle.

Meanwhile, 30 years of federal somnolence and neglect of affordable housing and a national dearth of innovation in policy and program design, coupled with the public’s rising thirst for customized preservation solutions, caused customers to turn away from HUD in favor of rapidly proliferating specialized preservation flavors.  On July 17, at the NH&RA’s Summer Institute Symposium on Preservation Strategies, I spent one of this year’s most intriguing and enjoyable days taste-testing Preservation Freestyle flavors offered up by several panels’ worth of a new generation of double-bottom-line entrepreneurs, featuring combinations including:

• Colorado’s statewide big-data strategic plan and map of all the potential preservation properties, together with what is effectively a triage algorithm to decide resource deployment priories.
• From Maryland, an 11-source Year 15-plus repositioning involving three levels of government resources (federal, state, county), plus a local PILOT agreement.
• Austin, TX’s city housing authority led tripartite conventional-into-affordable fast-decision/fast-close acquisition that recruited Community Development Trust as a long-term patient economic investor alongside both mission-oriented debt and LIHTC equity.
• Chicago’s inter-entity, inter-agency combined and coordinated strategy, driven by long-term Chicago-based innovator Community Investment Corporation (CIC), to target and preserve older affordable properties whether currently regulated or NOAHs.

And the takeaways from the day were:

1. When in doubt, preserve; with hindsight, it’s always cheaper;
2. Preservation strategy begins and ends with the inventory. With existing real estate, you can know almost everything about it before you start: where it is, what it is, what condition it’s in, who lives there, what it’s at risk of, and when. There is no excuse for acting without knowing all this ahead of time;
3. For policy makers and resource providers, preservation is an exercise in triage across dimensions of outcomes (how big a gap between no-action and action futures), timing (how urgent is it to act now rather than later), and resource opportunity (can this transaction tap a perishable or proprietary resource);
4. Using volume cap for anything but housing is like burning money;
5. For developers, preservation is an exercise in triage by cost-benefit analysis of feasibility (odds of closing), capital (outlay to inflow, how much and how soon), and unhedgeable political risk;
6. The good guys don’t all wear the same uniforms. Find ways to know them by their fruits;
7. Properties with ownership where entrepreneurial talent, deal economics or decision control are out of alignment, whether via slow obsolescence or otherwise, are inherently at risk – and the more misalignment, the greater the preservation urgency. Obsolescence can accelerate if the platform is facing generational transition, either within the family or out of tension between a paternalistic founder and a rising cluster of home-grown talent within the platform;
8. Private equity has discovered affordable housing as a niche asset class. It sees value-additive potential through refreshing the platform’s capital, portfolio configuration or growth strategy, financial structure, ownership dynamics (misalignment of economics, capacity and control), business model or risk profile;
9. When looking for new resources, find your latent future partners. If the property isn’t preserved, who loses?  What do they pay? Are they aware how much they’re drafting on your uplift? What resources do they have that you could use? Has anyone asked them to contribute to a structured transaction?  If you haven’t, why haven’t you?;
10. Major employers are an untapped resource, especially those in the 4+1 of sustainable urban jobs: education, tech, healthcare, government and leisure/hospitality;
11. You thought you were just a developer hunting a deal. In fact, you’re a combination of amateur investment banker and hobbyist policy maker; and
12. For preservation models, open-source is the only way to go. Try as you may to keep your nifty new transaction type proprietary, everything will eventually be known (published or leaked via gossip) or reverse-engineered.  You win such a meta-game only by making the pie higher: your goal is to lose market share slowly within a field and resource environment expanding rapidly.

In 2019, don’t have one flavor of preservation. Instead, ask your current and latent customers what they’re thirsty for, and then respond, Preservation Freestyle, “It just so happens that we can dial that up fresh from the fountain now.”