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As reported by The Washington Post, a Harvard University Joint Center for Housing Study found nearly 75% of the approximately 12 million affordable rental units in America’s major cities remain to date unsubsidized.
What is perhaps a new-to-you term for this type of housing? Naturally occurring affordable housing, or NOAH — and it may be coming to an investment you own. As such, it’s important for investors to understand NOAH and related goals or initiatives that may subject your property to interest from the state or non-profits looking to preserve affordable housing.
These areas are not just on the coast of the country either; these undesignated areas can be found in many cities. According to the Washington Post, NOAH “constitutes most of the affordable units in America.” These dwellings are typically understood to be “at least two decades old, short on amenities and affordable without a subsidy.”
Supporters of NOAH are interested in identifying and sometimes formally classifying less than desirable housing as affordable housing to help lessen the shortage in supply that many call a crisis.
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So there you have the loose definition. This is important because there is a push to bring planning, taxing and other factors in on developing new standards and incentives. This can be very impactful considering the percentage of the areas identified and potentially designated — even loosely — in order to preserve what is considered needed housing stock. Filtered, as opposed to naturally occurring, affordable housing is another take on the same theme.
Remember, real estate is a bundle of rights that you have as an owner of a property. You will of course be subject to zoning, planning and taxes on the property and its use. Otherwise, you can rent, lease or otherwise convey to produce an income or house an income-producing activity.
Preserving NOAH
The assets in these areas are generally 20 years in age or older and need significant rehabilitation or have extreme deferred maintenance. The reasons for the state of repair can range from rental factors that make it difficult to maintain the properties, lack of aptitude or even owners who couldn’t care less. The solutions being contemplated are in effect going to determine much of the value going forward if implemented. The discussions include what is known as covenants.
In a McKinsey article on preserving affordable housing, the authors point out that “A lack of covenants and subsidies has always, by nature, made NOAH assets vulnerable to either redevelopment or disrepair.” In the wake of the pandemic and its economic impact on NOAH renters and owners, there is even greater vulnerability to the loss of this type of housing.
Proponents of this approach of preserving and focusing on the issue from a holistic view think the situation requires intervention from different points. The talk is of stabilizing independent owners via new subsidies for upgrades to the property in exchange for covenants to keep it as affordable housing. Should the property become available for sale, the proponents of preserving NOAH suggest that avenues of financing can provide capital to developers interested in NOAH preservation while maintaining competitiveness in the market.
Equity And Government Intervention
When considering actions to preserve more affordable housing, I’m reminded of theories like Pareto efficiency and Hicks-Kaldor criterion. Both tackle the concept of improving one segment of a circumstance without harming another — with options to compensate the harmed party when harm cannot be avoided.
Covenants are one path proponents of preserving affordable housing are considering. Covenants — once upon a property — run with the land and cannot be extinguished after they are placed on the title unless all involved parties agree to amendments. In this particular case, the suggestion is to offer low-interest loans to rehab or otherwise acquire properties deemed NOAH. The basis of the covenant is that if the incentives are accepted, the current owner and any future owner shall hold the rental as affordable housing and accept those levels of pricing.
Investors who want to stabilize a property and want to achieve a true market rate of return would not be able to under these types of covenants or rules. If governments intervene in the housing supply mix without any real skin in the game, it brings a cloud over what may be the most economically viable thing to do from a redevelopment standpoint. This course of action also has the potential to limit gentrification in these very same areas — a phenomenon associated with increased property values and in the eyes of NOAH proponents, limited affordability.
Finding New Avenues To Affordable Housing
What are investors likely to do with more of these initiatives coming online in different cities? Take the low-rate loans and give a covenant? If they don’t wish to do that, then what? You might find yourself presented with a future of low or no rent due to the condition of your property and no subsidized rehab or redevelopment funds to compare. At that point, you would either need to reinvest yourself using more traditional financing or sell the property. Selling may be difficult — especially if your property is severely dilapidated. You may also find that non-profits or other investors willing to use subsidies will buy — increasing the number of subsidized properties.
In terms of other ways to accomplish similar goals to what NOAH proponents strive for, there are options. These include a more direct contribution on the government’s part such as contributing surplus government land in a true public-private partnership, a topic I’ve written on before. Another option to consider is increased density in out-of-the-box locations. The other option, of course, is for individual owners to keep affordability in mind for tenants.
It’s admirable to think outside the box while facing a circumstance as dire as the affordable housing shortage and the economic upheaval caused by the pandemic. I’d argue it’s just as admirable as the right of a property owner or investor to understand any studies or initiatives that could impact their investment. With many options before governments and even individual owners, it’s important to stay informed and understand stated goals.
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