May 3, 2022
Affordable Housing: Challenges Getting Landlords on Board Part II
Affordable Housing: Challenges Getting Landlords on Board Part II

Affordable housing is needed! Someone has to be committed to providing the product. It can be provided with government assistance in the form of tax credits and subsidies. It can be done by mission-based landlords who want to play in the space (for profit and nonprofits). Savvy developers understand that affordable housing is the perfect coordination between the structural, political and capitalist worlds and finding this combination can be challenging, even for the smartest landlords in the space. So, what are the hurdles of playing in the much-needed space?

The Structural World - Tenant Destruction and Accountability

Pest control is a difficult problem in affordable housing. Many blame the landlord for allowing an apartment to become infested with bugs, but no amount of pest control or chemicals in the world can solve a bug problem caused by poor housekeeping. Simply put, you can’t leave pizza boxes on the floor and dirty dishes in the sink, and not expect to attract bugs/rodents…it is the problem! If you leave food out, they will come. A landlord can spray, trap and keep after it, but until the problem (food and trash) is handled bugs will persist. For this reason, extremely poor housekeeping is a lease violation that can lead to eviction or non-renewal. 
We have a problem tenant that never cleaned the apartment, and the unit became a haven for roaches. Those roaches multiplied and infested all the neighboring tenants who had clean apartments. The one bad tenant created a chain effect of problems that caused others to move out. When we finally got this tenant out, we had to shut down three units for several weeks to fumigate and take care of the issue. Visit any student housing community, and you will understand. 

The Capital World - Unit Turns
The cost of operating affordable apartment units can be expensive, when tenants don’t comply with their leases. In many apartments, when you move out, you clean up, and you get your security deposit back. In an affordable community, some tenants never expect to see the deposit again, so they take out the pound of flesh on the way out. In a typical rental environment, a landlord cleans carpets, maybe paints and soon, a new tenant is ready to move in. In affordable communities, some tenants rip down window blinds, kick in walls and create a mess of anger on the way out. Not only does it cost more than average to “turn a unit” ($2,000 per unit), but it takes twice as long to repair broken windows, replace stolen appliances, etc. Landlords can get restitution for their losses through the court system, but good luck collecting. 

The Political World - Eviction Delays
Under normal conditions, to evict a nonpaying or poor housekeeping tenant, you give notice, you obtain a writ of possession, call the marshal, and maybe within 3-4 months, the tenant is out. In the City of Atlanta, so many evictions are being filed (pre-COVID) that it would take 6-8 months to get a nonpaying tenant out of the unit. In one case, notice was posted, we went to court and the tenant said they never got the notice of nonpayment…the judge gave the tenant 2 more months, and the same thing happened again… Due to COVID, we have had tenants think the rent moratorium was a non-rent period, and we have not been able to remove one nonpaying tenant for 15 months. 
Why would you ever want to be a professional landlord in the affordable housing space when the tenants, the courts and the system are not in favor of landlords?

The Capitalistic World
With so much damage and the tenant credit crisis, its no wonder that many landlords would rather focus on lucrative Class-A apartments. However, if a landlord is willing to take a risk in the affordable housing space, they want to be paid for the challenges. We often see investors requesting 15-20% returns for “affordable housing” investments, which is a contradiction, since landlords must raise rents to pay for the investor returns – adding $300-$700 per month to the rent. The Capital markets have earmarked funds for social capital but still want market returns. It’s difficult to have social change without capital compromise.

What’s Needed

What can encourage professionals to enter into a difficult but greatly needed environment like affordable housing? Some ideas:

  1. Tax Incentives (nontax credit) – for commitment to affordable housing. There are low-income housing tax credit programs, but they are competitive and costly to participate in. Why don’t we have tax reductions for all those committed to maintaining affordability?
  2. Infrastructure Assistance – the majority of apartments that are affordable were built in the 1970’s. The waterlines and sewer pipes are eroding, and many of the costs in an affordable housing community are fixing leaking pipes. No one knows how to budget for this or can forecast when it will happen.
  3. Cheap Capital – there are social impact funds that are seeking to invest in “green things.” Why not in affordable housing? Nonprofits exist in the space, but they are few and far between. Why not get the mission-based for profit world engaged?
  4. Insurance Assistance – do you know that insurance providers don’t want to insure affordable housing and those that do charge a huge premium? This makes it a difficult place to operate for non-institutional players who don’t self-insure. The risk is just too great (see last article on torte reform against ambulance chasing attorneys). 

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TriStar Real Estate Investment