February 2, 2022
Can Affordable Housing be Developed without Government Subsidy?
The nation is in an unprecedented affordable housing crisis. The ripple effects of the lack of affordable housing on the education system, traffic and public safety are unquestioned. We at TriStar have been buying existing older apartment communities (NOAH – naturally occurring affordable housing) to preserve affordability, yet today the purchase prices have made sustainability of long-term affordability difficult. The prices for the most blighted apartments have morphed from $40,000/unit to $100,000 per unit, and the cost to rehabilitate the units to livability are almost as much as building new. So why buy old when you can build new for almost the same price per unit?

 The challenge is how to stabilize rents for those working the hardest to drive our city? If the average rent in Atlanta is $1,600 a month, then the average household needs to earn a base salary of $64,000/year or $30 per hour to afford city living, a challenging hurdle for low-wage families in the service industry.

Affordable Housing – Government Model

Affordable housing is provided by the government through Low Income Housing Tax Credits. These are allocated to each state based on certain metrics and then offered on a competitive bid to qualified developers. It requires substantial compliance for affordability and the bureaucratic red-tape is intimidating and keeps many smart, qualified landlords from entering the space. Better said, development in the private sector is more profitable with less hurdles.  While tax credit developments are one solution to meet the demand for affordable housing, they account for less than 10% of all housing stock and are not sufficient to meet the current shortage of an estimate of 80,000 units in Atlanta alone. Conclusion – we can’t build our way out of a housing crisis with government subsidies.

Affordable Housing – NOAH Model (existing apartments)

“Anytime I’ve talked about affordable housing I’ve mentioned you and Star-C…you helped me to shape my thinking about it. It’s not just about building but preserving affordable housing…” Mayor Andre Dickens on the TriStar and Star-C model.

The existing apartment inventory is a clear and readily available means to preserve affordability. How do we incentivize existing owners to preserve and rent at affordable rates? This is where the government might make the best impact - the incentivization toward affordability. This might be a federal tax exemption for those committing to affordability.

New Solutions Needed

TriStar uses the term “capital stack gymnastics” to outline the solution to preserving housing affordability. Landlords can increase financial returns to investors by raising rents. The more you raise rents and collect, the higher the cash flow and returns to investors. To keep rents low, you have to take away the pressure to increase rents from investors. This means that you have to have investors/partners who will allow you the time without pressure to increase rents in order to preserve the community.

A solution is been outlined in what called a “3 P Partnership” – using Private money (with low returns); Public subsidy – via tax abatements; and Philanthropic grant money to decrease the cost of the capital and to create long term sustainability.

The Hurdles

  • Private Money- even socially conscious funds we have spoken need a “mark to market” … meaning that their investments are seeking to “do good” but at market returns. Return requirements are coming down and there is a sincere effort to lead change in this area…leave it to the private sector.

  • Public Sector – the public needs the private sector and their innovation to help with solutions, but the government and private sectors don’t necessarily trust each other…private sector makes too much money (in the public mind) Government moves too slow, and the working relationship is mired in regulations and processes (private mindset).

  • Philanthropy – free money from the philanthropic world can do wonders and it is just becoming comfortable investing in housing. However, they don’t trust the private sector world or the government. Their model seeks to invest in nonprofit affordable housing developments…but is the talent to do this development easily attracted to nonprofits??? There simply aren’t enough out there… again the talent seems to go where the money is and that’s not in the nonprofit world.

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We have a new model/ organization to solve the problem but it will take three 3 parties coming together to lead the charge.
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Call us today to learn more at 404-698-3535 or email dgibbs@tristarinvest.com.

TriStar Real Estate Investment