LeadingAge Magazine · November/December 2014 • Volume 04 • Number 06

A World Without HUD? New Approaches to Funding Affordable Senior Housing

November 12, 2014 | by John Mitchell

Despite reduced federal investment in affordable senior housing, providers are seeking new ways to finance needed development.

In 2011, when both political parties were still unwilling to shut the federal government down over a budget fight, the bedrock HUD 202 program that had provided affordable capital housing funding got compromised out of existence. Suddenly, a decades-old program that had in recent years provided up to half a billion dollars a year just vanished.

“There was no policy discussion prior to the cut,” says Alayna Waldrum, housing legislative representative for LeadingAge. She explained that in the mad dash to reach a budget compromise the HUD 202 program, a nondefense discretionary spending line item in the federal budget, was an easy target. Although the program was severely cut in the previous years to $90 million, complete elimination caught many in the affordable housing community by surprise. HUD 202 was replaced with a noncapital assistance “demonstration project” funded at a paltry $20 million that so far has not been put to much use.

On its face, this budget event was a disaster. But in discussing their response to the HUD 202 upheaval, providers demonstrated financial savvy, street smarts and compassion. With the need for low-income elderly housing continuing to escalate, a good old-fashioned cultural shift was in order.

“The writing was on the wall. Given the direction of Congress, it’s not surprising this transition has occurred. But our members have proven to be quite adept. There is a growing need for senior housing and with fewer resources and no new subsidy, we had to come up with alternatives,” says Thomas Bledsoe, president and CEO of the Housing Partnership Network (HPN). HPN creates partnerships between affordable housing bricks-and-mortar agencies and the business sector, government and philanthropic organizations.

One strategy HPN adopted was to retool a longstanding investment device, the Real Estate Investment Trust, REIT for short. Last year HPN led a group of a dozen not-for-profit developers to establish the country’s first REIT to be owned and operated by not-for-profits and only the second to focus on affordable housing. Formed as The Housing Partnership Equity Trust, it obtained funding from such sources as Citi Corp, Morgan Stanley, Prudential Financial, the Ford Foundation and the John D. Catherine T. MacArthur Foundation.

Bledsoe says under the HUD 202 program, it could take one to two years to close a property acquisition deal by the time options and tax credits were lined up.

“It was difficult to compete against buyers looking to privatize property and maximize their revenue or flip the property,” he explained. “Now, with a shared REIT among our members, it gives us power in the marketplace that we didn’t have before. Now we can get a deal done in three months.” He cited one recent acquisition project where this newfound ability to react quickly motivated the seller to reduce the purchase price on a property by $5 million.

This innovative REIT model offers something for every party involved, according to Bledsoe. Sellers and for-profit investors who are committed to both social and business effectiveness can find a way to work together. Residents benefit because the REIT system creates a much more consumer-driven mindset in which the operators benefit in keeping their tenants satisfied to reduce turnover. And housing agencies have an effective new tool to meet their mission.

In a suburb of Chicago, Mercy Housing, one of the REIT owners, was able to acquire an apartment complex scheduled to be sold to a for-profit developer. With an average income of $26,000, most of the residents would have been priced out and forced to move. According to one 64-year-old resident, the only alternative for her and her husband—if the rent on their two-bedroom apartment increased beyond the $855 a month they now pay—would be a nursing home.

Chris Burckhardt, COO at Mercy Housing, says the REIT has expanded Mercy’s ability to acquire existing properties that can be rehabilitated compared to new construction.

“It’s not only faster, but there [are fewer] compliance and reporting requirements with rehab than new construction,” Burckhardt points out. This factor helps keep development overheads costs down. He noted the REIT model, which Mercy is interested in expanding, allows affordable housing agencies to tap into an existing network of socially minded capital providers. He says with the rollout of the Affordable Care Act, there is a naturally occurring interest in linking housing with health care management.

“We’re currently working with the LA Public Health Department to implement a pilot project across our healthcare system to correlate housing services to the delivery of healthcare outcomes,” Burckhardt says. “Such population management is of great interest to health care systems, which are looking for innovative ways to reduce their hospital readmissions.”

Bledsoe says the REIT is but one alternative funding model available to members. In San Francisco, The Tenderloin Neighborhood Development Corporation (TNDC), also a HPN member, developed an innovative mixed-use project to provide a residential community for low-income elderly and residents who were formerly homeless. This model allowed TNDC to incorporate resources from state and local mental health agencies, rather than rely only on traditional affordable housing sources, such as the old HUD 202 program. These resources included tax credits, local capital and operating funds, as well as new funds available from the state of California authorized under a Mental Health Services Act Housing program.

According to Amy Schectman, president and CEO at Jewish Housing for the Elderly (JCHE) and Lizbeth Heyer, JCHE’s chief of real estate, the organization worked to develop alternative funding sources even before the HUD 202 program disappeared. JCHE’s $42 million, 150-unit Shillman project in Framingham, MA (designated a Nationally Recognized Community of Quality by the National Affordable Housing Management Association in 2013), was a complicated project involving 17 sources of funding.

“We have to produce four separate reports a year for the different agencies, none of whom can accept combined reports,” says Heyer. But the paperwork is worth it to provide affordable living to Shillman residents whose income is too high to allow them to qualify for subsidies, but not enough to find quality living in the private housing market. The 17 loans in the project break down into four groups: traditional mortgage financing, loans from their own capital campaigns, blended loan grants and tax equity credits. The latter provided $6 million.

Schectman stressed the importance of making aggressive “green investments” to lower annual operating costs, which she considers a de facto source of new funding. (For more on green investments, see “Smart Energy Savings in Senior Living” from the March/April LeadingAge magazine.)

“We were one of the first affordable housing sites in the country to receive an Enterprise Green Community designation, which is a meaningful alternative to LEEDS certification,” she says, referring to the role of geothermal, high-end insulation and solar panels in efficiently managing their projects.

Michelle Norris, president of National Church Residences Development Corporation and senior vice president, business development & public policy with National Church Residences (NCR), agrees the HUD 202 cuts were not unexpected.

“We‘ve seen it coming. The funding has been shrinking for the past 15 years; it was not the program it used to be,” she says. Norris stresses that it is key that housing providers also change their service model along with their financing. New delivery solutions are attractive to investors and donors alike, as well as government agencies and residents.

“Our residents are getting older along with our buildings. By repurposing space in combination with different funding sources, we offer better service to residents as they age. And State Medicaid offices like it because we can now save them money,” she says. Examples of this repurposing might mean replacing a market in a building with a health clinic or wellness center, or adding a commercial kitchen to allow assisted living.

She cites Stygler Commons in Gahanna, OH, as an example which has yielded the state over $2 million in Medicaid savings. With about 50 percent of NCR’s residents being dual-eligible for Medicare and Medicaid, savings were realized when the structure was converted from affordable living to assisted living use. This allowed a significant number of its 150 residents to move from a skilled nursing facility to assisted living apartments at Stygler.

“No one wants to live in a nursing home when they can live independently,” Norris says. But nursing homes become the last resources when low-income elderly lose access to affordable housing. So if there is a platform [in a building] that we can repurpose with creative financing, it allows folks who are aging to remain in place.”

This includes 90-year-old resident John Miller, who quickly learned to relax with peace of mind from Stygler’s 24-hour care service. He is able to get daily help from staff with bathing, cleaning and three-times a week dialysis, but still maintain a strong semblance of independent living. Miller especially likes the central dining room, which was upgraded in the renovation to create the mixed-use capability.

“I do enjoy the food and not having to cook,” he reports. Residents such as Miller who are cared for proactively are happier and use fewer expensive health care resources. NCR is now looking at a sister facility next door to Stygler Commons for an additional transformational preservation project. The vision is to convert 50% of the units to affordable assisted living and to finance with a social investment bond structure.

“It is an exciting time to be in the business of housing and health care if you are willing to innovate and collaborate with many new partners,” Norris says. Even HUD is getting into the spirit of collaboration, recently changing a long-standing rule which prevented housing agencies from selling 202 properties to retain and reuse the proceeds.

According to the National Alliance to End Homelessness, the number of low-income seniors is projected to increase by one-third by 2020 and double by 2050. Seniors with no alternative to independent or assisted living housing often end up in nursing homes and emergency rooms, and are admitted to hospitals more frequently. This usage adds up to higher costs for the Medicare and Medicaid programs.

Despite success stories, Bledsoe of HPN, who is working to organize other REIT projects, stressed that there are still great challenges in meeting the need for elderly housing.

“The fact is, if society wants to provide affordable housing to low-income elderly, subsidies of some sort will always be needed.”

Schectman of JCHE speaks passionately about the shared societal commitment to affordable elderly housing.

“I don’t understand how, as a country, we got in this situation when all the data points tell us that in the next 20-30 years we’re going to have an exploding population of seniors,” she says. “Without the 202 program, we’ll end up as a country with two major line items of spending—defense and nursing homes. These alternative sources are less efficient and less comprehensive, so we urgently need to work to restore the HUD 202 funding.”

Editor’s note: For more on creative financing for senior housing, see “Preserving a Secure Future With Multi-Source Financing” from the November/December 2013 issue.