NOAH’s Arc: A New Option for Affordable Housing?

By Keat Foong

The Takeaway

• A huge nationwide inventory of naturally-occurring affordable housing provides opportunities for investors
• NOAHs may be also be attractive to market-rate developers seeking value-add opportunities
• Ready capital is key to enabling affordable housing developers to compete for NOAH properties 

Will NOAHs ease the shortage of rental apartments for low-income and working-class residents? The jury is still out. But NOAH—the acronym stands for “naturally-occurring affordable housing”—presents an alternative for developers and investors in an era of dwindling public financing.

Conrad Egan
(Photo courtesy of Community Preservation Development Corp. ©2013.)

In a nutshell, NOAHs may be described as affordable, market-rate housing that is not subsidized by the government. The product is also characterized by its age, condition and location, which is typically second-tier or third-tier cities. Millions of units fit the description, and NOAHs may be attracting renewed attention from investors as subsidies from low-income housing tax credits and other programs dry up.

NOAHs will become increasingly prominent, predicted Conrad Egan, a veteran affordable housing advocate who is the former president & CEO of the National Housing Conference and immediate past chairman of the Community Preservation Development Corp.

“All affordable housing developers are experiencing anxieties. We are anxious about the future of federal funding, and not just Section 8,” Egan said. “Things are so unsettled now, and Congress is hostile to new funding.” The upshot, he explained, is that developers are reducing their reliance on federal subsidies in order to gain more control of the future.

That’s where NOAHs come in. Shekar Narasimhan, managing partner of Beekman Advisors, said that there are “a ton” of apartments all over the country that are 40 to 44 years old and need preservation as affordable units.

Shekar Narasimhan, Beekman Advisors

Narasimhan estimates that the universe of NOAHs contains far more than 3 million units, many of them built during the 1970s to mid-1980s under Section 236 and other now-defunct federal government incentives.

Such housing is located near “population centers that need them” and serves households earning less than 100 percent—and frequently, less than 80 percent–of median income. Residents are typically middle-class or working-class workers, such as teachers, nurses, hotel employees or retail clerks, explained Narasimhan.

Location is another factor. These properties are not in the big metros, or they would already have been converted or redeveloped into higher-income housing. Instead, they are located in second-tier cities such as Eugene, Ore., Toledo, Ohio, Norfolk, Va., and Cleveland, said Narasimhan. Generally, their owners are Mom and Pop-type operators and rather than by major regional or national players.

To identify properties that showed the characteristics of NOAHs, Beekman Advisors conducted a national search for properties that are at least 30 years old, comprise 200 or more units and are located in metro areas with a minimum population of 100,000. Those data points identified 344,083 communities in 35 states, including California, New York, Ohio, Illinois and New Jersey. Moreover, Beekman Advisors found that the majority of these properties have 10 or fewer floors, average 319 units, and were built from 1970 to 1974.

In a market flush with capital, investors seeking value-add opportunities can find NOAHs attractive targets for acquisition and upgrades. One way to keep these properties in the affordable sphere is for non-profit developers to acquire, preserve and manage them. Under the right circumstances, non-profit developers can compete successfully with market-rate developers to acquire a NOAH.

Leveling the Field

A key part of these deals can be securing bridge capital. That was the case when Community Preservation and Development Corp. teamed up with Housing Partnership Equity Trust, a social-purpose REIT launched in 2012 with $100 million in funding from institutional investors, foundations and non-profit organizations.

J. Michael Pitchford, Community Preservation Development Corp.

Equity Trust supplied CPDC with upfront capital to purchase Woodmere Trace, a 300-unit community in Norfolk, Va., which was built in 1975. Equity Trust’s participation enabled CPDC to beat out market-rate competitors and close the sale in 60 days, said Michael Pitchford, president and CEO of CPDC.

For the renovation that followed, Equity Trust was the heavy hitter as well, providing 95 percent of the $20.7 million cost. Another partner, Community Housing Inc., contributed equity to finance the remaining 5 percent.

For its participation, Equity Trust receives 85 percent of the total returns from the project. CPDC garners a 15 percent share of operating returns as well as a procurement fee of about 1 percent of total cost.

CPDC intends to maintain rents at not more than 70 percent of the median area income, said Pitchford. Units at Woodmere Trace were renovated as needed at a cost of about $20,000 apiece, said Pitchford. Post-renovation, CPDC will raise rents by about $50 a unit on average.

Non-profit developers can acquire NOAHs and keep rents affordable by buying at the right price and avoiding over-rehabilitation, contended Tim Deyo, vice president for national real estate programs at NeighborWorks America, which provides funding and training for affordable housing and community development organizations nationwide.