Berkadia’s Head of Affordable Housing on Rent Control

David Leopold discusses the impact of rent regulation on the industry and shares a few solutions to expand the affordable housing inventory.
David Leopold, Senior Vice President & Head of Affordable Housing, Berkadia. Image courtesy of Berkadia

Three states have enacted rent control legislation last year, and more could follow. Years of above-trend rent growth have resulted in a renewed push for setting limits. “It’s no secret that rent reform has become a national issue,” Berkadia Senior Vice President & Head of Affordable Housing David Leopold told Multi-Housing News.

Leopold recently joined Berkadia from Freddie Mac, where he served as vice president of targeted affordable sales and investments in the company’s multifamily arm. With a solid background in the affordable housing industry, he is currently leading the newly created Berkadia Affordable Housing division.

In the interview below, Leopold shares his thoughts on the effects of rent control, the lending environment and the best solutions for increasing the affordable housing stock. He also touches on how the COVID-19 pandemic is likely to impact the affordable housing market going forward. 


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How are construction loans performing in the context of affordable housing projects?

Leopold: Within affordable housing projects, construction loans tend to outperform conventional loans because lease-up is more predictable, given the high demand for affordable units. However, actual construction time frames and budgets for affordable projects often trail conventional ones because public agencies frequently tie requirements to subsidy allocations that conventional construction avoids.

To that end, as our recent affordability report explains, some developers are beginning to consider modular construction alternatives to decrease costs and increase speed to market. New approaches, like modular and manufactured housing, allow investors to build more affordable apartments in both subsidized and unsubsidized construction. Through both modular and manufactured housing, developers can construct garden-style communities from the ground up at a lower total cost, which decreases both their bottom lines and rental costs for future residents.

What role do real estate investors such as insurance companies, pension funds or hedge funds play in addressing the affordable housing crisis in the U.S.?

Leopold: Institutional investors—whether a hedge fund, pension fund, insurance company or otherwise—see multifamily commercial real estate as a vehicle for safe and defensive investments, with great potential for strong returns. For institutional investors, multifamily investments can justify the high cost in relation to their investment’s long-term intrinsic value or ROI potential.

Tell us about the effects of rent control so far. How does rent control impact the affordable housing market in the long run?

Leopold: It’s no secret that rent reform has become a national issue. Last year, statewide reform was enacted in Oregon, New York and California. These states took the boldest steps yet to address the affordable housing shortage, but unfortunately, legislators leveraging rent control as a source of immediate relief only compounds the nation’s more complex issue of available, long-term affordable housing. Instead, rent control today is impacting affordability in three key ways: decreasing supply, misallocating support and increasing overhead costs.

Rent control dampens supply and leads to a bifurcated market, split between properties that are controlled and those that are not. Price ceilings make rental housing an unprofitable venture, causing developers to have less incentive to build, maintain or improve their properties. This leads to property deterioration and poor living conditions for those who most need affordable rent.

Moreover, rent control does not provide a targeted subsidy for lower-income households who need assistance the most. In fact, rent control regulations are tied to units, instead of households, meaning that a rent-controlled unit could be rented to a household of any income level. Rent control reform often leads to a stream of local capital flowing out of an area and into more potentially profitable markets. These policies also make it more expensive for property owners and managers to operate, because of added compliance fees and overall operating costs.

The extent of the affordable housing challenge, however, varies across geographies. The housing market is affected not only by local market conditions, but also by socio-political factors, environmental concerns and the regulatory landscape.


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How are the uncertainties around the reform of government-sponsored enterprises impacting affordable housing lending?

Leopold: While we did see a slowdown of GSE activity in the fall of 2019, alternative investors were able to pick up the slack and provide substantial financing across the market. We can anticipate that these alternative avenues will continue to play a more active role in debt financing as the uncertainty around GSE reform continues.

In terms of affordable housing, alternative investors have shown the greatest interest in workforce housing and that’s the segment we find ourselves providing the most education on, and insight into, for our clients. Rent-restricted affordable housing remains reliant on GSEs for permanent financing and we expect that to continue.

What challenges and changes lie ahead for capital markets on the regulatory front?

Leopold: The country’s largest cities—like New York and Los Angeles—have seen a recent emergence of regulations to stabilize rent. Rent-control restrictions tend to depress new investment and make existing investment performance less predictable, thus making these markets less attractive. As a result, investors have begun to turn their attention to secondary markets, such as Phoenix, Las Vegas and Atlanta, because of their potential for growth and looser regulations.

California, Colorado, Illinois, Massachusetts and Washington were all anticipated to vote on rent control legislation in 2020, and Maryland, Minnesota, Nevada, Virginia and Washington, D.C., were considering rent control laws that may be brought before their citizens in the near future. Rent control legislation is on the rise and could mean big changes for the commercial real estate industry, should it be widely enacted.

Another regulatory development we’re keeping our eye on is potential revisions to the Community Reinvestment Act. CRA reform could impact LIHTC markets by changing the regulatory value banks receive from investments in low-income housing tax credits. In December 2019, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. announced proposed revisions to the CRA regulation. We continue to pay close attention so we can understand the potential impacts to our clients and partners.


Berkadia’s latest poll ranked modifying tax credit policies, local and state government intervention and regulatory changes for GSEs as the top three solutions for affordable housing in 2020. Can you expand on what these three solutions could mean for the market?

Leopold: Certainly, movement on the Affordable Housing Credit Improvement Act, which was reintroduced in June 2019, would have a meaningful impact on expanding and strengthening the low-income housing tax credit. Similarly, the Historic Tax Credit Enhancement Act, which was introduced into Congress last year, would have a positive effect on increasing equity available to support rehabilitation and redevelopment projects.

On the local and state government side, we’re seeing an increase in the creation of subsidy programs to promote affordable housing. On the capital side, these include efforts like local housing trust funds, subordinate financing and state tax credit incentives. On the operating side, these include efforts like tax abatement programs and density bonuses. These are positive interventions that encourage new investment and new development.

There have also been talks of regulatory changes that would lower the barrier-to-entry for borrowers to secure financing from GSEs, allowing more projects through and more capital to flow from GSEs to projects that are improving communities and combatting the affordable housing crisis. Conversely, any new limits on the GSEs’ ability to provide capital for affordable projects would have a detrimental impact.

How do you expect the coronavirus pandemic to impact the affordable housing market?

Leopold: COVID-19 and related economic impact have added more uncertainty to our already complex industry. Affordable housing is more vital than ever, as our tenants are often more vulnerable populations that may be disproportionately impacted by the virus itself and related economic hardships. We are actively tracking market conditions, legislative updates, lending and forbearance guidelines from the Federal Housing Finance Agency and GSEs, and, most importantly, we are speaking with our clients to better understand their priorities and areas of concern or opportunity.