Making the Case for Affordable Housing Investment
- Jun 03, 2019
High construction and land costs have pushed developers to building more luxury housing projects. Catering to underserved communities has become an even bigger challenge. A narrowing group of socially conscious investors is trying to fill a widening gap. According to Turner Impact Capital Founder & CEO Bobby Turner, nearly one in two households is considered rent burdened—monthly rent takes up more than 30 percent of income.
In 2015, the company launched the Turner Multifamily Impact Fund to address the growing shortage of affordable workforce rental housing in densely populated urban communities throughout the U.S. Currently, the fund owns more than 7,500 units in Washington, D.C., Las Vegas, Atlanta, Dallas, San Antonio, Austin, Texas and other major metropolitan areas. Plans call for the acquisition and management of up to $2 billion in urban market communities.
In order to raise awareness about the critical need for workforce housing and draw attention to residents’ needs, Turner Impact Capital teamed up with several celebrities. Together with actress Eva Longoria and NBA superstar Chris Paul, the company invested in affordable workforce housing units across the country, while tennis legend Andre Agassi contributed to the construction of charter schools. In an interview with Multi-Housing News, Turner revealed how social impact investing can deliver superior risk-adjusted returns and also touched on the weaknesses of the Opportunity Zones program.
What are the greatest challenges you came across when investing in projects that have social impact?
Turner: One of the greatest challenges we face is the misperception that investing in social impact requires sacrificing investment yield. Our track record refutes that and dispelling that myth is part of my personal mission as CEO. The fact is that social impact investing, if done correctly, can deliver superior risk-adjusted returns. This is because, unlike so many real estate investors, we are not speculating on demand, so our returns are significantly less correlated to broad market indices such as interest rates or the Dow Jones Industrial Average.
Demand for high-quality school facilities, community-serving health-care facilities and affordable workforce housing is unmet and dependable. By reliably meeting that need, not only can we earn superior returns for our investors, we can strengthen communities and cultivate hope at the same time.
What metrics are you looking at before deciding to invest in a certain project?
Turner: All of our housing investments must meet a set of criteria that we call the “ABCs.” They are affordable with naturally occurring rents within reach to those earning up to 80 percent of the area’s median income. They meet our bottom line requirement of delivering strong financial returns for our investors. They present community development opportunities where our resident-focused enrichment services can deliver clear and measurable impact for our tenants. They are located in markets with high demand, driven by dense, diverse and growing populations as well as proximity to job centers and transit. Also, they allow for environmental sustainability through audited opportunities for capital and operational improvements to ensure each community is environmentally responsible.
How can affordable housing investments produce market-level returns?
Turner: There are two ways to increase returns as a real estate investor. You can either increase rents or lower expenses to improve operating margins. We choose to do the latter. The greatest expense for a multifamily property owner is turnover and vacancies. By enriching a community and creating a “pride of rentership” through the targeted enrichment services I mentioned earlier, you can reduce these costs by lowering turnover and extending the duration of tenancies. And you do it while keeping the community affordable for working families. It’s a win-win.
What can you tell us about your fund partners? How do you collaborate with celebrities in order to cater to low-income residents?
Turner: Turner Impact Capital’s fund partners are extraordinary people who are incredibly passionate about our mission of harnessing market forces to make a positive difference in underserved communities. I consider Andre Agassi, Eva Longoria and Chris Paul to be “ambassadors of great will” in the areas where we invest, providing insight and guidance to help us develop and maintain socially impactful, community-serving real estate infrastructure. They are also very effective in drawing public attention to the fact that profits and purpose can come together in very powerful ways to make lasting change for communities.
Andre, Chris and Eva also have deep personal connections to their areas of focus. Andre’s role with the Turner-Agassi Charter School Facilities Fund stems from his deep-rooted belief in the power of education to change children’s lives. Eva and Chris teamed up with the Turner Multifamily Impact Fund because they are committed to making sure families have access to safe, stable housing they can afford.
Please talk about your latest social impact initiatives in affordable workforce housing.
Turner: Workforce housing is a critical need and a core investment area for Turner Impact Capital. America is in the grips of a severe housing crisis. Nationwide, nearly one in two renter households are considered “rent burdened,” spending over 30 percent of their income on rent, and one in four spend more than 50 percent of their income on rent. That comes at the expense of food security, health security and retirement security.
The problem is especially acute for working men and women—those earning up to 80 percent or so of an area’s median income. They earn too much to qualify for subsidized housing, but not enough to afford rising rents for housing near their jobs in major metropolitan areas. These workers often include the backbone of our society—people like teachers, nurses, social workers, police officers and other emergency responders.
The Turner Multifamily Impact Fund acquires multifamily apartment communities in densely populated, diverse communities. Traditional real estate investors would come in, upgrade features like appliances and countertops, and then increase rent levels. That’s not what we do. We preserve affordability and then we enrich the community through targeted resident services. For example, we provide discounted rent to a teacher who lives on the property who organizes free after-school tutoring classes to resident students. Those working in the health-care industry spend time running vaccine clinics, providing health screenings or delivering health education. Resident police officers organize a neighborhood watch program and park their squad car in a visible spot, which makes the entire community more secure.
These kinds of innovative services reduce turnover and vacancies, increase pride of rentership and improve quality life for residents. Resident satisfaction has risen to above 94 percent, so we know it’s working. It’s a great example of our “profits with a purpose” model at work.
What are the main flaws of the federal Opportunity Zone investment program and how would you change it in order to make it more efficient?
Turner: I see numerous serious flaws with the Opportunity Zone program. First, the program does nothing to reduce the risk of investing in underserved areas. If you look at the past, successful programs like federal empowerment zones and low-income housing tax credits attracted billions to disadvantaged areas because they provided tangible incentives such as tax credits and credit enhancements that meaningfully changed the risk equation. The Opportunity Zone program doesn’t do that.
Second, many of the largest real estate investors out there are tax-exempt institutions such as pension funds, university endowments and sovereign wealth funds. Because of their tax-exempt status, opportunity zones give them no incentive to invest. And third, the program is not set up to encourage long-term investing. Taxes on deferred gains need to be paid by 2026, so I think we’ll see a rush to sell assets prematurely so investors can satisfy their tax liability.
I would also add that there is more than meets the eye in investing in disadvantaged areas. Even if the program were structured correctly, I’ve learned how important it is to do a lot of listening and learning at the community level to design projects to succeed over the long-term. A top-down, we-know-best approach that doesn’t respect the specific needs and character of a community will not end well for the investor.
What would you say to those who hesitate to invest in workforce housing projects?
Turner: America’s housing crisis is not going away any time soon, unfortunately. The disparity between housing costs and renter income is only growing wider and the stock of existing workforce housing is shrinking as opportunistic investors acquire apartment communities and convert them into higher-cost luxury units. At the same time, not enough new affordable housing is being developed due to the high cost of land and construction in urban areas. The need for affordable workforce housing is large, growing and unmet. We would welcome more investors to join us in filling this need.