The El Dorado of Permanent Sustainable Affordability
Exhibit 1: Some useful concepts: Sustainable affordability, at-risk property, discontinuity, conversion liquidity, and recapitalization
Sustainable affordability
A property enjoys sustainable affordability if it is now and should be for many years affordable and desirable to low-income residents. This necessarily encompasses six components:
- Physical. Represents quality housing with sound condition, attractive appearance, and no urgent capital needs.
- Operational. The property has high occupancy, stable expenditures, and generates positive cash flow.
- Financial. Long-term capitalization is in place, in balance, and not in danger of disruption; property maintains adequate working capital and cash reserves.
- Affordable. Income-eligible residents can afford the rents either from their own resources or with resident income subsidy.
- Capable owner. The property owner is a preservation entity with both mission commitment and business capacity.
- Responsive. Regulatory and operational schemas allow flexibility to enable the property to cope with the unexpected.
- See Six Dimensions of Successful Affordable Housing and see Preservation Entities in Renewed Affordability: A Paradigm for Existing Affordable Housing.
'At-risk' property
A property whose sustainable affordability is in near-term jeopardy. This can arise from several different directions:
- Market conversion. Property has substantially higher value as market housing and there is powerful economic pressure to convert.
- Financial disruption. Underlying financing or critical subsidy will terminate, balloon, or change abruptly.
- Physical deterioration. Property age, perhaps exacerbated by an external event (e.g. harsh weather or a physically stressful tenancy), mandates a major renovation or upgrade that cannot be handled with internal cash flow resources.
- Owner waning capacity. Owners age, buy, sell, change philosophy, experience financial reverses or successes, or simply fail to keep up with changing times.
Discontinuity
Any material event disrupting sustainable affordability and placing a property at risk.
Conversion Liquidity
A property's conversion potential may be conveniently thought of as being in one of three fundamental states of nature:
- Liquid. The property is economically able to convert today, either because its rents could rise, costs could fall, or an alternate use (e.g. occupant ownership) would be materially more valuable. Liquid properties stay affordable only if restricted by covenant or if the owner is decision-impaired.
- Slush. The property probably has potential above its current use, but not so much as to make it liquid.
- Frozen solid. The property is so uneconomic that only the presence of an affordability-oriented finite resource (e.g. Section 8 contract, below-market mortgage) enables it to be viable.
Policymakers allocating resources are thus challenged to design interventions that capture properties in their incipient slush phase, after they have ceased been frozen and before they become fully liquid.
Recapitalization
The financial restructuring of a property to change its capital configuration. Usually carries with it changes either in operating requirements (rents, expenses) ownership (new partners in, old ones out) or affordability (extended, modified, increased, or relieved). Not only is capitalization restructured, property sustainable affordability is invariably enhanced.
Many recapitalizations are stimulated by a single proximate externality (e.g. conversion risk, imminent financial default, physical collapse), but in well-designed ones, all relevant attributes are addressed. Indeed, precisely because this is so, recapitalization is useful not simply to patch whatever hole the transaction has suffered, but rather as a sub rosa reorientation of program requirements.
Mark-to-market and renewed affordability are both recapitalization programs.
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