Preserving and improving affordable housing in overlooked places with Brian Murray and Alison Carey

I'm David bank and from Impact Alpha. This is an agents of impact podcast.

0:02

When you bring that impact lens and really lean into it, you know, HUD acknowledges that and that also then ends up becoming almost dollar for dollar value to investors.

0:06

That's Brian Murray of SHIFT Capital. Brian and Allison Carey of Adera Companies join me to discuss Shift Adara and their LSA Affordable Housing Fund, which focuses on preserving and improving subsidized affordable housing in cities and regions that don't see enough such investors. Shift Capital is an early user of Impact Space, Impact Alpha's enhanced set of databases and investment tools for fund managers and other agents of impact. Let's jump right into our conversation. Brian Murray and Allison Carey, welcome to the podcast.

0:18

Thank you so much. It's great to be here.

0:55

Glad to be here.

0:57

We've been looking forward to this conversation because you bring together particularly Brian, who we've known for a while, so many different threads and I just want to bring folks a little bit very quickly up to date. We'll get to all the exciting new stuff. But Brian, Shift, we know from the, you know, the neighborhood fund from I think you know, as long back as 10 years and the Kensington Corridor Trust and maybe just take us from that experience to what we're going to talk about now and this new housing preservation fund that you're raising with Alison. But take us through the sort of problems you've been solving along the way.

0:58

Sure, sure. So I guess for those who don't know us, SHIFT is a mission driven real estate group. Bcertified started about 15 years ago with a core mission to to build just and equitable neighborhoods. We started off with our first fund which is based in Philadelphia, our SHIFT Neighborhood Fund which was a place based approach to tackling the challenges of inclusivity of long term wealth building and combating gentrification as a neighborhood is invested in and changes. It was through that work that we really started to think about exit strategies from some of these real estate assets in neighborhoods that do change and have the challenges of displacement. And we created the Kensington Corridor Trust.

1:32

And Kensington, as folks may know is a neighborhood near I think downtown Philadelphia has had some challenges over the years and it's really quite an exciting project.

2:27

Yeah, appreciate it. It's the first perpetual trust focused on real estate in the country and it's led by Adriana Abizida and we quickly exited stage right after helping to set that up. So it is truly community led and purpose driven. But as we thought about second fund and growth as a firm, we realized that it was going to be impossible for SHIFT to replicate what we do in Newark, New Jersey, in Rochester, New York, in Baltimore. It just is physically impossible. But as we thought about scale, we started to get approached by various developers, impact developers, who were quote, emerging or coming into their own or looking to grow in the space and access and the type of capital that we've been able to raise to date. And we realized that if we partnered up with them that we would provide them an opportunity to grow their own company without them giving up pieces of their company. So we created our Catalyst Fund, which is a fund that comes in and a GP position with developers across the country in specific projects. We work with those groups for one, maybe two, maybe three projects and then the hope is that they don't need us anymore. And we've been successful in a few so far that have had a lot of success, like Mosaic Development Partners in Philadelphia, which is one of the largest black owned development firms on the east coast right now. And we're currently partnered up with about 10 developers. It was through this that we met Allison, who we're going to talk about in a minute and then thus kind of transformed and launched this affordable fund that we're excited about right now.

2:36

Well, Alison, maybe just bring us up to date on your side. You came in and worked with SHIFT and what problem were you kind of most interested in?

4:35

I appreciate it, David, thanks so much. I met Brian and the SHIFT team about three and a half years ago now. At the time, had been working in the affordable housing preservation space and was thinking about the next chapter of my career, thinking about the possibility of starting my own firm and was connected with Brian because he was a role model and a leader in the impact investing in the impact real estate space and had started his an impact firm in Philadelphia and was so inspired by the work that Brian and SHIFT were doing that I ended up joining the team. So about three years ago joined joined SHIFT on the capital market side with the the long term plan to one day launch my own firm focused on affordable housing preservation and other neighborhood scale impact projects. And Brian and I started working together on a housing preservation business plan a couple of years ago, which has subsequently developed into the fund that we'll be talking about today.

4:44

Well, let's get right into it and particularly on the affordable housing challenge and opportunity. And the LSA Affordable Fund has an interesting angle on it. So tell us how you see the market.

5:53

Absolutely. We're focused on, as you noted, a particular form of affordable housing which is project based subsidized affordable housing. These are properties, multifamily rental properties, where the owner has a contract with generally the federal government to subsidize rents so that households living at these properties are paying an affordable rent based on their particular circumstances and the contract and the government pays the balance up to contract rents. And these are properties that are generally serving households earning up to 30 or sometimes 50% of area median income. And in that way are serving a really important need across the country. As we know that about 50% of households across the country are rent burdened. And that percentage goes closer to 90% when you're thinking about households in these income bands.

6:07

And these projects have been built and folks are there, but in many cases they're either getting long in the tooth and need some repairs. And in many cases I think the subsidies are expiring and projects may or may not go market rate, get sold off and the new developer might raise the rent. So you're actually preserving affordable housing for folks who may not have a lot of other options.

7:12

Exactly right. When we think about affordable housing, affordable preservation, it is two things exactly as you noted, it is both extension preservation of the affordability protections and it's investing in the physical infrastructure to make sure that those housing properties remain high quality housing for residents. And so when we're looking at acquiring and investing in these properties, we're looking for opportunities to leverage the subsidy and the programs that are available for this purpose for affordable housing preservation so that we can both extend the affordability protections for the long term. In most cases we're extending multiple decades those protections on the property. And we're also investing into physical needs at the property. Often that's, you know, deferred maintenance, accessibility enhancements, other amenities that we can add that are supportive of resident economic opportunity and well being, and then also investing in long term operations and increased budgets for maintenance, adding resident services and other programming that are supportive of high quality affordable housing.

7:38

In many cases there's subsidies, more subsidies to be had than the previous owners or operators have been taking advantage of. Why were they leaving money on the table?

8:52

There's a lot of reasons why that may be the case. We are identifying properties where there is an opportunity to leverage additional subsidy. Some cases that fact pattern exists because of changes in the local market. Perhaps there was rent growth and gentrification so that surrounding properties that are, that are market rate are seeing an increase in rent that has not been then translated to the subsidy at the properties that we're acquiring. In some cases there is complexity involved with renewing and increasing the subsidy at the properties that some owners may choose not to tackle or maybe looking for a buyer that has the skill set to do that to continue to invest in their property. So there's, there's a number of reasons and then the third would be, you know, adding enhancements. So we are looking for ways that we can drive impact and support well being for residents and communities. And so we're not only acquiring and maintaining properties as is status quo, but we're also looking for ways that we can add improvements to these properties, whether it's programmatic or physical, which then further supports subsidy that would be available to the property. Because HUD is, HUD and other housing agencies are truly looking for owners and are looking to support owners to invest back into these properties.

9:04

Okay, well, let's get into the sort of what the investment proposition. I imagine you fight the perception in some cases that affordable housing is not necessarily a strong investment. We've been finding that it's getting a lot of attention, including from institutional investors, for kind of a stable, low risk, steady yields kind of investment that even pension funds and others like as part of their portfolio. What are you telling your investors?

10:28

Yeah, David, I think that's, you know, we've been doing this a long time and we've looked at a lot of affordable housing models and I think this one is probably the most exciting for us because we're really looking at core, core plus type of assets. You know, government backed payments, low rents for tenants, very low delinquency rates, but with value add returns. And that's largely because we have a very unique skill set to unlock those type of returns. But also, as Alison said, when you bring that impact lens and you really lean into it, HUD acknowledges that. And that also then ends up becoming almost dollar for dollar value to investors. And so that combination of risk that we're really taking here with the return I think is kind of unmatched right now. You know, we work with a lot of LIHTC developers, folks in the low income housing tax credit ground up. We do a lot of other impact place based work. And there's a ton of risk in real estate between interest rates, you know, federal government policies, construction cost. This one is really nailing what it means to have a much lower risk but yet still have a good return. The truth is, as you were talking about before, it does seem like there are dollars getting left on the table. But a lot of these assets, we're talking about affordable housing and subsidized housing from the 50s, 60s, 70s. These are older assets. They are not the most attractive. They're not the ones. I mean, if you drove by some of the assets we owned, even now, you might say, oh, yeah, that subsidized housing. And I think part of our mission here and part of our work is that when people come back to these homes, we want them to be proud of them. And I say homes, I mean, apartment buildings, these are multifamily, but we want them to be proud of them. We want to see that there's value getting created, that the services and the doors that get open for them are a big deal in their lives, whether they're seniors or whether they're families. And so we're excited about the returns, but I think that that's really driven by the fact that we're leaning in on the impact side.

11:02

And there's three parties in the partnership. Shift, Adera and Lafayette Square. What do you each bring to it?

13:37

Sure. So when we were working with Alison on this strategy, we started having conversations with Lafayette Square. They're a phenomenal group doing great private equity in places around the country. So the idea was to strategically partner with Lafayette Square in a way that brought some of the assets that they bring to the table. One, they brought capital to the table, and that's certainly important. Two, they have a robust focus around data and data collection. We are building strong listening to our tenants and really strong data around our work that we're doing. Three, they've built an institute that influences policy and brings big ideas to policy. And we were interested in how, over time, this platform could inform. Inform larger policies as well. So there's been a lot of ways in which Lafayette Square brings value to the table. Alison, as you can tell, and as you've heard, is a phenomenally talented manager who just needed an opportunity, but is second to none in terms of execution. And three, we really try to lean in. Obviously, Shift is about supporting that manager. One, two, helping to bring the capital to the table, and three, really thinking deeply about the impact side.

13:48

Yeah. We've had Damian Dwin of Lafayette Square on the podcast talking about investing in working class people in working class places. And I know that the partnership you have has already done a number of deals in such places. So tell us about some of the particular projects.

15:15

Sure. So we're in Erie, Pennsylvania. We're in Fall River, Massachusetts, and we have some projects in Philadelphia right now. But the places that we're looking resonate and geographically are in line with. With the same mantra as Lafayette Square. So so the places that we're investing, not many other institutional groups are able to access and are able to invest in. And largely that's because we're doing the hard work of researching and looking into different areas like Erie, like areas of Massachusetts. We're not necessarily looking at Boston, we're not necessarily looking at the bigger cities, although we will have some assets that may fit that profile. And that's where we think the opportunity is. We're going where most other portable groups are not necessarily going. And we're finding very stable asset, we're finding higher quality assets. And aligning that with the idea of investing where workers are is very much in the mantra of us and Lafayette Square. And also it's a huge marketplace. So when you're not just looking at one or two cities and you're looking at rural places in New Jersey or central Pennsylvania or Ohio or Minnesota, we're going places that a lot of others aren't. And we think overall over time we're going to be able to roll up a set of great assets that when we think about exit, when we think about where we go with this, will be very attractive to either create an Evergreen fund out of or to sell to a larger investor who's looking to diversify from the traditional affordable housing that they've done with others.

15:34

Just tell us a little more about Evergreen funds and exits because we've been hearing a lot about permanent capital for keeping housing affordable permanently. Like not having to exit because. Because you don't have the requirements of say a 10 year fund. Is that where things are going in affordable housing?

17:21

Yes and no. I think specifically it has to hit a couple key points and really the main driver is cash on cash returns. So I think that the Evergreen model really fits when you're able to drive cash returns back to investors on a consistent basis, but not just 2 to 3% but a significant amount that their investment starts to come back over time. And that value doesn't necessarily have to get extracted on the back end in some sort of sale. So I do think, you know, in the affordable space generally Evergreen does make a lot of sense. There are opportunities when you're working with government subsidized assets where you can re up over time whether the compliance period is going. And the Evergreen fund certainly puts it in position to do so. And so this is our first fund under this strategy. So it didn't make sense for us to do that off the bat. But this has all the markings for a strong long term Evergreen strategy.

17:40

The other trend that we're hearing a lot about is that doing the right thing in housing is also the right thing for investors. That putting in place kind of the social services, whether it's health clinics or schools or farmers markets or employment assistance, all these things might cost a little more, but they tend to actually boost returns, keep, keep rents coming in. Is that, is that a, is that true?

18:48

That is our expectation and it's something that we're really excited about and as a team, are committed to measuring. And we have been working together on a framework for impact measurement and that impact can be both resident outcomes and performance of these investments. From an economic perspective, we've been thinking about an impact framework that is multi layered. At the project level, we are building what we're calling a building of opportunity scorecard. We identified in our research that there are really four key variables about housing that look to impact resident outcomes. Location of that housing is an amenity, rich, clean, accessible location, quality of the housing, stability of housing, and then what we're calling the human touch or the resident service piece, the, you know, the community support that households experience. So we've developed a way to measure across those four variables and provide a score for each of the properties that we're acquiring that will then track over time and look to correlate those scores with information that we're collecting on resident economic and other outcomes, as well as benefits to the fund from an economic perspective. And then at the fund level, we are also making a commitment to impact by committing to donate a portion of our sponsor profits back into communities where we're investing by partnering with and sharing those profits with local organizations that are committed to economic opportunity work as well. So we're excited about building tools that will help us track those impacts that we expect will be there in a multi layered way.

19:13

All right, so you've launched the LSA Affordable Fund. How's it going?

21:16

So we just launched late last year and so we've just gone out in the marketplace, started having conversations. We're raising $100 million. We've got our first three deals closed, another deal under agreement right now. So we're off and running, having conversations at the moment.

21:23

And who are you looking to support you?

21:41

So I think that this is a fund that can speak to a lot of different players. I think that there are CRA driven banks that certainly this is applicable to. There are institutional partners that are looking to get into the affordable game that this could fit. And we're having those conversations and then family offices and individuals. So it's a wide range ride net, which we think is attractive because typically there's a lot of groups that don't have access to this type of affordable housing. It's usually institutionally driven. And so we're excited to have a broad brush here.

21:44

Well, Brian and Allison and Lafayette in Absentia will be watching this fund and all of your work and the affordable housing space and in general, obviously. So come back again and tell us how it's all playing out, please.

22:22

Thanks so much, David.

22:36

Thanks, David. Really appreciate the time.

22:38

Thanks to both of you. That's going to do it for this Agents of Impact podcast. Big thanks to Brian, to Allison, to our producer Isaac Silk, to the whole team here at Impact Alpha, and to all of you Agents of Impact, with gratitude for all that you do sa.

22:39