It was an event that occurred in a medium-sized American city, and though it was a virtual blip against the backdrop of larger news, its importance was noted by various observers of civic policy. In December, the Port of Greater Cincinnati Development Authority outbid more than a dozen private equity firms to buy 194 rental homes, thwarting possible corporate plans to raise rents, evict occupants, and turn an easy profit. The Port plans to partner with local nonprofits to rehabilitate the houses and create a path toward ownership for their low-income residents. The story eventually made it all the way into The Wall Street Journal.
The Port's move was one of the most aggressive local government interventions yet in a turbocharged U.S. property market that is leaving low-income Americans fewer and fewer options for housing. The seeds of the latest price spike were laid in the wake of the 2008 financial crisis, during which nearly ten million foreclosures left a glut of homes on the auction block. Corporate speculators began buying the properties and ramped up efforts year by year. A mere five landlords took control of more than 4,000 single-family homes in Cincinnati and Hamilton County over the last decade, and the Wall Street-based investment company Blackstone bought more than 48,000 homes nationwide between 2012 and 2016.
While high prices have long been a feature of boomtowns like San Francisco, New York City, and Denver, the profit margins on modest homes in Cincinnati and other small and medium-sized municipalities such as Nashville and Allentown has triggered a tidal wave of private equity money. Publicly traded companies, investment firms, and smaller investors account for 18% of total home sales in the U.S., up from about 8% in 2009. Real estate prices are going up at the fastest rate in U.S. history, with private equity money helping to fuel the rise.
Nonprofits have long worked to keep housing inventory affordable for low-income Americans. For example, the Neighborhood Assistance Corporation of America makes it possible for financially unstable people nationwide to buy homes, while in California the Oakland Community Land Trust has purchased houses in order to make ownership available to their current tenants. These and many other nonprofits help low-income residents sustain a better quality of life and maintain a presence within the fabric of cities, whereas unrestrained market forces would see them pushed even farther to the social margins.
Public money, private inequity
Private equity firms have enormous pools of money and the ability to outbid normal buyers with all-cash offers for homes. In recent years they have employed computer algorithms to unfair advantage. But their latest efforts have coalesced around the Low-Income Housing Tax Credit program (LIHTC). The program was launched by the federal government in 1986, and enables a nonprofit to partner with an investor to provide funding in exchange for financial gain in the form of tax breaks. After fifteen years the nonprofit is given the opportunity to buy out the investor, taking ownership of the property for below-market value. It's a win-win for both parties.
But some of those banks and other investor partners have begun selling their stakes to third party investors, who then claim that certain wording within the LIHTC is ambiguous, and balk at fulfilling the terms of the partnerships. These investors demand large payouts from nonprofits, and if those aren't met, raise rents or put the homes on the open market. These types of predatory takeovers resemble those in other debt related sectors, such as student loans, and is unregulated federally and in most states. The shady practice is wreaking havoc on a taxpayer funded housing aid program valued at $8 billion a year.
The battle between nonprofits and private equity firms is being played out across the country. In Boston the nonprofit housing group Tenants' Development Corporation is in a fight with Alden Torch Financial, as the latter tries to wrest 36 brownstones away that the nonprofit has managed for decades. In Southfield, Michigan, just north of Detroit, the high powered SunAmerica, Inc. stands against the nonprofit Presbyterian Villages of Michigan. In Seattle the nonprofit Senior Housing Assistance Group found itself in a fight and was forced to sell ten low-income properties, with most of the money going to investors. And in Florida, a nonprofit called Opa-locka Community Development Corp. fought to hang onto 216 low-income housing units after its original partner Bank of America sold out to Boston-based HallKeen Management.
Many of these conflicts have led to litigation. While Opa-locka Community Development Corp. won its original case and the appeal, the courts have been good to private equity, handing down multiple victories despite the clear intent of the LIHTC program, the public service it has provided, and the understanding with which nonprofits entered into the partnership agreements. SunAmerica, which is a subsidiary of American International Group, Inc., won a crucial case in New York. The firm had blocked the nonprofit Riseboro Community Partnership from acquiring 34 units in a historically significant building in Brooklyn. It was a devastating ruling for nonprofits, with far-reaching legal implications, not least because SunAmerica was not a secondary investor that came in with a new reading of the partnership agreement—it and Riseboro originally signed on together in 1999.
Riseboro has appealed and is awaiting judgment. The case has meanwhile generated widespread interest. Leticia James, the attorney general of New York, filed an April 2021 amicus brief in support of Riseboro, but the brief is just an opinion, and has no legal effect on the case. The only silver lining is that SunAmerica is required under state law to keep the housing units affordable, but that requirement ends in 2030, and there's little doubt what will happen next in the rapidly gentrifying area of Brooklyn where the disputed building is located. SunAmerica claims it will keep rents affordable, but Riseboro learned that the company had at one point planned to sell its stake in the building to Blackstone as part of a $5 billion deal.
International capital comes calling
The 2021 Pandora Papers leak gave shape to the extent of the challenge faced by nonprofits and low-income renters by revealing how global capital has descended on American towns seeking high returns from investments in affordable housing. In one case, a firm called Progress Residential, a subsidiary of New York City-based Pretium Partners, circulated invitations among chosen members of the international wealthy, promising 15% to 20% returns on minimum investments of $2 million. The plan was to buy tens of thousands of properties foreclosed after the 2008 crash and convert them into rentals. Since millions of people had lost homes they owned, the rental market looked like a gold mine of profits. The scheme generated an investment kitty of more than $1 billion. Against such titans nonprofits and disputed LIHTC legislation don't seem to stand much chance.
The ongoing courtroom battles around the U.S. over low-income housing may determine whether the LIHTC program will even survive. While it has produced more than two million affordable housing units and is generally considered a success, it was always vulnerable. When it was created, some affordable housing advocates wanted legislation that used tax money directly to finance construction and renovation, but inviting in private capital represented the type of check on government involvement that was the prevailing ideology then. It was always a case of letting the wolf in the door. Private firms will always—unless constrained by law—seek more profit. The LIHTC is supposed to have constraints, but its language allows bad actors to pretend the intent of the program is unclear.
There is hope, however slender. How it all shakes out could ultimately hinge on new congressional legislation, which is being discussed. Senator Ron Wyden, chair of the Senate Finance Committee, introduced a bill in September called the Decent, Affordable, Safe Housing for All Act, or DASH Act, designed to clarify LIHTC. Designated S.2820, the bill hasn't yet been voted on, but even if it passes it will be in a revised form. What parts will be revised into the wastepaper basket are unknown at this time. Meanwhile, as the practice of disputing LIHTC agreements gains pace in investor circles and the tactic is supported by courts, nonprofit housing groups need to be wary, share knowledge, understand their legal rights, and hope for the best.