Uncertainty is the Universal Challenge
by Polina Bakhteirov
April 8, 2020
This interview with Polina Bakhteirov, a vice president of development with Omni New York, was conducted and condensed by frank news.
Will you tell me about your current work?
Omni is an exclusively affordable housing developer, established in 2004. Since then, we have acquired, developed, and managed over 17,000 affordable units across 11 states with an aggregate transaction value of around $3 billion. Omni has a reputation for acquiring very distressed properties and turning them around through extensive rehab and added security.
Prior to joining Omni, I spent about a decade in the public sector. Immediately before joining the firm, I was working in Newark, NJ on small business development with a focus on supporting and growing minority and woman owned business enterprises. Prior to that, I was the inaugural director of preservation for the New York City Housing Authority [NYCHA]. There, I built out the preservation team to implement NYCHA’s PACT plan, which stands for “Permanent Affordability Commitment Together.” I led the rollout of various federal subsidy conversion tools, such as the Rental Assistance Demonstration [RAD] and Section 18, to convert public housing units to project-based Section 8 funding.
These conversions require the housing authority to address the repair needs of each converted property, so we partnered with private and non-profit development teams to raise adequate financing to address the capital backlog and also to bring on new property management and increase on-site social services for residents.
What are your most pressing concerns right now?
I’m primarily concerned about our residents – their health, level of access to medically-accurate information, and ability to cover the costs of basic necessities. Many may be laid off or have hours cut back.
We know from the past month of data in New York City that the neighborhoods hit hardest by the virus are low-income – where the majority of our residents live.
More broadly, low-income renters, especially those living in public housing, may not be receiving information on how to protect themselves from the virus and how to care for those in their homes who are, or may be, infected.
The New York City Department of Health reports that the adults living in NYCHA are four times more likely to be hospitalized for asthma than their non-NYCHA NYC counterparts.
We know that across the board, public housing residents are predisposed to becoming sick with COVID-19 due to pre-existing conditions. Furthermore, 40% of NYCHA families are led by seniors who may contract the virus from their (sometimes asymptomatic) family members, while nearly one in four NYCHA residents are seniors who tend either not to have access to information virtually or are reluctant to trust it. What happens when these residents show up at their management office to pay rent and discover that they can only pay online, via phone, or by mail? Now this senior has unnecessarily left the safety of their home and potentially exposed themselves and others.
Another prominent issue is the lack of consistent government guidance for affordable housing operators. At this point, HUD has issued three consecutive sets of FAQs and more are expected. Sometimes, updated guidance rolls back provisions from previous iterations. For example, the agency changed its guidance on mark-up-to-market projects from what was originally a 5% rent increase allowance since rent comparability studies are suspended due to widespread stay-at-home orders, to now saying that they will issue additional guidance on the matter in the coming weeks. Any requirements for a second appraisal will be a practical challenge as appraisers are not consistently deemed essential workers from state to state.
Furthermore, HUD’s guidance on interim recertification of income for residents differs from that of some public housing authorities, including NYCHA. Even New York State has contributed to the litany of guidance discrepancies, reversing their previous stop on in-person real estate showings, inspections, and appraisals. Another confusing inconsistency that I’m experiencing on my portfolio at Omni is how various states are defining essential workers. For example, New York has carved out the construction of affordable housing as essential, but Philadelphia has shut down such development. My hope is that Phase 4 of the federal legislation will provide more guidance on infrastructure and specifically housing.
Uncertainty is the universal challenge across the globe and the affordable housing industry is no different.
HUD wants to keep RAD transactions going, but some documents cannot be recorded. Numerous public land disposition processes are on hold, while others are moving forward but without defined timelines. That makes responding to certain Requests for Proposals [RFPs] more difficult. Should we proceed with architectural design or pause it? Will the changing needs of the community call for a different development program in 3-6 months? Furthermore, the halt of land use review processes may have a multi-year stalling effect on construction. We as developers are obsessed with predictability, so you can imagine our current state of mind. Nonetheless, I think we can all agree that the market will eventually recover, especially given its strength coming into the current crisis and what we anticipate to be even stronger demand for the affordable asset class coming out of the pandemic.
As the federal government contemplates all of its economic triggers, the LIHTC rate [Low-Income Housing Tax Credit Rates] is at a ten-year low of 3.12% for the month of April, and is expected to be even lower in May. This is actually an opportunity to push Congress to permanently set the rate at 4%, similar to how it has done so for 9% credits. Adding this additional layer of predictability to affordable housing finance will definitely be welcomed in this time of great economic uncertainty where underwriting of LIHTC deals - and in general - will most certainly become more stringent.
I believe our biggest areas of opportunity moving forward are in the urban multifamily market. Residential occupancy levels are typically 5% higher for the affordable asset class vs. market-rate units during economic recessions, so the next 12 months may be a greater opportunity to build more new affordable units. And as the federal government is determining the best way to support American renters, I think they should take heed of former HUD Secretary Castro’s proposal to make Section 8 - Housing Choice Vouchers - a federal entitlement for every eligible adult, just like Social Security and Medicare. Or enact a monthly renter’s tax credit for government unassisted households.
Thinking bigger, I want to improve city design so that it builds up people’s immunities and better protects them against future pandemics. I believe this is the moment to further solidify the linkages between health and housing.
At Omni, we have discussed property management logistics, how we're going to continue to operate our sites at this time. It's everything from how are we going to collect rent, to who is on the properties cleaning, and how is garbage being collected.
What are you doing to enhance the safety of residents and employees alike?
In terms of property management, we're looking to stagger shifts. We're looking at reducing the onsite presence of employees to the extent possible, while still maintaining high-quality service. And then obviously examining various cleaning mechanisms and, and ensuring that those deep cleaning sessions are being implemented on a more aggressive schedule. We are also looking to see what work needs to be done immediately and what work is going to have to be delayed. And that's obviously challenging. We have to be able to communicate that to our residents. Other considerations are the policy on visitors to the properties, communications delivered in the languages spoken there, and supporting residents with alternative methods of paying rent and completing interim income recertifications. I’ve found guidance from the National Initiative on Mixed-Income Communities quite helpful when it comes to property management.
People already living in poverty are losing work – how do you protect your most vulnerable tenants?
There are various eviction moratoria coming from different state governors. It's an effective measure in terms of protecting folks from eviction for a period of time, but that doesn't solve our revenue and debt service issues. We still need a residential income coming in order to continue to run the buildings and to run the business. We are also of course worried about having to do layoffs internally.
A lot of our developments have Section 8 contracts on them. And so we hope that the additional infusion of funds from the federal stimulus will fill the gap when it comes to federally assisted households.
We also have properties that are strictly LIHTC (Low-Income Housing Tax Credits) where residents don't have a federal subsidy. We're still thinking through how we can support those folks and how long our reserves will last because of course, all these properties have reserves for emergencies. The biggest challenges that we are facing now, similar to the federal shutdowns we encounter from time to time, is that we just don't know how long this will last. That is really what we are grappling with now.
What do you think about a rent freeze?
That is tough, right? We are not in the business of evicting our residents. In the entirety of our existence over the past 16 years, we have come in and turned around properties that no one in the private sector wanted to touch. We don't want senior residents to lose their homes. At this point, we're trying to figure out how much leeway we can give on rent collection, while also ensuring that we have enough income to continue to operate. We don't want folks that have to choose between rent and other necessities.
I don’t believe that a full-on rent freeze or strike without support for property operators is the best economic solution, since many affordable housing owners have mortgages out on their developments that are securitized, and the investors in these mortgage-backed securities are often pension funds for public workers. Their inability to collect on those investments will have a negative economic impact on working and middle-class families. It’s very circular.
I think the new forebearance allowance for affordable housing owners is a stop gap measure, but there are a few issues. First, the time period (90 days) does not sync up with the “parallel” eviction moratorium of 150 days (120 days plus 30 days’ notice). Second, forbearance is reserved for federally-backed multifamily mortgage borrowers who were current on their loan payments as of February 1st. But we closed on a 2,600-unit property in mid-February with over 6,000 vulnerable residents – where does that leave us?
My top questions as of today are:
- How much will rental income drop in April as compared to March?
- How will forbearance payments be repaid and over what amortization period?
- How will property managers cover continuous operating expenses (payroll, utilities, maintenance, insurance, administration, real estate taxes), which are not subject to any forbearance programs?
- Does business interruption insurance cover COVID-19?
- Will the federal government authorize emergency housing vouchers for residents facing rent hardship in order to stop the cascade of financial losses between renters, landlords, and lenders?