Soundbites: Adventures in Affordable Housing Finance

Soundbites

Toni Johnson sat down with the Housing Partnership Network's Tom Bledsoe to discuss HPN's work in places like New Orleans and the use of enterprise capital.

This is Toni Johnson with Heron.org Soundbites. I’m here today with Tom Bledsoe of Housing Partnership Network, one of Heron’s grantees to talk about HPN’s impact. Hi Tom.

Hi.

So Tom can you start by telling our audience a little bit about HPN—what you do, what communities you work in?

The Housing Partnership Network (HPN) is a business collaborative of 100 of the top nonprofits in the United States that develop and finance affordable housing and community development. They have a whole range of services to help families succeed and to revitalize neighborhoods. It’s focused on the leaders of these organizations. We help them innovate, we help them develop new strategies [and] we do policy work in Washington. But it is really a learning community and the step we have taken as a network, which really separates us, is we build businesses that help our members grow and scale their impact.

Impact Notes:
-373,600 affordable homes developed
-$100.9+ billion of community investment
-17,250 employed by HPN members

Our strategy is to bring the organizations together who see value in collaboration and think they can achieve more together than separately. Where we can help them in different parts of their business—aggregate, develop new products, go to market [and] increase their competitive position ultimately to get capital and resources through collaboration. We build a lot of enterprises to do that. We’ve created an insurance company to help insure our member's properties when they were having difficulties. We have a REIT [Real Estate Investment Trust] to raise capital, this is a whole range of companies—ten nowthat have emerged through this process. But it is all built on this underlying sense of a cooperative of leaders, it’s their mission that we're helping try to advance.

You received an enterprise capital grant as a part of the capital raise for your organization. Can you tell us a little bit about that experience and what you ultimately used the money for?

It was a wonderful experience, the money has almost all been used and deployed. It was very precious capital to us. We were at a very important growth phase in the network. We are a social enterprise in our own right, and we also design, create, launch and often times manage businesses.

So we have to have a lot of capability to do that. That includes R&D capacity, administrative support capabilities [and] capital raising capabilities. There is just a range of resources that we need. We were going through a big growth phase where we were trying to launch two or three new companies. And we were trying to go from a model where we’re raising about 60 percent of our income through management fees, internally raised fees and significantly increase it. We needed to both grow our staff, we wanted to increase by more than 50 percent over a four-year period. And we wanted to invest that resource into starting a number of businesses, which required capital—a lot of leveraged capital—but it required our staff to have the capability to take this business platform to the next level.

So what happened? We get asked a lot about the impact of the organization. Can you talk a little bit about both your impact generally for HPN, and how your impact became better with the help of enterprise capital?

Sure, our industry is at an inflection point. We need to develop new approaches to solving the affordable housing crisis. The needs are getting greater and the availability of public capital is diminished. How do you solve a growing problem with less resources? We need to come up with new ways of raising capital and we need to look at the business model for some of the work we do and figure out how to do it more efficiently.

So we had a number of companies that we wanted to launch that really helped our members in a really tangible way do that. Two that I will mention—one is a REIT, it is the first nonprofit owned REIT in the United States. The problem we are trying to solve is that our members are attempting to preserve housing that is affordable in their communities, workforce housing, not necessarily subsidized. But is serving a really important part of the community. It’s at risk and private developers want to step in and acquire that property, basically reposition it in the market, raise the rents [and] many of the people get kicked out. The affordable housing crisis has gotten really severe for them but you’ve also lost a really important resource.

We have now, over this three-year period, acquired 2500 apartments, 12 properties using this REIT. It has gotten tremendous notoriety because it is the most effective way of bringing in this new type of institutional capital, that’s not the traditional capital we work with. And it is a way of going after a whole asset class that is really important yet traditionally nonprofits don’t play in it.

That’s not how our members typically operate, they assemble sites, it take them two years [and] they need to have a patient seller. It takes them a long time to cobble together the financing. This other market moves in 60 to 90 days and you need to be a cash buyer. Nonprofits basically are shut out of that. We have an ability to preserve these properties, make them a long-term asset, and prevent the affordable housing crisis in these places from getting worse but we have to be able to step in really fast.

The REIT, what it did, we raised $100 million dollars of capital through a leveraged financing structure. We raised it with MacArthur, Ford and some foundations, Citibank, Prudential [and] private real estate investment companies. Our members can identify a property they want to buy, they can compete strongly with for-profits and they can close a deal in 90 days. So we have now, over this three-year period, acquired 2500 apartments, 12 properties using this REIT. It has gotten tremendous notoriety because it is the most effective way of bringing in this new type of institutional capital, that’s not the traditional capital we work with. And it is a way of going after a whole asset class that is really important yet traditionally nonprofits don’t play in it.

At the beginning of this campaign in 2012our capital campaignwe were still in the final design stages, the company was launched, it’s now been operating for four years [and] it has been very successful. It’s been written up in the Wall Street Journal, It’s been really regarded as one of the important innovations in the industry. We needed to invest in staff resources, we took risks, we needed R&D capital. So we were able to over this period, to invest, that has been a very significant expansion.

The other onejust much more quicklyis using some of the same concepts around aggregation. We are now taking our members who formed a cooperative to go to market to buy building and other kinds of materials that they use for their business. To be able to negotiate much better deals with suppliers and manufacturers. So it’s called HPN Select, it’s a buying platform. We think we can lower our members costs by 10 to 15 percent on what they purchase, which is an enormous amount of money and it helps take some of the pressure off on how expensive it is to develop affordable housing. That’s a business that we launched during this period.

Those are two good examples, I think, of the kind of innovation we can do. Part of the capital campaign, we wanted to raise a lot of R&D money to do this kind of work. Our goal was to raise $20 million dollars of capital leveraged by Heron, in the end we ended up raising more like $32 million dollars.

We traditionally work through intermediaries and we often get asked about the people that we consider our stakeholders. Do you have a story about a person or community that you can share with our listeners to really help understand the impacts on the ground level?

You know, there is really a book-ended story. One starts in New Orleans after Hurricane Katrina when there was obviously a huge housing crisis. There was a need to rebuild so many neighborhoods and so many homes. And New Orleans just did not have the capacity. There was no nonprofit like our members in New Orleans operating.

What we decided to do was to step in, after Katrina, and help that city create a nonprofit that was modeled after our best practice around the country. We launched it, we incubated it with the plan of spinning it off. That was 10 years ago this year. So this year the Gulf Coast Housing Partnership announced its anniversary, it has now become the strongest nonprofit developer in the region. It’s developed about 2500 homes, done about 50 projects, all different kinds of properties. From homelessness to home ownership, getting mixed income properties rebuilt, doing work with nonprofits and civic institutions creating art centers.

In one particular neighborhood, Central City in New Orleans, which is one of the poorest in New Orleans and we've done about 15 different kinds of developments there. And it has really transformed a community that was so impacted by Katrina. So I look at the last 10 years, you see we are making a case for a certain style of organization and that we are investing helping them scale and grow. There was a market that didn’t have one, we stepped in and we helped built it. We raised $25 million dollars to do it, the company was very successful. It was because—I think this is very important to Heron—our strategy there was enterprise capital.

What we said was for a nonprofit to operate in a way that we know they need to, and to be nimble and quick in a marketplace like that, they needed to have their own capital. This year we launched in Detroit, what you could call a replication of the Gulf Coast effort in New Orleans. Where Detroit has a similar challenge in some respects [and] has very limited capacity. And the Gulf Coast story and model was very attractive to civic and business leaders in Detroit and philanthropic leaders. We’ve went through a process where we agreed to launch, incubate and similarly spin-off a new nonprofit development entity in Detroit. It was launched over the last couple of years, it’s about to close its first deals.

So I think ten years back with the Gulf Coast and showing the power of this enterprise model, and here ten years later on the anniversary, and then that model inspiring something similar in Detroit. Each of these organizations will go on to impact tens if not hundreds of thousands of people, it will help revitalize really important neighborhoods.

Thank you Tom. For Heron.org, this is Toni Johnson.


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