Financing Permanent Supportive Housing in Los Angeles

Executive Summary

Enterprise Community Partners received a two-year grant in 2012 from the Conrad N. Hilton Foundation to research challenges and solutions to the financing of permanent supportive housing (PSH) in Los Angeles. At the heart of this research, Enterprise was interested in identifying any possible mechanisms for stretching limited funding to produce a greater number of PSH units, especially in light of recent reductions of key public resources for affordable housing development. The research focused on four main objectives:

• Define and characterize the current financing system for permanent supportive housing production in Los Angeles
• Assess the impact that reduced public subsidies for PSH is placing on the nonprofit PSH housing development community
• Identify obstacles in developing and preserving PSH from a financing perspective
• Identify opportunities or new approaches for state and local government to respond to these changing market conditions

Our research resulted in the preparation of three distinct research briefs on this subject: (1) An Analysis of the PSH Financing Landscape in Los Angeles; (2) Targeting Relief Policies among Housing Finance Agencies in California; and (3) Permanent Supportive Housing Portfolio and Preservation Analysis. This Executive Summary serves to review important findings and recommendations from these briefs.

Methodology

The content for this research effort was shaped from a variety of sources. Throughout the grant period, Enterprise reviewed numerous studies and planning documents on the subject of affordable housing and permanent supportive housing; where applicable, those citations are provided. Enterprise also held a roundtable in March 2013 with PSH developers in Los Angeles. We later complemented what we heard during the roundtable with a series of individual interviews with each of those PSH development organizations in September 2013. These engagements served to explore developer perspectives on the financing environment for PSH production in Los Angeles. To inform the analysis on PSH preservation, Enterprise extracted project performance data for 39 PSH developments in the greater Los Angeles area that were assisted through the federal Low-Income Housing Tax Credit (Housing Credit) program and that were still in the 15-year initial compliance period. In its portfolio, Enterprise defines PSH projects as those with at least one-third of the units designated for households with special needs and where resident services are provided. Only properties with an Enterprise equity interest as of year-end 2012 were included in this research. We also drew upon insights from Enterprise-funded capacity building grants to three high-volume PSH developers in Los Angeles. These grants allowed these developers to conduct assessments of their portfolios and provide recommendations for repositioning aging PSH properties. Lastly, we contracted with an affordable housing development consulting firm, California Housing Partnership Corporation, to provide a separate analysis of barriers and strategies related to PSH preservation.

Local Funding and Policy Landscape

Over the past five years, Los Angeles has experienced a decline in public resources for affordable housing development, of which PSH is a component, resulting in a vastly changing funding environment. Reductions have resulted from:

• The statewide dissolution of local redevelopment agencies (RDAs) in 2011, causing the loss of $50 million in annual tax increment financing for affordable housing development in the city of Los Angeles
• A 51 percent cut in federal HOME funds allocated annually to the city of Los Angeles between 2009 ($43 million) and 2014 ($21 million)
  Federal sequestration and its constrictive impact on local public housing authorities that administer rental assistance programs (e.g., Section 8)
• The virtual depletion of bond-funded state housing and community development programs (Propositions 46 and 1C)
  The commitment of nearly all of the $115 million in funding awarded to Los Angeles County under the California Mental Health Services Act (MHSA) Housing Program
• The lack of homelessness assistance funding for new project requests (e.g., Shelter Plus Care) in the 2012 or 2013 national Continuum of Care competitions

All told, local experts estimate that Los Angeles County has lost essentially $0.5 billion in financial support for affordable housing in the past five years. At this point, despite aggressive advocacy for new resources, as exemplified in the industry’s recent advocacy for a permanent state source for affordable housing development (embodied by SB 391), it does not appear these public sources will be restored. Yet because of the fragmented nature in which Los Angeles invests in PSH, there remains a limited understanding of the level of resources that flow into the PSH delivery system. This makes it difficult to assess the precise degree of PSH resources that were lost with these dramatic shifts in the funding landscape noted above.

In light of these environmental changes, there remains the countervailing pressure on the PSH delivery system to create additional housing to keep pace with unflagging demand. Analysis suggests that PSH production has accelerated in the past two years, and there was little evidence yet of a notable dip in PSH production in this post-CRA environment.

Fortunately, there is a healthy PSH pipeline that predated the dramatic resource dip in 2011, fueled significantly by capital funding available through the MHSA Housing Program. Nonetheless, there are legitimate concerns about our ability regionally to sustain that pipeline in the years to come unless new resources are brought to bear to support PSH production efforts. Fortunately, there have been encouraging signs in the PSH funding landscape for capital and operating support that may begin to offset the reduced investment from historic partners. The creation of the Los Angeles County Department of Health Services (DHS) Flexible Housing Subsidy Pool, a general fund allocation of $100 million for the state Multifamily Housing Program for 2014-2015, and the passage of Proposition 41, authorizing $600 million in existing bond authority to fund multifamily housing for veterans statewide, all bode well for the PSH development community.

Other highlights from the financing landscape analysis are included below:

• Interviews with public officials responsible for allocating capital funding for PSH suggested that Los Angeles can realistically expect to finance three to five new PSH developments annually, assuming that the current level of Housing Credits do not decline further.
• The establishment of a geographic apportionment of Housing Credits for the city of Los Angeles and an accompanying the Housing and Community Investment Department of the City of Los Angeles (HCIDLA) Managed Pipeline process has been a “game-changer” that impacts the PSH development community in ways that cannot yet be fully assessed.
• Understandably, PSH developers expressed caution about this new process. Concerns centered around limitations on the amount of projects that a developer can have in the pipeline at any given time; selection criteria that they argue disfavors PSH projects; higher thresholds for community engagement; and compatibility with the new civic focus on transit-oriented development, as PSH developers compete for capital funding and project sites adjacent to transit corridors. Developers further warned that they likely will have to look outside of the city of Los Angeles for additional development opportunities.
• PSH stakeholders were also queried about notable trends they have seen in developing or funding PSH development across Los Angeles, all of which pose unique capacity challenges. Here is what they shared:
  • Public policy has shifted to target or limit PSH to chronic and veteran homeless populations, catalyzed by federal housing policy, implementation of the local Home for Good plan and the regional expansion of a coordinated assessment and entry process(CES).
  • Consideration needs to be given to the financial health of the development organizations that are being asked to deliver PSH in this new environment.
  • PSH developers will inevitably be drawn to focus more on re-investing in their existing portfolio as time progresses and resources shrink. This raises questions with regard to the technical capacity of PSH development organizations to effectively assess their portfolio needs and structure complex repositioning transactions. This trend also impacts the public sector, which has not developed sufficient policy regarding repositioning older PSH properties.
  • Capital funders are encouraging mixed-income, mixed population housing, in which a percentage of overall units in an affordable housing development are dedicated as PSH.
  • There has been an emergence of new players on the PSH marketplace, including both for-profit affordable housing developers and local funders (e.g., Los Angeles County DHS).