DC’s largest developer is getting into affordable housing

As our region grapples with an affordable housing shortage and the continued loss of low-cost housing, a private developer and non-profit organization have started a new initiative to address the problem — and to do so without public subsidies.

JBG Smith and the Federal City Council have developed a model combining philanthropy and private industry which they hope will preserve affordable homes in rapidly-changing neighborhoods in and around DC. To be clear, the Washington Housing Initiative isn't solely charitable, it's also a for-profit investment vehicle.

A new, for-profit player when it comes to preserving affordable housing

JBG Smith is the one of the largest developers in the region, and thus has a massive impact on the local housing market. It has a new business plan to preserve the rapidly-diminishing stock of ‘naturally’ affordable housing. These homes are more affordable, not because of direct subsidy or intervention, but because of their quality or their need of repair.

According to AJ Jackson, Executive Vice President of Social Impact Investment for JBG Smith, there are around “240,000 naturally affordable homes in the region… and we're losing the battle with them.”

JBG Smith’s plan incorporates two main elements. The first element, the Washington Housing Conservancy, is a non-profit entity that will purchase and rehabilitate housing (typically older and cheaper) in rapidly-changing neighborhoods. The resulting homes will be rented out as a mix of market rate and workforce housing, with the lowest rents affordable to those make around 60% of Area Median Income (AMI). For reference, 60% AMI in our region is about $65,000 for a family of four.

The idea of preserving affordable homes via rehabilitation is not necessarily new; both for-profit and non-profit groups already do this albeit in different ways. For-profit ventures typically upgrade the homes with higher-end amenities and look to sell or rent the units at higher rates.

Non-profit groups, on the other hand, focus on fixing up the homes but maintaining their affordable prices, usually combining local and federal subsidies to do so. For example, some might apply for Low Income Housing Tax Credits (LIHTC), which supports building homes for those below the 60% AMI level. There are other local nonprofit builders like the Arlington Housing Corporation in Virginia, Somerset Development Company in DC, and Wesley Housing in DC.

The Washington Housing Conservancy will use the non-profit method, so these homes will not include high-end amenities. This effort is focusing on how to preserve these homes without needing public dollars. That’s where the Impact Pool, the second element of JBG Smith’s plan, comes in.

JBG Smith will manage a for-profit fund that focuses on leveraging “patient, lower-cost capital,” according to Jackson, meaning that investors in the fund will still make a small profit, but it will take longer than a traditional real estate investment might. This sort of project might attract investment from endowment funds, large institutions, or impact investors seeking lower risk, longer-term return on their money.

This kind of financing vehicle for affordable housing has been tried before in other areas of the country with some success. In fact, the non-profit Enterprise Community Partners has been operating a similar fund in our region for some time. What JBG Smith brings is scale. It has a lot of capacity when it comes to fund management, finding and acquiring appropriate properties, and in reaching large investors.

Jackson adds that the plan is to ensure that this Washington Housing Conservancy is “additive… to bring capital to where it wouldn't happen” otherwise. To help ensure this, the WHC is creating a stakeholder council to help guide the work.

In DC, WHC’s redevelopment projects will trigger the Tenant Opportunity to Purchase Act (TOPA), which allows city tenants to negotiate with landlords and sometimes purchase their apartments. JBG sees alignment between its goals and those of tenants (i.e. preserving affordability), and hopes to create an option for groups of tenants looking to make TOPA deals.

Because quickly changing neighborhoods do not follow city lines however, the Social Impact Initiative will extend to localities outside of the District to Maryland and Virginia as well.

Why not just use public money?

JBG is modeling this initiative as a catalyst to get more investors thinking about using private market tools to preserve and develop affordable homes. The partnership with the Federal City Council (a non-profit led by business and civic leaders) is in part to help make the model become replicable. According to Kevin Clinton, Chief Operating Officer at the Federal City Council, this is “an open source, broad tent effort.”

By forgoing public subsidy, the group can also maintain the speed and competitiveness private developers have typically when trying to close deals. Public subsidy often includes a number of processes and uncertainty if you’re applying for scarce funds.

Finally, by targeting moderate income rentals, JBG Smith thinks it has found a model that doesn’t necesitate public money. This means they can apply for additional subsidy to “buy down” units to even more affordable levels.

JBG Smith initially aims to preserve 2,000-3,000 units — quite a few, but still not enough to stop the decrease of affordable housing on its own. Although this project certainly will not fix all of the region’s housing woes, it could facilitate private sector involvement in a new way to help ease the pressure on the market.