By David Langlieb
As Reinhold Niebuhr’s serenity prayer advises, it is wise to accept the things we cannot change. The rub is that what can’t change is often unclear. At the Philadelphia Accelerator Fund (PAF), we’ve spent many restless hours contemplating Niebuhr’s appeal concerning news coverage about hedge funds and other corporate, out-of-state landlords parading into Philadelphia, buying rental property, and driving up rents. This has been a simmering issue for decades, but in the current inflationary environment where too many dollars are chasing too few investment opportunities, the comparatively low costs of Philadelphia real estate and the regional undersupply of housing have amplified the problem.
This summer, a viral TikTok post drew attention to a 35-property portfolio of occupied, single-family homes in Cobbs Creek, offered for $7 million. The listing described the portfolio as a “capital appreciation opportunity” – language presumably tailored to attract an institutional investor. This kind of thing coming to a stable, minority-majority community like Cobbs Creek hits especially hard, reaffirming how deep the corporatization and financialization of the American economy can reach into city neighborhoods. What can be done about this? It feels fundamentally unacceptable, particularly in a city like Philadelphia, with a proud tradition of owner-occupied homes and local landlords.
Late last year, the Nowak Metro Finance Lab at Drexel University published Investor Home Purchases and the Rising Threat to Owners and Renters: Tales from Three Cities. The report by Bruce Katz, Emily Dowdall, Ira Goldstein, and Ben Preis compared investor acquisition trends in three cities – Jacksonville, Richmond, and Philadelphia – and revealed some jarring statistics. Namely, over the last 30 years, the percentage of the housing rental market owned by sole proprietors (meaning individual landlords) has declined from 77% to 41% nationally. This trend toward the investor acquisition of rental properties has heavily impacted Philadelphia. In 2020 and 2021, investor purchases were approximately 25% of all single-family home sales in the city.
Not every LLC is a large, faceless, non-local institutional investor, as sole proprietors may find it advantageous to form an LLC to own and operate one or two properties. But many of them are. And it’s not hard to intuitively understand that hedge funds and other corporate investors are often subpar landlords. With no particular connection to the city or its inhabitants, such property owners tend to maximize rents and minimize operating expenses. A local landlord may not be perfect, but with institutional investors from out of state, the long-term stability of the neighborhood is inevitably subordinated to short-term ROI.
The PAF Alternative
Katz and his co-authors correctly diagnose the problem and shed light on the key dynamic: cash is the main competitive advantage that corporate and institutional investors bring to real estate transactions. Most local developers and landlords – particularly Black- and Brown-led firms with owners who want to invest in their communities – do not have the personal liquidity or access to capital to make fast, credible offers on rental properties. Sellers understandably favor cash buyers, as the process of bank underwriting or securing financing from another source adds time and uncertainty to the deal. As hedge funds and corporate investors get increasingly aggressive with cash, it has become ever more difficult for small, local landlords operating in good faith to acquire real estate.
My hope is that PAF can play a meaningful role in leveling the playing field in the years ahead. We have made some headway already, as we have the benefit of a clear mission focused on assisting small developers, and we have tools in the toolkit to address the problem. As alluded to in an earlier blog, we turn around letters of interest and term sheets, bolstering the credibility of small, local buyers who need financing. Our most recent loan for a rental rehab project closed in seven weeks, from the first handshake to the final HUD-1. Further, by providing affordable interest rates to our borrowers – now around half the cost of ‘hard money’ lenders who are typically the primary alternative for small developers – we can make deals viable that otherwise might not work. Our credit analysis process is flexible, and we underwrite quickly. Most importantly, we mandate as a matter of policy that a majority of units on any PAF-financed project are deed-restricted for at least 15 years at an agreed-upon level of affordability. This deed restriction attracts the right kind of landlords willing to accommodate rent caps and sends a clear message about who we’re here to serve.
Looking Ahead – Products and Partnerships
During my five years with New Jersey Community Capital (NJCC), the organization’s excellent lending team had considerable success utilizing what NJCC calls its “developer line of credit” loan product. This is the best financial product I have seen made available to small affordable housing developers by any Community Development Financial Institution (CDFI) in the region. Developers are underwritten for a sample project at the loan application stage and then typically re-underwritten every 24 months. If approved, they receive access to a flexible line of credit that can be used to make fast offers on properties – sometimes from private buyers, sometimes purchased out of foreclosure or tax sale – and term out a portion of the line after construction completion as a mini-perm sub-note for rental real estate. The developer line of credit also works well at financing affordable for-sale rehabs. The challenge for PAF is to find the kind of patient investor capital needed to create this kind of loan product. But as we look to grow the Accelerator Fund, strategically doubling down on speed and flexibility will be of paramount concern.
Financing is part of the answer, but collecting information is also critical when identifying opportunities and strategically deploying resources. This is why I am thrilled that Philadelphia is among the 11 pilot cities chosen for the recently announced partnership between Accelerator for America and Tolemi (a Boston-based technology development firm). This effort will utilize a data software tool designed to curate and synthesize essential property data for cities with an eye on housing. Much of this information is currently difficult to access and analyze – for example, recognizing shell LLCs with common owners or identifying vacant parcels primed for affordable housing development. It will be especially beneficial for a city like Philadelphia, where 12% of our land is vacant, and the need for deliberate, methodical land use collaboration between government, financing institutions, non-profits, and responsible local developers could not be more significant.
The challenges are undeniable. But despite the headwinds, a comprehensive, affordable housing development and preservation strategy for Philadelphia is collectively at our fingertips. Let us have the strength to change what we can.