Affordable Housing: Former Wall Street Investor Seeks to Resolve One of America’s Biggest Real Estate Problems
By Mike Green
Diane Freaney, 72, is a former Wall Street investor on a mission to disrupt, redesign and redefine the business landscape of developing affordable housing across America. The issue she chose as her life’s work is one of the biggest problems plaguing the nation today.
For many years, Freaney found success in the realm of the 1-percenters by putting their money to work for high returns. She now puts her own money to work locally in the community where she lives in Portland, OR. Her mission is to develop a replicable model that addresses the nation’s most challenging problem of sustaining affordable communities.
Freaney incorporates a core philosophy of MOM (My Own Money) to guide her investment decisions. She actively invests in real estate, entrepreneurs, small businesses and the development of her local community and the people therein. She’s out of the house daily engaged in meetings, local activities and support of her local Lion’s Club. Freaney fervently believes in the power of sustainable neighborhoods, where families remain rooted and empowered to grow over time. This is basic premise behind the initiative she founded: Rooted Investing.
The goal of Rooted Investing is to “Bring capital back to Earth,” Freaney said. She started by moving $1M of her own funds into a self-directed IRA to invest in local community projects, with a goal of 3 percent return on investments. Freaney freely admits her focus is not on charitable giving, but rather smarter investing that sustains and grows healthy prosperous communities over the long haul, versus destroying them for short-term gains.
“Wall Street investing is a number’s game,” Freaney said. “It’s a casino where the ‘house’ always wins. Still it was difficult to leave that world behind. I hyperventilated for a week after I sold my last mutual fund and closed my account.
“Today I am creating the world I want to live in. I have learned to listen and be present in the moment. I am honored to provide capital to people and communities with a shared vision and values. I love my life. Who could ask for anything more?”
Today, the winning ‘house’ that Freaney is investing in is a home she’s building in a diverse Portland community as a new model for what she calls, “Neighborhood Housing,” which is an affordable home for low-income families that serves as a foundation for developing sustainable communities.
AMERICA’S AFFORDABLE HOUSING PROBLEM
The Department of Housing and Urban Development (HUD) proclaims:
“A family with one full-time worker earning the minimum wage cannot afford the local fair-market rent for a two-bedroom apartment anywhere in the United States.
“Families who pay more than 30 percent of their income for housing are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care. An estimated 12 million renter and homeowner households now pay more than 50 percent of their annual incomes for housing.”
Freaney subscribes to the HUD formula for family budgeting. The challenge she faces is that, on one hand millions of American workers are earning minimum wages that, on high-end average, amount to $9 per hour. On the other hand, institutional investing in real estate housing has introduced corporate landlords seeking high returns on investments, which drive up the rent and displaces low-income families. With a lifetime of experience working on Wall Street, Freaney is familiar with the motivations of the investor landscape. But in retirement, she moved into a diverse community where people across the income strata can afford to live. In doing so, she became familiar with the struggles of the average low-income family in her own community.
As a member of America’s “investor class,” Freaney is unlike the stereotypical profit-driven stakeholder. She fervently believes that families should be able to sustain themselves in a permanent location with one full-time worker outside of the home. This rooted philosophy offers myriad community benefits such as: children can grow up in familiar surroundings, schools can operate with a lower level of transitional population, and local businesses dependent upon patronage from residents can survive. But, Freaney also factors in upward mobility of stable families. She doesn’t expect minimum-wage workers to remain so in perpetuity. Yet, in today’s economic climate, the reality is millions of families are getting by on minimum wage for years.
Freaney believes families at the lowest income bracket should still be able to pay just 30 percent of their current income for housing. And as their income increases, so does the rent. But rent payments remain rooted in 30 percent of the income of one fulltime worker in the family. If the stay-at-home partner derives income from entrepreneurial endeavors, that income isn’t taken into account for rent adjustments in Freaney’s model. Thus, the model has a built-in incentive for one partner to work fulltime and the other to maintain the home and engage in building a small business that increases the family income.
For example: In a family with one worker outside the home and one stay-at-home worker with no extra income, the monthly gross earnings of the family is $1,440. If the family pays only 30 percent of their gross monthly earnings for rent, that amounts to $432 per month (not including utilities). This begs the question: Is it possible to provide affordable housing for families under this model?
Top 10 States: Minimum Wage
- Washington DC $10.50
- Washington (state) $9.47
- Oregon $9.25
- Connecticut $9.15
- Vermont $9.15
- California $9
- Massachusetts $9
- Minnesota $9
- Rhode Island $9
- Alaska $8.75
Source: Bankrate.com
***
EXPLAINING FREE MARKET FORCES
The real estate market allows the purchasing of large swaths of available housing wherein low-income tenants struggle to make ends meet each month. When the growth of existing or new businesses introduces new jobs into a region, those job openings impact the housing market. After all, new workers also need places to live. Job growth also impacts the transportation needs of a region. Since workers wish to live as close to where they work as possible, an astute investor keeping an eye on business growth trends and job openings will be on the lookout for nearby housing properties that are below the value of the rising market.
Corporate investors tend to purchase as much of the available properties as possible and wait as the flood of new employees into the region drive up the demand for housing, which is limited. The challenge for the corporate landlord who has invested in properties where low-income residents live is they are restricted by law in dramatically driving up the rent to market value, unless the tenant leaves. Once the rental unit is vacant, the landlord can then restructure the monthly rent to whatever the current market will pay.
The bet that the corporate landlord/investor is making is that the low-income tenant won’t be able to make ends meet every month in perpetuity. So it’s a waiting game. And when the low-income tenant is late or misses a payment, the corporate landlord has the upper hand and can evict the tenant and elevate the rent on the same unit to market rate prices. The new monthly income generates strong returns on the investment for both the corporate landlord and the shareholders who invested in funding the process.
RELATED NEWS: Like the U.S., Europe is selling off its Housing to Aggressive Corporate Landlords
EXPONENTIAL IMPACT OF INNOVATION
Explosive growth in the tech-innovation sectors creates more job openings and more demand for more high-wage workers. The demand for housing near innovation districts and hubs increases as the business success rate in the region increases. Many innovation hubs and districts are located near or in communities with affordable housing for lower-income workers. This creates a market-driven conundrum … and a domino effect.
The job market creates an opportunity for high-wage workers. That’s good for job-seekers.
These high-wage workers can pay more for housing than the previous cohort of existing workers in the region. That’s good for landlords.
The existing lower-income tenants paying a previous market-based rent are impacted by the cascading domino effect of new jobs, new workers, limited housing and the opportunity for the landlord to make more money. That’s not good news for the lower-income tenant. The rising cost of living in the same community means more pressure on the existing tenant who unable to afford huge hikes in the rent. One financial hiccup and the tenant will be forced to find another place to live. This dynamic isn’t considered as a cost of real human impact in the corporate capitalist game of hiking the house rent.
Bloomberg Profile
For hard-working low-income renters like Virginia Valencia, the impact of eviction by a corporate landlord is life-changing. Bloomberg profiles Valencia’s personal tragedy in a story from April 7, 2014 titled, “In Silicon Valley, a New Investment: Eviction.” Bloomberg offers an excellent analysis of the last bastion of affordable housing in Silicon Valley. Here’s an excerpt:
Virginia Valencia earns $12 an hour working the morning shift at Tesla Motors Inc. headquarters in Palo Alto, California, where she serves food and drinks to the staff and billionaire co-founder Elon Musk.
After work, the single mother of three goes home to the one-bedroom rent-controlled apartment she’s struggling to keep in East Palo Alto’s Woodland Park, an 1,811-unit complex bought in 2011 by Equity Residential, the largest publicly-traded U.S. landlord. The company, founded by real estate magnate Sam Zell, owns more than 70 percent of the regulated apartments in the only city between San Francisco and San Jose with a rent control law.
Valencia has been fighting eviction since she fell behind on her $1,064 rent payment in November. And she’s not the only one. Each month, as many as 300 Woodland Park residents receive notices from Equity Residential giving them three days to pay or vacate their homes, according to an employee’s sworn testimony in a lawsuit.
“I’m alone and I don’t have a family to fall back on,” said Valencia, 32, who works for a contractor that operates Tesla’s food services. “It seems like they just don’t want us here.”
MARKET EQUILIBRIUM
Without principled policies and ethical protocol in place, the real estate rental market is driven solely by greed. Since the corporate framework in real estate is based on market-driven opportunities to derive a positive return on an investment, disrupting this natural force with compassionate investing principles won’t be an easy task.
Freaney believes that equilibrium in the housing market can be achieved and provide investors a positive return without overkill, which displaces families and destroys communities for short-term gains. Of course, determining the point at which investors can comfortably capitalize on market opportunities without overkill is key. It’s akin to finding the precise point in the market where balance is achieved, and investors make a good profit while sustaining community culture, diversity and cohesion of families.
“I believe in ‘Capitalism with heART,’” Freaney said, quoting a catch-phrase created by award-winning storyteller and Portland native, Renee Mitchell. “I am 72 years old and I have seen it work. Now is the time to go ‘back to the future.’”
But is Freaney’s dream possible?
Any high demand for housing creates an opportunity to exploit the market where low-cost real estate exists but isn’t capitalizing on new market rate opportunities. The purchase of those properties enables the investor to benefit from the higher demands for limited housing in an area. The challenge for the investor is removing the current tenants in order to make room for the new tenants who can pay substantially higher monthly rents. Freaney’s model of community preservation requires investors to adopt a different mindset and perspective toward investing in real estate. That’s akin to transforming the Donald Trump-like investors across America. Sam Zell’s domination of the Silicon Valley rental market is Exhibit A.
For Freaney to succeed, she needs to adequately address two primary problems in the market:
1. Affordable Housing: Changing investor behavior or displacing them with principled mission-driven investors
2. Sustainable Housing: Developing quality homes that are both affordable and sustainable across generations
RELATED: Average national rent for the 2nd quarter of 2015 was $1,211, a $58 increase from the same time last year.
ADDRESSING AFFORDABLE HOUSING
The challenge inherent in the first problem is that changing corporate investor behavior requires the Herculean task of somehow convincing those with the capacity to consume large quantities of real estate in mass purchases to limit the degree of profit on such investments. It’s asking a lot to expect people to voluntarily place an artificial cap on their profits. That’s an idea not likely to be received well by investors.
Profit-Driven vs Mission-Driven Investing
However, the displacement of some of the Profit-Driven Investors (PDI) with Mission-Driven Investors (MDI) is a viable approach to disrupting the market forces. Obviously, the PDI landscape cannot be completely displaced, but the population of investors can include a diversity of mission-driven investors who help limit runaway forces that result in destruction of communities. One such MDI is the National Foundation for Affordable Housing Solutions (NFAHS). It is a nonprofit 501(c)(3) organization. According to the Foundation’s website:
“The Foundation is dedicated to preserving the nation’s existing assisted rental housing stock and is committed to providing our underserved low-income population with better access to decent, safe and well-managed affordable housing and community programs and services.”
Another nonprofit investor is the NHP Foundation. This organization employs the business model of owning, developing and managing properties for low-income to moderate-income families. According to the NHP Foundation’s website:
“NHPF’s holistic approach goes beyond providing the brick and mortar edifice. It combines affordable housing with a robust resident services program — known as Operation Pathways — which provides a wide variety of educational, health, financial literacy, and enrichment programs for our residents. We are one of the few national nonprofits that provides affordable, service enriched multi-family housing to those with low- to moderate-incomes.
“By acquiring a majority of its properties from financial institutions and private owners using commercial bank financing, permanent tax-exempt bonds, and Low Income Housing Tax Credits, The NHP Foundation is able to preserve existing buildings as affordable housing. These investments have stimulated the improvement of surrounding properties and helped stabilize neighborhoods in many of the communities where we are located.”
Nonprofit organizations and foundations that provide funding and resources to ensure preservation of affordable housing and sustainability of communities represent one insertion point to disrupt the natural mortgage market forces, by displacing a small number of the PDI with MDI across the investor landscape.
But, this laudable approach is minuscule and insufficient to make demonstrable progress in meeting a tremendous need across the nation for affordable housing that aligns with the economic conditions of tens of millions of families. Therefore, an additional approach is required that has exponentially greater capacity to disrupt the market. Freaney believes that a much larger capacity is contained within the assets of philanthropic organizations in every region of the country.
***
RE-THINKING ASSET INVESTING
Corporate and private foundations are required by law to ensure that a “minimum annual payout obligation of 5 percent of the net fair market value of the foundation’s assets” is appropriated to charitable giving. These funds can be used to bolster the capacity of MDI affordable housing advocacy organizations such as the NFAHS and NHP Foundation, and others. But corporate and private foundations also have another, much larger, opportunity.
The top 100 foundations in America have combined assets totaling more than $275 billion. The 5 percent charitable contributions from just the top 100 foundations is $13.75B. But where does the other 95 percent go? That’s $261.25B.
Asking the question doesn’t suggest those funds should all be invested in resolving the affordable housing crisis. It’s a question that requires research to determine specifically where the funds are actually invested.
Institutional Real Estate Investing
Institutional Real Estate, Inc. (IREI) says that it is the “exclusive industry insight for tax-exempt investors — pension funds, endowments and foundations.”
The multicultural and multiracial landscape of workers paying into pension funds and participating in charitable giving to foundations typically do not pay attention to how, when and where investments are made by the institutions managing the funds with which they are entrusted by the public. According to IREI, it offers insightful information that perhaps could be useful to the general population of workers who authorize a portion of their paycheck to support this investment arena. IREI’s website says it provides:
A monthly publication offering analysis of market trends related to pension fund investment in private equity real estate. It covers the people, trends, and events driving this dynamic market, and features the industry’s most extensive information on manager searches, new product offerings and pension fund real estate allocations, plus features on pension fund investment capital flows, investment strategy and portfolio management.
To better understand how philanthropic organizations manage funds, the federal Securities and Exchange Commission (SEC) requires foundations to file form 990 that reveals how they invest their assets, as well as allocate charitable donations. Researching these public data can reveal which philanthropic organizations addressing the affordable housing issue may be counteracting their advocacy mission with investments in corporate landlords like Equity Residential, America’s largest publicly traded landlord.
RELATED: How Equity Residential has Become one of the Most Successful REITs in the Country.
How does an foundation reconcile the allocation of charitable funds to support the preservation of affordable housing through annual nonprofit giving, while simultaneously investing portions of its much larger asset portfolio into a market-driven process that exacerbates the affordable housing problem?
This is the question Freaney asks. The answer poses yet another challenge to the affordable housing problem. Many philanthropic organizations who invest portions of their assets into the mortgage landscape may not be aware of this conundrum. Through the purchase of mortgage-backed securities, philanthropic organizations become shareholders in the PDI (profit-driven investing) corporate landlords who drive up the cost of housing in order to increase profits for their shareholders.
Philanthropic organizations addressing the issue of affordable housing face a conundrum: On one side of the ledger they seek to have social impact through strategic contributions and continued support of organizations that match the mission of the organization. On the other side, they must ensure asset investments that seek higher profits to ensure the financial health of the organization do not counteract its philanthropy. But sometimes the investment of assets can inadvertently conflict with the philanthropic mission of the organization.
For example:
If Foundation A gives $1M annually to support affordable housing while investing $10M as a shareholder in companies engaged in corporate governance of rental properties, the foundation may realize a significant profit from the asset investment that enables it to give more the following year to combat the problem it is invested in perpetuating. This degenerative cycle is self-defeating.
Freaney wants philanthropic organizations to more carefully examine where they are investing the bulk of their assets to ensure those profit-driven investments aren’t conflicting with their mission-driven philanthropy.
“The answer is simple,” Freaney said. “It’s simple arithmetic, no complex computer algorithms, no tax credits, no debt. It’s a long-term investment with no exit strategy. Tenant families pay 30 percent of income for rent and utilities; landlords pay 10 percent of rental income in real estate taxes. Landlords, tenant families and the municipality are now partners, not adversaries. When tenant families succeed, the system heals and the world is a better place.”
There are ongoing discussions across the philanthropic landscape among leading foundations to determine how to manage the need to ensure wise investments of the foundation endowment funds that also underscore its mission-driven objectives.
DEVELOPING SUSTAINABLE HOUSING
Efforts are underway across the nation to find new ways to build sustainable residences that remain affordable to low-income and moderate-income families. Over the decades, cheaply built public and private housing projects have turned out to be unmitigated disasters. Many became uninhabitable and have been demolished. The challenge facing the nation today is how to construct affordable homes that can last 100 years.
CAMBA Housing Ventures in New York City is one of a number of efforts combining well-designed architecture, LEED-certified green building materials, and energy-efficiency into a safe, healthy sustainable dwelling for low-income residents. The result has been dramatic drops in asthma and other health-related problems caused or exacerbated by environmental conditions, as well as a comfortable and aesthetically attractive place to live. Today, many municipalities across the nation are engaged in supporting a wide variety of projects aimed at developing sustainable and affordable housing for low-income residents. Ironically, Portland, Oregon (second-highest rental rate growth in America) is held up by the National League of Cities as a leading example of what cities can do.
EMERSON STREET PROJECT
Freaney moved to Portland in 2008 and began to focus on the need for sustainable, yet affordable housing that didn’t change the culture of the community. She purchased a home on Emerson Street and is now engaged in transforming a low-performing, box-like energy hog house into a high-performing passive home that uses as little energy as possible to ensure comfort all year round.
Freaney’s focus is to develop a replicable model for single family homes. She hopes her Neighborhood Housing model will be used to renovate and build new homes in communities nationwide to ensure the health and sustainability of the people, homes, environment and community culture.
This former Wall Street investor now believes that ensuring the stability of families and communities can be a smart and profitable long-term investment. Freaney’s holistic criteria for profit-making investments are mission-driven and founded upon her model of rooted investing. Perhaps Freaney’s model will serve as a lesson in sustainable investing for the corporate community:
“I believe when people invest their time to learn about the people and places where they live, and then invest their own money in the development and sustainability of people, places and businesses, they and the communities where they live benefit more.”
# # #
Mike Green is an award-winning journalist. He is co-founder of ScaleUp Partners LLC, a leading national consultancy pioneering the field of Inclusive Competitiveness. Contact Mike on Twitter: @amikegreen2 or email Mike at mike@scaleuppartners.com