Beating Luxury Developers at Their Own Game

It might seem impossible for a non-profit affordable housing developer to compete with a luxury housing developer to purchase residential buildings, but the tide is starting to change.

| Fall 2018

  • “Our goal is to go in and compete for these properties, and we still have to pay market value for them. We put in some improvements, but we try to keep those rents as stable as possible,” Hopkins says.
    Photo by Getty Images/Gcshutter

It was late spring 2017 when Aeon president Alan Arthur got the call from Richfield City Councilmember Maria Regan Gonzalez. A tenant had contacted her because he was worried that his apartment complex would soon be sold to a luxury developer, forcing out 400 working-class families and 250 school-age children who could not afford luxury-level rents. Not too long ago, the same scenario had occurred at a 700-unit apartment complex in Richfield, an inner-ring suburb of Minneapolis.

Aeon, a nonprofit founded in 1986, had developed around 2,800 units of affordable housing at that point, some of it new construction, some rehabbed from older stock. Like thousands of nonprofit affordable housing developers across the United States, Aeon had come to rely on low-income housing tax credits (LIHTC) to finance its work. Using these credits, nonprofits like Aeon have developed more than 372,000 units of affordable housing since the tax credit’s inception in 1987, according to data from the U.S. Department of Housing and Urban Development (HUD).

However, things have changed dramatically since 1987. Aeon and other nonprofits like it around the country are no longer working only in neglected corners of the real estate market that have been left behind by redlining or deindustrialization. As researchers like New York University sociologist Patrick Sharkey have brought to light, community organizing, community policing, changes in consumer taste wrought by popular culture, and other factors have combined to create a new real estate market in which the haves desire to live in many of the same neighborhoods they once left behind to the have-nots. But the haves move quickly, and so do the developers who seek to profit from them.

“We’re seeing investors and market-rate developers buying up class B & C properties, 1960s vintage, putting in some cosmetic upgrades and increasing the rents dramatically,” says Blake Hopkins, vice president for housing development at Aeon. “In the process, they’re displacing all the households that are there, moving folks out of the school districts they’re in, pushing them out into a challenging market where they can’t find apartments they can afford.”



While the terminology and the concept may be problematic, these housing units that are suddenly in investors’ crosshairs have come to be known as “naturally occurring affordable housing.” It’s housing stock that, when built years ago, no one ever thought luxury-unit seekers would want. There might be some Section 8 voucher holders in these units, but for the most part these homes were built without public subsidy and they’ve been operated without large-scale public subsidy or affordability restrictions on rents for years, maybe decades. Now they’re ripe for the picking by luxury developers, who often come in offering all-cash deals, closing much faster and with far less paperwork than the traditional tax-credit-fueled affordable housing transaction.

The established nonprofit affordable housing development system, based on a tax-credit allocation process built for a different era, is starting to adjust.