In 2015 and 2016, representatives from various public agencies, foundations, and nonprofit groups in the San Francisco Bay Area, Los Angeles, and Denver participated in “capital absorption” workshops, to forge solutions to local affordable housing shortages through strategies that attract land, capital, and other resources. They represented not just housing, but transit, planning, and economic development organizations—stakeholders that often don’t join forces to solve problems, even though they work on overlapping issues in identical geographies.

At one of these meetings in 2016, Abigail Thorne-Lyman, program manager for transit-oriented development (TOD) at Bay Area Rapid Transit (BART)—a public transportation system that annually shuttles more than 125 million passengers across the region—realized her agency might be able to make a game-changing contribution to solving the local housing crisis, which is among the nation’s largest. More than 250,000 of the region’s very low-income households lack access to affordable housing. The median home value is San Francisco is $1,147,300, compared to $197,500 nationally; the median monthly rent is a whopping $4,350, more than three times the national median rent of $1,500. Nearly half of local renters spend more than 30 percent of income on rent.

Each six-member team of participants from each region had drafted a spreadsheet of all pending development projects that included affordable housing units. “Staring at our list, we realized that capital wasn’t the primary constraint to building more housing,” explains Thorne-Lyman. “What we needed—the missing piece, so to speak—was land.”

In the Bay Area, developers don’t buy land until they are confident they can assemble the necessary financing for their project, making it difficult to compete in a hot real estate market, Thorne-Lyman says. But BART already owned 300 acres across the region.

That evening, Thorne-Lyman started imagining scenarios in which BART made all its land available for developments that included affordable housing. She ran the numbers. “I saw that we could produce maybe 30,000 units if we put our land in play,” she explains. Ten thousand units could be affordable—which is significant, given that the typical affordable housing development in the Bay Area produces 50 to 200 units. “And if we put ourselves out there first, maybe other transit agencies in other counties would come along,” as BART serves only four of the Bay Area’s nine counties. Together they could make an even bigger dent. “The 30,000 units could turn into 60,000 units, all on public land,” says Thorne-Lyman.

Thorne-Lyman and the rest of the capital absorption team delivered the analysis to BART’s general manager, Grace Crunican. Both Crunican and the BART board of directors decided to increase the agency’s commitment to both market-rate and affordable housing on BART land. Then they asked Thorne-Lyman and the team to model scenarios above and beyond any they had privately imagined.

“That conversation with Grace was like a slingshot,” says Thorne-Lyman. “We had these ideas and played them out. Then the board asked for an even more ambitious vision for our land. Through our work with the capital absorption team, we had all these willing partners—including the affordable housing advocates, community development financial institutions, and foundations—who backed up the idea and pushed it out to the public.”

BART’s new TOD development targets, adopted in December 2016, call for production of 20,000 new housing units and 4.5 million square feet of office space on BART land by 2040. At least 35 percent of these units—7,000, to be exact—will be affordable to low- and very low-income households. So far, BART has produced 760 affordable units on its land, meaning the agency has some work to do. Nonetheless, Thorne-Lyman is encouraged by the challenge. “California has this affordable housing crisis, and we can say that BART will be part of the solution,” she explains. “We have land. And we are willing to offer it up.” 

“Someone has to be thinking big about how to address this crisis. We are putting forward something big,” she says.

The Capital Absorption Framework

The capital absorption workshops that Thorne-Lyman attended were part of a pilot program designed to help cities attract and deploy community investment and to leverage other critical resources, such as land and expertise, to achieve their goals. Community investment is defined as “investments intended to achieve social and environmental benefits in underserved communities—such as loans, bonds, tax-credit equity, and structured investment vehicles.”

The program’s chief architect, Robin Hacke, says, “It’s a way to make resources go to places where they’re not going by themselves, to address the failures of mainstream finance to produce enough affordable housing, reduce health disparities, or minimize the impact of climate change on vulnerable places, among other factors tied to land use.”

Hacke, who is the director of the Center for Community Investment at the Lincoln Institute, is utilizing a new “systems change” strategy that she designed in collaboration with colleagues David Wood of Harvard University’s Initiative for Responsible Investment, Katie Grace Deane, and Marian Urquilla. Called the Capital Absorption Framework, the model is predicated on this idea that mainstream capital markets frequently fail to address the needs of low-income communities, requiring a systemic approach to repair this breakdown and achieve meaningful outcomes at scale (opposed to one-off projects that are difficult to accomplish and, even when successful, fail to move the needle in a significant way). By “bringing to the table” stakeholders who rarely join forces to solve problems despite having aligned interests, the model also augments available assets and power, helping to identify effective new tools and strategies to address unmet community needs.

The framework is a response to challenges Hacke and Urquilla faced while working on The Integration Initiative, an $80 million program begun in 2010 to improve the lives of low-income residents in five pilot cities—Baltimore, Cleveland, Detroit, Minneapolis/St. Paul, and Newark. Administered by Living Cities, the idea was to align interests across a range of players and invest capital in neighborhoods that traditionally can’t access funds.

The Integration Initiative demonstrated that participating cities not only lacked capital; they lacked the capacity to absorb and deploy the funds allotted to them through the program, says Hacke.

“Spatially inequitable distribution of low-income people across the United States grew from decades of public policy that basically starved communities of capital, through redlining by banks or redlining aided and abetted by the Federal Housing Administration,” says George McCarthy, president and chief executive of the Lincoln Institute of Land Policy, who was involved in The Integration Initiative during his tenure at the Ford Foundation.

Systems Change

In order to overcome the effects of discrimination and the market’s failure to deliver adequate goods, services, and opportunities to disadvantaged communities, we need to ensure that capital can flow to those places. Ensuring that residents can thrive means finding ways to finance affordable housing; developing healthy environments with access to fresh food and safe places to walk, bike, and play; and providing access to quality education and jobs. It is not enough simply to invest in a single project and expect places to be transformed. The Center for Community Investment is committed to strengthening the systems that engage a community in planning for its future, creating a platform and network of relationships that unite the institutions and individuals with the capacity to advance the community’s vision; developing and executing investment transactions that implement that vision; and shaping the policies and practices that accelerate how transactions proceed.

—Robin Hacke

“Because we starved communities of capital, we think the way to help them recover is just to provide them with money. But that misses the point that over the years we didn’t just strip out the capital but also the capacity of those places to help themselves. Many people in the community development movement believe that if we just find a way to get more capital to places, then good things are going to happen. But one of the hard lessons we have learned is that, even if you can get the money to those communities, they don’t necessarily have a way to use it. It may sound like I’m blaming the victim, but that’s not it. Rather, it’s understanding that when you deny a place critical resources for long enough and then suddenly provide it, the community may not be ready to deploy it. It’s like people. If you starve someone for too long and then provide food, that person may not be able to eat it.”

Managing the Pipeline

“To deploy capital successfully, places need to identify sources of capital as well as projects that can use it. Proponents of impact investment have focused on organizing capital supplydemand for investment,” Hacke says. “For example, in Detroit, Baltimore, and Cleveland, they were not primarily looking at housing. They wanted to accelerate all kinds of development, including commercial and mixed-use developments. Getting the right set of deals and the right conditions to supply capacity to those deals required much more than just investment capital. The work took longer than we expected and required much more upfront arrangement of the plumbing than we had anticipated,” she adds.

“Despite the great need in disadvantaged communities, stakeholders have to overcome major obstacles to complete projects,” says Hacke. “If people don’t believe that the deals have a decent-sized chance, they give up on them. So we organize stakeholders around what is most urgent at that time and organize the resources that way as well to increase the probability and the confidence that the critical deals will get done.”

The lack of confidence stems from the cold truth that community development projects are usually difficult to realize (figure 1). Hacke confronts that fact head-on by asking participants to identify what she calls “exemplary community impact deals. The ones that stick out in people’s minds as representative of the field tend to be complex, time-consuming, and politically fraught, balancing the interests of many stakeholders and blending many different sources of capital with varied constraints and requirements. Practitioners evoke the language of heroic quests to describe these deals.”

Identifying and examining “exemplary deals” is helpful in two ways. First, it highlights the complex and convoluted nature of many community investment projects, clarifying the need for a more efficient, scalable strategy. More importantly, analyzing exemplary deals can help stakeholders determine the potential resources and constraints of the larger community development system, including the engagement level of various players, the availability of an array of skills and resources, and opportunities for collaboration.

3 Components of an Effective Community Investment System

Once stakeholders in a region have used the exemplary deals framework to examine how the community investment system is currently operating, the next step is to identify ways to improve the functioning of that system so that it can deliver impact at greater scale. As organized by the framework, an effective system requires three things, which are the focus of Hacke’s work with communities.

Identify Shared Priorities

First, stakeholders must articulate a well-defined set of priorities that are widely embraced across the community. Affordable housing is not always the anchor for establishing these priorities, but it was the easiest starting point in Hacke’s pilot programs—in part because the field has reliable, effective funding sources, such as the Low-Income Housing Tax Credit, and a robust network of experienced organizations.

“We work really hard to convene and build cross-sector relationships so that we can operate from a set of shared priorities,” says Thomas Yee, the Initiatives Officer at LA THRIVES, a nonprofit that works to advance the equity agenda around smart growth and participated in the Capital Absorption Framework pilot.

“There’s going to be disagreement among really progressive advocates, elected officials, and private developers, so it takes a lot of working together, building trust, and finding common ground. But that’s the way to organize system-level approaches. It allows you to boil down the work to a few principles that excite people and keep them focused on the system instead of their particular neighborhood or project.”

One of the shared priorities to emerge out of the Los Angeles work is the importance of ensuring that LA Metro, the public agency responsible for bus and rail services in Los Angeles County, effectively serves low-income residents, who are the agency’s core riders.

Prior to joining the workshops, LA Metro knew its core riders were low-income. Based on the findings of a research study the agency had commissioned prior to joining the Los Angeles team, the agency also understood how it could assist those riders to live near transit lines. It was developing aggressive housing targets on agency-owned land when it joined the LA THRIVES collaborative.

“The sea change was coming together to get LA Metro to think about what that means for how the agency runs its business—about the bottom-line question of what happens if those core riders are living farther and farther away from existing transit systems,” explains Yee.

According to Yee, LA Metro was interested in additional ways to counter displacement, and joining the collaborative was “really the water needed to grow those seeds.”

The idea that low-income riders would be pushed farther afield disturbed the other members of the pilot’s Los Angeles team. The transportation planners balked at the cost and inefficiencies of expanding service to outlying areas, while the conservationists worried about the environmental impact.

The community advocates were concerned about economic and social isolation, and the housing folk feared there was a lack of affordable housing in the outer ring areas. Resolving this issue correctly would present an opportunity to simultaneously address these seemingly unrelated concerns, and so it became a shared priority among the collaborative. In response, LA Metro adopted a new term for thinking about transit in the context of displacement: the Transit-Oriented Communities frame.

But LA Metro wanted to do more. It was clear that, unlike BART, the agency did not have much additional land that could allow for thousands of new affordable housing units. Instead, LA Metro, in partnership with other members of the team, created a loan fund to support the development of affordable housing and retention of existing low-rent, nonrestricted units near the agency’s transit lines. Critically, the units do not have to be on agency-owned land, but they must be close enough to provide easy access to the transit.

“We are so excited that LA Metro is willing to make investments off their property,” says Yee. “Making it easier to develop affordable housing on agency-owned land is one thing—and obviously a huge step in and of itself. But for them to go beyond agency-owned land is a big innovation and demonstrates a commitment to limiting the displacement of core riders.”

Establish a Pipeline of Deals

Once stakeholders identify a set of strategic priorities, they can then focus on establishing a pipeline of deals—the second step in implementing the framework. Stakeholders begin by examining deals in progress, analyzing whether they support the priorities and where there may be gaps.

The practice of examining the deal pipeline also helps to highlight the resources that are necessary for success.

For the Denver team, analyzing the city’s pipeline resulted in the recognition that the team needed to focus more on attracting mission-driven private capital, says Dace West, a leader of the Denver pilot and, at the time, executive director of Mile High Connects, a nonprofit with a mission to ensure that the Metro Denver regional transit system fosters communities that offer all residents the opportunity for a high quality of life.

“We had this powerful moment as a community when we realized that the way we are doing community development work is really driven by specific, restrictive funding sources that are more mature systems—like tax credits, which are oversubscribed—or, in other cases, sources of capital that are not very predictable,” says West, referring to the takeaways from the pipeline analysis.

“We realized that we are so often falling short in the developments we are working on because of an inability to be very systematic about the way we draw down and deploy capital. So, going forward, we are very focused now on how we leverage private-sector impact investment capital into the system, looking at traditional capital sources in new ways and at what we need to do to unlock significant capital seeking a place to land,” West says.

“We have discovered, from deep and intentional work, that impact means really different things to impact investors. When some say they want impact, what they are really saying is that they want to be able to squint and see something good; that is good enough for them, because what they really want is liquidity and rates of return. We think, ‘That’s good to know, because we have been wasting our time on these things that aren’t real issues.’ Now we can focus on questions such as: what is that target rate of return, and where are the right places to leverage that capital versus other kinds of capital? And that’s been a real ‘aha’ moment—this recognition that real estate, which is something we had been thinking of as a more traditional investment, can be an actual community impact investment, which creates new and interesting connections.”

One of those connections is to Denver’s housing finance agency.

“As we have been thinking about ways this new capital could land, we have discovered that we have a very unusual housing finance agency.

It is very creative and flexible and is already managing a huge number of siloed, structured funds that have a community purpose in some way,” says West. “We are working to build out a platform that uses the agency as a base to draw in capital that can go to specific sleeves but can also flow across those gaps and allow us to pursue projects driven by the community and its needs. The housing finance agency is not responding merely to existing funding sources any longer; it’s acting as a broad-based intermediary that can work across and among agencies in the system.”

Create an Enabling Environment

After building out a pipeline of deals, it’s a natural next step to the final piece of the framework—strengthening the “enabling environment.” This is defined as “the latent conditions that shape the system’s operations,” including but not limited to “the presence or absence of needed skills and capacities, political realities, formal and informal relationships among key actors, and the cultural norms and behaviors that manifest differently in different places.”

In the capital absorption workshops, participants are asked to figure out which areas of the environment are or are not working well, and which policies and practices directly affect their strategic priorities. In doing so, they can better grasp the opportunities and limitations inherent in the current system.

For Thorne-Lyman and the rest of the San Francisco team, it was analysis of the enabling environment—of what resources are and are not available and functioning well in the ecosystem of affordable housing—that immediately revealed that shortage of land.

Center for Community Investment

Thorne-Lyman is not the only one excited by the work that has come out of the Capital Absorption Framework. McCarthy is also encouraged.

“Land is one of a community’s most valuable and scarce resources,” he says. “Land policies can play a central role in attracting or generating the investment needed to tackle vacancies and blight produced by dysfunctional land markets or to address the disparate impact of pollution and climate change on poor and disadvantaged families.”

For that reason, the Lincoln Institute of Land Policy launched the Center for Community Investment in 2016 with support from The Kresge Foundation, Robert Wood Johnson Foundation, John D. and Catherine T. MacArthur Foundation, and Surdna Foundation. The Center is a leadership development, research, and capacity-building initiative to help communities mobilize capital and leverage land and other assets to achieve their economic, social, and environmental priorities. Hacke will direct the new center and use it as a platform to advance the capital absorption model.

“We have seen over and over again that land really is an important part of the solution, whether we are talking about the health of people or green infrastructure and the health of natural ecosystems. Being at the Lincoln Institute, which has such tremendous expertise in the use of land to generate and capture value, is a real boon for us,” says Hacke.

Building on the success of the pilot, the Center for Community Investment has launched a new initiative, Connect Capital, aimed at helping cities and regions across the country improve access to opportunities so that everyone has a fair chance to lead a healthy and productive life. The Center is working with cross-sector partnerships that are reshaping local systems and deploying capital to make their communities healthier, more cohesive, resilient, and vibrant. Selected teams receive coaching and the opportunity to participate in learning sessions to help them strengthen their local community investment system.

At Lincoln, Hacke hopes to expand her work by piloting it in additional communities. Participants in the pilot cohort encourage those cities to seize on the opportunity. “When we started this work two years ago, it felt like an abstract academic exercise replete with homework assignments. But we hung in there with their approach and have seen such value in the framework,” says Christopher Goett, a senior program officer at the California Community Foundation, one of the supporters of the Los Angeles pilot. “Robin, Katie, David, and Marian pulled together a safe space that allowed us to tackle difficult work and created a support system that strengthened over time. In hindsight, these activities have been critical moments for us in our evolution and growth.”

“Community and economic development work is often addressed through programs in their own respective silos, but that’s not how the world operates,” Goett says. “Average Angelenos wake up and use transit to get to work or drop off their children at school. Systems such as housing, employment, and education all interact, and that’s how the Center’s frame is laid out.”

“For someone who manages a smart growth portfolio here at the California Community Foundation, the framework continues to become increasingly useful; smart growth is, by its nature, integrated. We have to think about public health at the same time we think about infrastructure and housing, and with this frame we can walk through the transit-oriented development door and still see the anti-displacement and housing angles.”

Revised in January 2018, this article originally appeared in April 2017 Land Lines.

Loren Berlin is a writer and independent communications consultant in Chicago.

Photograph: Courtesy of Abode Communities

References

Bay Area Council Economic Institute. 2016. “Solving the Housing Affordability Crisis: How Policies Change the Number of San Francisco Households Burdened by Housing Costs.” (October). http://www.bayareaeconomy.org/files/pdf/BACEI_Housing_10_2016.pdf

Hacke, Robin, David Wood, and Marian Urquilla. 2015. “Community Investment: Focusing on the System.” Working paper. Troy, MI: Kresge Foundation.

Truong, K. 2016, October 11. “Here Are 11 Solutions to the Bay Area Housing Crisis.” San Francisco Business Times. October 11.

Zillow.com. “San Francisco Home Prices and Values.” https://www.zillow.com/san-francisco-ca/home-values/

Zillow.com. “United States Home Prices and Values.” https://www.zillow.com/home-values/
 

People who work with me are often surprised by the extent to which my philosophical canon derives from low-budget offbeat films, typically from the 1980s. When in need of wisdom, I frequently turn to the teachings of Repo Man or, for this essay, Terry Gilliam’s allegorical masterpiece Time Bandits. In the movie, a group of public workers are employed by the Supreme Being to fill holes in the time-space continuum left from the haste of creating the universe in seven days: “It was a bit of a botched job, you see.”

Like the Time Bandits, policy makers are often tasked to fill holes—actual potholes in roadways, or more theoretical holes that are the artifacts of dysfunctional private markets, such as the inadequate supply of affordable housing. For example, housing economists in the United States have become quite adept at tracking the size of the hole, which has only become harder to fill since the federal government committed to address it as a national policy priority beginning with the Housing Act of 1949, part of President Harry S. Truman’s Fair Deal.

In his 1949 State of the Union address, President Truman noted that to fill the needs of millions of families with inadequate housing, “Most of the houses we need will have to be built by private enterprise, without public subsidy.” Nearly 70 years later, our collective failure to solve the affordable housing deficit may stem from wrongheaded analysis of the problem, and the conclusion that market-based solutions can be designed to solve the mismatch between the supply of affordable housing and demand for it.

To support this claim, permit me a short departure into market theory. From the now-preferred mathematical approach to economic analysis, a market is simply a system of partial differential equations that is solved by a single price. The equations capture the complex decisions made by consumers and producers of goods—reconciling consumers’ preferences and budgets with producers’ production techniques, capital, and transaction costs—to arrive at a price that clears the market by settling the transactions of all suppliers and consumers willing to trade at that price.

Acclaimed economists Arrow, Debreu, and McKenzie proved the theoretical existence of a single set of prices that can simultaneously solve for the “general equilibrium” of all markets in a national or global economy. One important aspect of this Nobel Prize–winning contribution was the observation that a unique price cleared each market—one market, one price. There was no expectation that a single price could maintain equilibrium in two markets. And this is the fundamental flaw of the housing market—it is actually two markets, not one. Housing markets supply both shelter for local consumption and a globally tradable investment good made possible by broad capital markets that serve global investors. This dual-market status used to pertain to owner-occupied housing, but, with the proliferation of real estate investment trusts, rental markets are now in the same boat.

Markets for consumption goods behave very differently than investment markets, responding to different “fundamentals.” On the supply side, prices for consumption goods are dictated by production costs, while prices in investment markets are dictated by expected returns. On the demand side, such things as tastes and preferences, household incomes, and demographics determine the price of housing as shelter. Investment demand for housing is dictated by factors like liquidity and liquidity preferences of investors, expected returns on alternative investments, or interest rates.

In developed countries, global capital markets and the market for shelter collide locally with little chance of reconciliation. Local households compete with global investors to decide the character and quantity of housing that is produced. In markets that attract global investment, plenty of housing is produced, but shortages of affordable units are acute, and worsen over time. This is because a huge share of new housing is produced to maximize investment return, not to meet the needs of the local population for shelter. For example, there is no shortage of global investment willing to participate in developing $100 million apartments in New York City. But affordable housing, being much harder to finance, is in short supply. And in markets that have been abandoned by global capital, house prices fall below production costs, and surplus housing accumulates and decays. In extreme cases such as Detroit, market order can only be restored by demolishing thousands of abandoned homes and buildings.

Perhaps it is time that we question the conclusion that market-based solutions can address the challenge of sheltering a country’s population. Truman concluded that “By producing too few rental units and too large a proportion of high-priced houses, the building industry is rapidly pricing itself out of the market.” But Truman was thinking about the market for shelter, not investment. Remarkably, the number of housing units in developed countries significantly exceeds the number of households. In 2016, the U.S. Census estimated that there were 135 million units of housing in the country and 118 million households. One in seven housing units was vacant. This over-supply of housing characterizes every metropolitan market in the United States—even markets with extreme shortages of affordable housing. In 2016, 10.3 percent of housing units were vacant in New York, 6.0 percent in the San Francisco Bay area, 8.2 percent in Washington, DC, and a stunning 13.7 percent in Honolulu. The problem is that many households have insufficient incomes to afford the housing that is available.

In the end, rather than fill the holes in the fabric of time and space, the Time Bandits decided to take advantage of them to “get bloody stinking rich.” The bandits sought to capitalize on celestial imperfections, the way global investors seek returns from short-term market dislocations. To illustrate the dangers of such naked speculation in unregulated markets, consider an apocalyptic tale from a very different market. In 1974, heavy rains during planting season in Bangladesh suggested that rice might be in short supply at harvest time, and rice prices started to rise. Savvy commodity speculators realized that there would be a good return on any rice that was held off the market. The actual harvest produced a bumper crop, but the interaction between market expectations and market manipulations by commodity investors produced one of the worst famines of the 20th century—with an estimated 1.5 million famine-related fatalities. The famine did not result from real food shortages. The collision of the market for goods and the market for speculative investment priced rice out of the reach of the local populations, with landless families suffering mortality at three times the rate of families with land.

Perhaps shelter and food are too important to be left to unregulated markets to allocate. Perhaps public policy should focus on protecting a share of the market—and the public—from the ravages of speculation. In this special anthology issue of Land Lines, Loren Berlin describes efforts to preserve affordable housing in the form of manufactured homes and to promote permanent affordability of that stock through the conversion of manufactured housing communities to limited equity cooperatives. Community land trusts and inclusionary housing policies are also effective ways to insulate shelter from speculation, as demonstrated by Lincoln Institute research. After almost seven decades of failed efforts to get private markets to meet populations’ needs for affordable shelter, it might be time to develop, and to export, these other approaches based on a more realistic understanding of the complexity of housing and capital markets.

This article originally appeared in July 2015 Land Lines.