SITO's petition to the St. Louis AHC
The aims of the St. Louis Affordable Housing Commission include the "preservation and production of affordable, accessible housing and support services that enhance the quality of life for those in need." The AHC awards funding to entities in pursuit of these aims. However, rarely has the AHC supported selective rehab--the approach taken by SITO. We believe that the AHC should include funding of selective rehab and have petitioned them to do so. Below is a letter from our founding director, Jim Roos, to the AHC, outlining why and how selective rehab can be successful.
August 22, 2022

Dear Members of the Affordable Housing Commission,

Please consider our thoughts and proposal within. For 45 years Sanctuary IN the Ordinary (SITO) and Neighborhood Enterprises (NE), managed and/or owned hundreds of lower cost rental units. In 2019, Jim Lutz, retired after 20 years with Rise, and I began reviving the SITO selective rehab strategy and bringing it “to scale.”

Steve Rothchild, in his 2012 book, The Non Nonprofit, said, "Measure what counts." For us what counts is a strategy that utilizes healthy community development and increases the net number of affordable-at-market-rate and subsidized-affordable units.

In the November 1993 HUD report, “Nonprofit Housing, Costs and Funding,” the executive summary concludes with, “In addition to some system of cost control, it appears that a system is needed that provides more of the subsidy and financing from fewer sources… which would function both to reduce processing costs and to focus more clearly the responsibility for cost control.”

In 2019 Loretta Hiner, chief housing strategist at the Affordable Housing Commission (AHC), said the 2019 average Total Development Cost (TDC) of units assisted by AHC was $224,163. In 2018 it was $193,855. She added that more single-family homes were funded in 2019 than 2018, thus driving up the per-unit cost.

Hiner also said that from 2003-19 the average per unit subsidy from AHC was $23,785. In 2014 Missouri auditor Tom Schweich said the average tax credit subsidy per unit was $61,000 and that (only) $0.42 of each tax credit dollar was used to build housing. I estimate that in 2019, total subsidy per unit was about $100,000 and TDC per unit was about $200,000.

Under SITO’s strategy there is only one, very modest, source of subsidy—the value of zero-interest on 20% of the TDC for 10 years. The six 2-bedroom, 1000-ft2 units that SITO rehabbed this past year had average TDC of $80k. Subsidy was only $8k (the value of interest-free financing at 5% for 10 years on $16k).

By mid-September, the AHC will request proposals for 2023. There are 2-3 weeks available to add Selective Rehab and its related features of Nonprofit Ownership, Permanent Financing, Competent Management, and Neighborhood Greening as a proposal option in 2023.
 
The AHC currently seeks applications in three categories: Services, Rental Development, and Home Ownership Development. Both development options require gut rehab or new construction. The AHC follows the Community Development Agency (CDA) requirements even though the AHC charter doesn’t require such.

In a 2020 letter to me, Bill Ratja, acting director of CDA, told me what HUD/CDA required and suggested we seek AHC financing with fewer requirements. He wrote:

     “It was my understanding that during our meeting you had determined that Neighborhood Enterprises’ strategy would not be a good fit with CDA funding given the added costs of compliance with HUD regulations and the additional code requirements of the city. However, I did suggest that you might pursue other funding sources such as the Affordable Housing Trust Fund and the Federal Home Loan Bank which have fewer compliance requirements and may be a good fit for your strategy.”

SITO seeks a fourth proposal option: Selective Rehab of Rental Housing
 
Characteristics of selective rehab
  1. Selection of properties that are neglected but structurally sound
  2. Partial rather than gut rehab to save some existing systems
  3. Rehabbing partially occupied rather than vacant properties
  4. Work specifications are done by the NPO doing rehab rather than an architect
  5. Minimal reconfiguring of the basic floor plan
  6. “Down-sizing”—for example, have an eat-in kitchen instead of dining room
  7. On smaller jobs, using neighborhood tradespeople or in-house crews
  8. Applying prudent rehab codes rather than new construction codes
  9. Getting a flow of smaller projects, rather than “packaging” a big one
 
General strategy and timetable
  1. In Sept 2022 AHC dedicates $2m of 10-yr, zero-interest financing for this approach in 2023
  2. By Nov 2022 NPOs describe themselves and state if they plan to seek financing in 2023
  3. Anytime in 2023, NPOs offer specific plans and within 10 days AHC approves or rejects
  4. Rents must be affordable for 10 years—at or below 50% of St. Louis City Area Median Income
  5. Half of projects/dollars funded must be used north of Delmar
 
20% LTV, zero-interest, 10-year, financing from AHC is contingent on NPOs
  1. Having 75% LTV bank loan for rehab and/or permanent financing
  2. Having 5% equity
  3. Completing rehab in 6-9 months (with leeway for unforeseeable issues)
  4. Obtaining occupancy permits and vouching that units are lead safe
  5. Having capable property management
  6. Rehab being 30-70% of Total Development Cost*
  7. Cleaning up adjacent property lines, alleys, vacant lots**
  8. Producing annual operating reports available to AHC and public
  9. Allowing AHC to inspect, at random, annually, up to 10% of units
 
15% LTV, zero-interest, 10-year, financing, is contingent on all the above except
  1. Rehab cost may be less than 30% of Total Development Cost
  2. NPO must have 10% equity or bank commitment for 80% LTV
 
NPOs will strive for, but AHC financing is not contingent on, the following
  1. Units being energy efficient to a specific level
  2. 1/4 of units have #8 or other rental assistance, 1/2 are market rate, 1/4 are either
  3. Providing specific services (NPOs will team with other NPOs for services)
  4. Using local, mostly minority, small-scale contractors
  5. Total Development cost for 1-2 bedroom units being between $40k and $80k
 
David Wessel in his 2021 book, Only The Rich Can Play, describes Opportunity Zones (OZ) created in 2017. OZs provides tax breaks for investments in “mostly-poor” census tracks, yet investments are being made in the more affluent areas (like Cortex and Ball Park Village) of those mostly-poor census tracks. Wessel said OZs are “billionaires designing innovative tax breaks for other billionaires, poor people being used as a moral excuse to cut taxes for the rich.” Wessel noted that the Rockefeller and Kresge Foundations tried to get OZs to help truly distressed areas. Rockefeller gave $1m to St. Louis to fund an OZ coordinator. In 2020 Stuart Zimmerman, with Audubon Associates, a NP associated with Washington University, said there is no evident way to utilize OZs with SITO’s strategy.
 
I give this OZ example to indicate how public money for a good cause can fail to accomplish its goals, particularly when associated with helping rich people save or make money. Missouri auditor Tom Schweich made a similar observation about Low Income Housing Tax Credits.
 
Funding for SITO strategy will enable more NPOs to quickly repair existing units and provide new units that are permanently affordable. See our Strategy page at https://www.sitohousing.org.
 
Hopefully you will not see this as too prescriptive. SITO believes this approach has the greatest benefit to affordable housing and healthy community development, and avoids misuse of public and charitable funds. In the past year SITO demonstrated this strategy on six units at 3437 Osage and 3835 Michigan, 63118. The St. Louis Post-Dispatch described our effort on Feb 2, 2022.

Sincerely,
 
Jim Roos
Founding Director, Sanctuary IN the Ordinary
jimroos@sitohousing.org
 
* The Enterprise Foundation in the late 1980’s did selective rehab of 400 units in Baltimore. Their analysis showed that TDC was least when rehab was about 40% of TDC and was nearly as favorable when rehab was between 30-70% of TDC. TDC was the highest when shells were gut rehabbed and second highest when better maintained units got only a small amount of repair.
 
** Most people ignore the common fence lines and trash and overgrowth on adjacent, often LRA, property. At small cost with great benefit, those semi-private, semi-public areas can be maintained by NPO’s which have received public financing assistance.