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America’s PHAs Are Reinventing Themselves

By Tyrone Garrett, Executive Director, District of Columbia Housing Authority

Tyrone Garrett, Executive Director, District of Columbia Housing Authority and PHADA Trustee.

The confluence of HOPE VI, Choice Neighborhoods, and Rental Assistance Demonstration is having a lasting impact on the structure and complexity of America’s Public Housing Authorities. An infusion of private, often intricate, financial transactions as well as corresponding regulatory changes is causing Public Housing Authority (PHA) directors to rethink, realign, and reinvent their organizations.

The makeover started slowly when Henry Cisneros, then-Secretary of the U.S. Department of Housing and Urban Development, released a document called “The Transformation of HUD.” The plan foreshadowed an infusion of private industry expertise and capital, à la the HOPE VI program that delivered seismic changes to American cities. Cisneros’s plan was received well, widely lauded on Capitol Hill, and accepted in many political and business circles. At the time, many HUD observers – both pro and con – saw his plan as a potential offramp for long-term federal commitments to fund housing that serviced low-income citizens.

Cisneros empowered local housing agencies with “…more flexibility to tear down nonfunctioning buildings and replace them with alternatives,” namely affordable housing funded with a blend of public and private investments. Until then, private capital was largely non-existent in the daily operations of a PHA. It is estimated that over a 15-year period, HOPE VI demolition and revitalization grants facilitated the demolition of more than 96,000 distressed public housing units and produce more than 100,000 new or renovated housing units in the nation’s cities.

Later the Obama Administration leveraged the HOPE VI momentum with the ambitious and intricate Choice Neighborhoods program. And later still, Obama’s HUD launched the Rental Assistance Demonstration (RAD) program which allowed a PHA to administratively convert its housing stock to leverage private capital to renovate and upgrade traditional public housing buildings while ensuring no changes to the existing rent rates or income mix. In 2018, HUD announced the completion of 100,000 RAD conversions, and Congress increased the total allowance to 455,000.

Amidst these changes, a typical PHA’s traditional business model diversified and a typical PHA’s administrative staff workloads became more complex as the sophistication of financing plans became more inventive.

A declining commitment from HUD has changed the way local housing agencies operate. PHAs are forced to look to other sources… to keep their organizations moving.

Fradique Rocha, Co-CEO of CVR Associates, a management consulting firm, recently described the evolving environment in the following way: “The vast majority of mixed-finance real estate transactions include millions of non-public dollars. The deals are highly sophisticated financial transactions wrapped inside extremely complicated legal agreements. Some of the sharpest minds in the real estate business are sitting across from housing authority staff to negotiate these transactions…. It would be naïve and irresponsible for PHAs to assume they do not have to protect their interests by bolstering their team with professional staff or advisors who have the capacity to successfully negotiate with and manage their prospective private partners.”

It has been two decades since Cisneros’ plan was rolled out and Portfolio Repositioning is HUD’s current stratagem to preserve the nation’s affordable housing infrastructure. HUD’s plan includes four options: RAD, the demolition of public housing, the facilitation of voluntary conversion of public housing to vouchers, and the retention of assets after a Declaration of Trust release.

Kate Bennett, the Boston Housing Authority’s (BHA) senior deputy administrator for redevelopment projects, recently said, “We will never see the kind of federal dollars we’ll need to transform those sites,” referring to large housing developments like Bunker Hill, a 13-city block housing complex with 1,100 units. Like many other housing authorities, BHA sought private developers and nonprofits to finance redevelopment projects, leveraging the value of the land to attract potential partners.

PHAs have traveled through an extended era with features like, oddly enough, the automotive industry of the early 1970’s. That is, just as the “natural order” of GM, Ford, and Chrysler was upended by overseas competition, the “natural order” for PHAs has been upended by the financial, regulatory, and legislative forces affecting our industry’s relationship with the U.S. Department of Housing and Urban Development.

We have reached a tipping point. A declining commitment from HUD has changed the way local housing agencies operate. PHAs are forced to look to other sources like private capital markets, philanthropy, and local governments to keep their organizations moving. A look back at the mortgage industry may inform what’s imminent for PHAs.

Today, Fannie Mae is one of the largest financial institutions in the world. On any given day, the company trades billions of dollars in securities in the market place. However, in the wake of the 2008 recession, the company’s very existence was in the balance. Market, congressional, and regulatory pressures required the company to take a hard look at its core business, assets, and position in the market.

Ultimately, a takeover by the federal government and a deep self-assessment produced a restructured company and introduced new leadership. The reorganized company successfully emerged from the recession stronger, nimbler, and more efficient than before.

As part of the new leadership team, Egbert L.J. Perry joined Fannie Mae’s Board of Directors in December 2008. Perry, who stepped down as the company’s chairman in December 2018, recently said, “(Fannie Mae) was reorganized, with its approach to technology, data management, and risk management being at the core of the reorganization.”

Advances in online technology lowered the barriers to entry for start-up companies looking to enter the mortgage business. Almost overnight small digital companies like Quicken Loans, LendingTree, and others were able to compete with a multi-billion-dollar legacy company like Fannie Mae.

Said Perry, “In essence, we had to rethink our organization, our workforce, and our approach. We had great employees but the earth was moving beneath us. We introduced voluntary retirements, generous out-placement strategies, and other incentives, including in-house training to re-engineer the work force.”

Whenever I chat with industry contemporaries, I learn that in spite of what might be local tradition, government civil service rules, or negotiated labor agreements, my colleagues, too, are working to adjust to an ever-evolving set of demands.

While most of us agree that organizational restructuring is necessarily disruptive, there seems to be consensus that just as GM, Ford, and Chrysler PHAs have to change their strategies and business models. And, just as Fannie Mae evolved to broaden its productivity and effectiveness, PHAs must adapt to the social, political, and financial realities facing our industry. The alternative, of course, is to sit idly by as housing units continue to deteriorate and disappear and as housing waitlists lengthen.

By definition, PHA directors do not sit on the sidelines.