Talking Heads: Anthony Tarter, Executive Vice President and Director of Agency Workforce Housing & Social Impact for Bellwether Enterprise
By Darryl Hicks
10 min read
Workforce Housing Is Slowly Getting the Attention It Deserves
Bellwether Enterprise, a subsidiary of Enterprise Community Partners, is a major lender of affordable multifamily housing, amassing a $26 billion servicing portfolio. Over the past year, the company has made a major push into workforce housing including opening an office in Dallas devoted exclusively to this market and hiring Anthony Tarter to run it.
Tarter has more than 17 years of experience in the real estate finance industry having originated over $5 billion in conventional, workforce and affordable multifamily loans. Prior to joining Bellwether Enterprise, Tarter served in various roles at PGIM Real Estate Finance (formerly known as Prudential), Arbor Commercial Mortgage, PNC Real Estate and PNC’s predecessor ARCS Commercial.
Tax Credit Advisor sat down with Tarter to discuss the workforce housing market and Bellwether’s plans and strategy.
Tax Credit Advisor: What motivated Bellwether Enterprise to launch a separate workforce housing division?
Anthony Tarter: Over the past three to five years, workforce housing has really become this hot word in the housing market. Workforce housing is not affordable in the sense that it doesn’t have subsidies or tax credits, but it’s “naturally occurring affordable housing.” If you know the mission and history of Enterprise and Bellwether, it made sense to start doing and promoting workforce housing. Whether it’s mandated affordable or naturally occurring affordable, it’s still affordable and meshed with our DNA. Enterprise and Bellwether live by the slogan, “Capital on a Mission,” so it made sense to start doing workforce housing.
TCA: How many workforce housing deals has Bellwether Enterprise closed to date? What does your pipeline look like in 2020 and 2021?
AT: The company was involved in financing workforce housing before I came on. We have $26 billion in our portfolio and I would say 20 percent is workforce housing. Pre-Corona we had about $300 million in acquisitions in the pipeline spread across the country. When Corona hit, they all faded. Not because they were workforce housing, but because of the financial markets. Equity providers, bridge lenders, they all pulled out. We had a mass exodus of acquisitions. Right now, we’re probably working on around $150 million in deals that are mostly refinances and a few acquisitions. It’s going to be slow for a few months, but we expect business to pick up in Q4.
TCA: How do you define workforce housing?
AT: The workforce is people who make too much money to live in subsidized housing but not enough to afford higher-end market-rate housing. Many are hourly-waged workers, people who work at Walmart or other retail, for example. They live paycheck to paycheck and pay anywhere from 30 to 50 percent of their income towards housing. If the average median income needed to live in tax credit housing is $30,000 for a family, then a family living in workforce housing makes just over that amount where they don’t qualify for subsidized rent from government programs, but still need an affordable place to live. Workforce housing in Dallas is not the same as workforce housing in Los Angeles. In many markets, it’s people who make 60 to 80 percent of area median income, but in LA, New York, Seattle, San Francisco, it’s people making 100 to 120 percent of the AMI.
TCA: Do you find workforce housing more challenging to finance compared to affordable housing? What are some of the key differences between the two from a lender’s perspective?
AT: I don’t want to say it’s easier, it’s just different. There are no tax credits or project-based vouchers. However, financing workforce housing comes with its own complexities in a variety of different structures. According to a report published at the end of 2018, 53.1 percent of all multifamily rental housing in the United States qualifies as workforce housing. Much of workforce housing is not new construction, but rather urban and rural properties built in the 60s, 70s, 80s and maybe even the early 90s. Values at workforce housing properties are generally determined by actual income and expenses at the property, without any kind of subsidies or abatements taken into account. With most workforce housing, you’re buying an asset at a lower replacement value. On a new construction, for example, it may cost $150,000/unit, whereas our valuations are anywhere from 50 percent to 75 percent of that number.
TCA: What are the key financing sources available for workforce housing?
AT: Pre-Corona, everybody: Fannie, Freddie, Federal Housing Administration (FHA), Commercial Mortgage-Backed Securities (CMBS) issuers and life insurance companies. Currently, we are in an interesting climate that’s somewhat stagnant. Not everybody is showing their colors and their cards. CMBS issuers are on the sidelines. Fannie, Freddie and FHA are all still very active. Is that because the government is guaranteeing these loans? Yes, probably. The government is trying to stimulate the economy and increase liquidity. Fannie and Freddie are heavily involved with most asset classes, including affordable, workforce and Class A. Interest rates are probably at least 75 to 100 basis points lower compared to this time last year. The drop in interest rates has promoted an influx of refinance requests that we are seeing, allowing owners to put new attractive debt on their properties while giving them the opportunity to put some cash in their pockets. Most workforce housing has some form of interest-only (IO), which FHA doesn’t offer, but Fannie and Freddie do. The IO terms can be anywhere from two years to half and full-term, which helps boost returns for investors.
TCA: Given the growing importance of workforce housing are you seeing more states and cities providing subsidies or other incentives to spur development?
AT: Yes, it is something we are seeing. In high-cost markets, like Austin, San Francisco, Seattle and New York, you have Class A housing that doesn’t have any government subsidy, then you have Big A true affordable with tax credits. But there’s the working class. Where are they living? In Texas, we worked on some workforce housing projects where the developer went into an area that was impossible to build without any government assistance. One option that developers like this have been exploring is a Public Facility Corporation (PFC). This is essentially a program that includes a ground lease for 75 to 100 years that says if you maintain half of the units at 80 percent of area median income (AMI), you don’t have to pay real estate taxes. The PFC structure can be seen as an alternative to using tax credits where you are not having to pay taxes which is generally one of a property’s largest expenses. The PFC structure is generally used on new construction, not on preservation of existing properties. I wouldn’t say they’re super common, but they’re happening more often in larger metropolitan statistical areas (MSAs). It’s certainly something we need to see more of especially on new construction properties.
TCA: What’s your process for determining which projects qualify as workforce?
AT: The first thing we do is pull a rent log to analyze the local rents. Then we use census data to gather average median incomes in the specific submarket. Those are the main calculations for determining whether a project qualifies as workforce housing. A project could be naturally occurring at 80 percent AMI, 100 percent AMI or in some cases 60 percent AMI. These calculations tell us whether a property qualifies as workforce housing and the extent to which percentage of units at the property qualify at varying levels of affordability, depending on the submarket that the property is in. When I say naturally occurring, I mean the owners did not force rents to be at those levels. Rents are naturally occurring at those levels within that submarket. The owners did not reduce rents from $800 to $600 to make that happen. In most cases, owners would increase rents if they could to 100 to 120 percent AMI, but then their property’s occupancy could decrease as they increase rents. To stay in line with their competitors, they charge rents that keep the place full. That metric is very important for us to analyze because the bulk of our business is financed through Fannie and Freddie and per their regulator, they want this type of business.
TCA: What are the emerging hotspots where you are seeing more workforce housing deals?
AT: Every market in the country has workforce housing. I am seeing areas where it’s becoming much more prevalent. Atlanta, Kansas City, Orlando, Tampa, the outlying suburbs of Washington, DC. Places in Virginia, like Hampton, Fredericksburg and the capital of Richmond, where we’re seeing a ton of workforce housing. Probably where you’re not seeing much workforce housing is in high-cost markets like LA, San Francisco and New York. We are seeing a lot of these workforce housing properties in lower-cost areas, just outside of the major metropolitan area. This trend is no different than a single-family home. As you get further away from the major metropolitan area, homes get cheaper and you start to see more workforce housing properties. When developers look at a deal and say, ‘we may as well scrap this and develop something new,’ most don’t think about the people who are living there now and where they’re going to go. If you build a new Class A property, they can’t afford to live there. If you build tax credit/truly affordable property where there is an income limit to qualify to live at the property, they may not qualify to live there. This leaves an abundance of the population, such as teachers, retail workers, firefighters, police officers, etc. who need to find an affordable workforce housing property to live in. A lot of the times it is a place located further away from their workplace or family. This is why we emphasize the need for more workforce housing for the common blue-collar worker.
TCA: What other important trends are you seeing in the workforce housing market?
AT: Social impact is key. I work with a nonprofit called Veritas Impact Partners, which pre-Corona was focused on offering after-school programs for children living at workforce housing properties, financial literacy and health education programs. Tenants are more interested in amenities and programs that impact and better their lives than they are about a bigger fitness center or a nicer pool. These programs that Veritas is implementing are focused on helping tenants with childcare, or even their nutrition. Due to the hardships the people of this country have been facing during the COVID-19 pandemic with businesses being shut down and health concerns at an all-time high, Veritas Impact Partners has formed the Veritas Relief Fund. The Veritas Relief Fund is focused on providing resources and financial support to residents who are suffering the financial and social impacts of this pandemic. Relief initiatives include grants for tenants who need assistance paying rent, 24/7 access to virtual healthcare through Teladoc, additional health services, access to food, job placement and other resources including financial education.
