By Meghan Hall
The rise of COVID-19 has brought about talk regarding the importance of essential workers, those that are considered the backbone of our economy and necessary to community vibrancy and health: teachers, first responders and nurses, among others. However, rapid urbanization has pushed workers further from employment centers as they search for affordable living accommodations, and the “missing middle” has become a pandemic of its own. While tax credits and public-private partnerships are able to move new low-income housing development forward, few, if any incentives exist for developers to pursue projects that would benefit those who consider themselves “middle income.” Catalyst Housing Group has spent the past several years working to create a model that not only pursues ground-up development, but takes existing market-rate assets and turns them into properties specifically for the missing middle demographic.
“I spent close to 20 years in the institutional multifamily housing space, and most of that was on the market-rate side of the business,” explained Catalyst’s Founder Jordan Moss. “I started Catalyst a handful of years ago to focus exclusively on affordable housing, but the cutoff for all of the existing subsidies that provide for this is for households who make 60 percent AMI. That generally is a pretty low number.”
Catalyst’s beginnings—for a number of perfectly aligned, somewhat random reasons said Moss—can be traced to Seattle, where the company worked to develop mostly affordable housing for low-income seniors in the area. However, in doing so, Moss said that Catalyst found a number of pain points around building affordable housing that proved to be somewhat limiting in scope.
“[For affordable housing,] you need to secure an allocation of credit and bonds, and generally there are a lot of other pools of capital that goes into those,” said Moss. “So when you think of the breadth and scale of the affordable housing crisis, you sort of need—you definitely need—scalable solutions, and I just didn’t feel that that model lent itself well to that.”
Additionally, emphasized Moss, many residents leaving high density areas today are those who simply can no longer afford to live in the region based on their wages.
“We were looking at this picture…and just scratching our heads wondering how we can have fully functioning communities on a long-term basis if we can’t find a solution to adequately house essential workers in the communities that depend on them,” said Moss.
Ben Metcalf, former director of the California Department of Housing and Community Development and former deputy assistant secretary at the U.S. Department of Housing and Community Development, echoed a similar sentiment to Moss.
“Having a diverse housing stock with homes for sale and apartments for rents at a range of price points, is I believe, the secret sauce for having communities that are vibrant,” said Metcalf. “When we don’t have communities like that, what we tend to find is widening inequality, and decreased economic mobility, increasing patterns of segregation, and also increased environmental damage.”
The inability to provide housing options for the missing middle prompted Catalyst to look for other ways to structure deals and financing, ultimately focusing this time on the San Francisco Bay Area. To solve the affordable housing crisis, however, the region needs to not only add to its stock, but place affordable and accessible housing in one Metcalf defines as communities of opportunity.
“I think one of the things we need to be much more thoughtful about at a city or regional level is not just getting more housing built, but also ensuring places where housing is constructed includes places where we do see the most opportunity for people who do live in those neighborhoods,” emphasized Metcalf. “One of the great travesties of California is that some of our most productive, job-rich high performing schools, low-crime neighborhoods have effectively become these fortress suburbs that have locked out development that is aimed at a more accessible price point for folks of modest means.”
With these factors in mind, Catalyst helped to launch the California Community Housing Agency, known as CalCHA, in 2019, which operates as a joint powers authority and a political subdivision of the state. CalCHA is different from other JPAs, says Moss, in that it has the unique power of asset ownership. So far, CalCHA and Catalyst have worked to acquire several multifamily properties throughout the region, including Verdant at Green Valley in Fairfield, Calif., and Annadel in Santa Rosa. Most recently, CalCHA issued $226 million to acquire Serenity at Larkspur, a 342-unit community in Larkspur, Calif.
“Catalyst has a more pragmatic business model,” said Metcalf. “The housing that is getting built is produced by market-rate, private sector developers using institutional financing which is priced at a higher level. But there is an opportunity in this housing, particularly after a period of several years when that institutional capital is looking to exit and get a return on its investment.”
Thus far, the assets that CalCHA and Catalyst have acquired are existing, market-rate properties. As tenants’ leases roll, if they qualify for the program, then they will receive the appropriate reduction in rent. If they do not, then the tenant will continue to pay market rent until they decide to move out, at which point the unit will then cater to new tenants, who typically make between 60 to 120 percent AMI.
“We inherit whomever happens to organically be there from day one,” said Moss. “In reality, in the institutional multifamily space, turnover rates at large apartment buildings like the ones we have been acquiring are generally in excess of 50 percent annually. To play that out, it should only take a couple of years to be fully in compliance.”
Annadel in Santa Rosa, for example, has now qualified more than 60 percent of its households in about a year. Ultimately, Catalyst is working towards producing ground-up development as well, and is currently scoping out development opportunities throughout the Bay Area.
The assets are one hundred percent financed by the issuance and sale of CalCHA bonds, governmental revenue bonds that are backed by project revenues. According to Moss, the average term is about 30 years. Once the bonds are repaid, all of the underlying upside in the properties is given to the underlying public jurisdiction to use as they please.
“[Cities] can take title to that asset on a free and clear basis and utilize all of the cash flow, or they could sell the asset and use sales proceeds,” said Moss. “My goal and my hope and my belief here is that we have proven how to create tens of billions of dollars of direct, tangible economic public benefit over the next 30, 40 years.”
12 cities have since joined CalCHA, with several more expected to join in the coming weeks. Marin County, Menlo Park, Burlingame, Livermore, Napa and Glendale are some of the cities part of CalCHA currently.
Long term, said Moss, Catalyst is looking to expand its model into the Seattle market. “We are actually looking to expand our model into the Seattle metro; it is fairly well publicized that they have also experienced rising housing prices,” said Moss. “If you look at the growth of Amazon and Microsoft, and generally that region as a tech hub, they have some similarities to the Bay Area.”
And, even as COVID-19 has taken root, both Moss and Metcalf believe there is opportunity for Catalyst and CalCHA to continue to grow.
“There’s no one silver bullet to solving the affordable housing crisis by any means,” said Metcalf. “But I think one of the tools that needs to be in our toolkit is something like what Catalyst offers: the ability to acquire buildings when they do go to sale and use publicly motivated investment capital to be able to keep folks in place during this challenging time.”