The Bottom LineThe Bottom Line

How Freddie Mac Rejuvenates and Diversifies ‘Mom-and-Pop’ Building Owners

Small Business Loan Program is a “pathway to capital” for smaller, newer building owners.

Tammy K. Jones's Basis Investment Group, in conjunction with Freddie Mac's Small Balance Loan program, finances acquisition and preservation of smaller properties such as this Los Angeles apartment building. (Credit: Basis Investment Group)

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Tammy K. Jones has a vision for her firm to be a one-stop shop for smaller, less experienced building owners needing access to capital. Since its founding in 2009, her Basis Investment Group has made more than $3.2 billion in loans and other investments to real estate owners across the country. (The firm also works with larger building owners)

That’s a long way from growing up black in southeast Queens, N.Y., in a two-bedroom apartment with a family of eight; from being the first woman in her family to go to college (at Cornell); from getting married and having a son before graduating and moving to a new city and, tragically, losing her husband in a car accident a year after that.

It almost goes without saying: Jones knows a thing or two about hustle. “We’ve had to be better, stronger, faster to get where we are and we know other [minority- and women-owned businesses] do, too. I believe the secret to our success [at Basis Investment Group] is our diversity. I believe we are a living testimony to that,” says Jones, who employs more than 70 percent women and minorities at Basis.

Being such a diverse firm has been crucial to their success in making $600 million so far in loans and other investments for buildings owned by women or people of color.

“It’s not that we’re out there only targeting women and minorities, but through our networks we get those deals,” says Jones, who also serves on the board of the Real Estate Executives Council, a professional trade association that promotes the interests of minority real estate executives.

Basis took a big step toward Jones’ ultimate vision last summer, when it became a licensed lender for Freddie Mac’s Small Balance Loan Program, which provides a streamlined process and paperwork to facilitate access to affordable capital for small, sometimes less experienced owners of smaller apartment or co-op buildings. Along with other requirements, eligible properties for the program must have at least five units, and loan sizes run from $1 million to $7.5 million.

Since launching at the end of 2014, Freddie Mac’s Small Balance Loan program has financed more than 6,400 loans totaling more than $15.8 billion, with 84 percent of the program’s lending going to finance housing affordable for households earning 80 percent of area median income, according to Freddie Mac.

“It creates opportunities to create wealth,” says Jones. “A lot of our borrowers are just getting into the [real estate] business, looking at owning four-unit or six-unit properties. Some of these smaller borrowers have had to go to [predatory] lenders, or have gone to banks and gotten turned down.”

The bank lending process for getting into real estate investment just isn’t built for many Basis clients, and not only because some of them are women or minorities. Smaller, sometimes less experienced building owners — what some call “mom-and-pop” shop building owners — may own just a few buildings at a time (typically between five and 50 units each), and are not interested in flipping them into luxury rentals or condos. Clients like these are no longer getting the attention from smaller local and regional banks that they once did. There are also far fewer such banks around — roughly 5,000 banks exist today, compared with around 14,000 banks in the mid-1980s.

“Through consolidation of banks across the country, there is a gap in the market that Freddie Mac is filling through [this program],” says Jeff Englund, senior managing director for affordable multifamily housing at Greystone, another licensed Small Balance Loan Program lender, which made over a billion dollars in loans through the program in 2017 alone.

Now in its fourth year, the Small Balance Loan Program is really the only large-scale, national program geared toward preserving affordability in this segment of the rental market, targeting what’s sometimes called “workforce housing.” In this segment, tenants typically earn more than 60 percent of area median income; until this year, that has been the maximum income eligible for units subsidized by low-income housing tax credits. Even though households earning up to 80 percent of area median income are eligible for federal Section 8 rental assistance, because of budget limitations only one in five eligible families receives that assistance.

Over its first three years, the Small Balance Loan Program has provided financing to maintain, modernize or otherwise preserve 210,000 units of housing that are affordable for households earning up to 100 percent of area median income. And the pace has accelerated, with nearly half that total coming last year.

Losing unsubsidized housing in this segment — to gentrification, deterioration or other causes — forces those families into higher-cost parts of the rental market, reducing their ability to spend on other necessities such as food or healthcare. Or it could force them to compete for units affordable to households earning less than they earn, bidding up those rental prices. It’s already happening in many places; an estimated 100,000 new units of affordable housing come online every year, but for every new affordable apartment, two are lost due to deterioration, abandonment or conversion to more expensive housing.

As long as this is a country where most housing is privately-owned, including most affordable housing, these smaller building owners, the lenders that work with them and the one nationwide financing program that is geared toward their needs form a key bulwark against a much larger housing crisis than the one that already exists across the United States.

“A lot of the crunch is in these urban centers,” says Stephen Johnson, vice president in charge of the Small Balance Loan Program at Freddie Mac. “There’s a crunch for affordable housing, upwards of 80-90 percent of our business is in those markets.”

Without a relatively easy way to access capital for acquiring, maintaining and preserving these buildings, the option to cash out and sell to a luxury developer might be an even more attractive prospect.

“The fact that you have this kind of financing allows people to buy multi-family properties and charge the rents that help people stay where they are,” Jones says. “If it’s financing that’s more prohibitive, [building owners] can’t keep the building’s finances at a place where those rents make sense.”

To make things as easy and smooth as possible, the program offers loans with set interest rates that aren’t tied to prevailing market interest rates, and sets maximum loan sizes based clearly on building size and market conditions. It’s not one-size-fits-all, but it’s like walking up to a counter at a fast food restaurant and seeing a clear menu of options. There’s also a relatively quick and predictable closing process, running 30-60 days depending on the deal.

“Prior to this program, there really wasn’t a formalized small balance solution that was as streamlined as this,” Jones says. “This program is less intimidating, the costs are clear, the documents are non-negotiable and affordable. It reminds me of a [single-family home mortgage] process. The documents are what they are.”

That’s no accident. It’s the way Freddie Mac works, as one of the “government-sponsored enterprises” or GSEs created by Congress over the 20th century to support the U.S. housing market. While its older counterpart, Fannie Mae, focuses on the single-family housing market, Freddie Mac focuses on the multi-family housing market.

Neither makes loans directly. Fannie and Freddie work by taking most of the risk out of lending to targeted borrowers. Each agency “buys” loans that meet certain characteristics, paying licensed lenders the principal on each loan and a share of the interest the lender would have earned had they kept the loan for themselves. It’s also called creating a secondary market. All the loans that Fannie or Freddie buy also have to meet clear standards and parameters for responsible lending. While Fannie and Freddie often still get blamed for causing the subprime mortgage meltdown of 2008-2009 by encouraging lenders to make loans to unqualified borrowers, that’s a myth that continues to linger.

2017 marked the third straight year that Freddie Mac was the largest source of financing for multi-family housing in the United States. Through Freddie’s overall network of licensed lenders, which it calls “seller-servicers,” they financed $73.2 billion in loans to owners of multi-family housing. But the vast majority of those loans, around $65 billion, were to owners of larger buildings or projects, typically 200-300 units per loan. That included a deal in the fall, for example, to save 768 units of unsubsidized affordable housing from going on the open market and possibly being converted into luxury condos.

As far as he can remember, Johnson says smaller deals typically popped up here and there at Freddie Mac, but ultimately the larger deals always ended up consuming everyone’s time. Johnson saw a clear need to have a dedicated team for these smaller deals, not only to process the paperwork but also to have boots on the ground all over the country who knew the markets where these deals originated. Before Freddie Mac buys any loan, it does its own inspections of buildings and properties, checking for major or minor repair needs, local market conditions, and even rent rolls — this to avoid making a loan that’s so large that a landlord is forced to raise rents exorbitantly in order to repay it.

A dedicated Small Balance Loan team gave Freddie Mac the capacity and flexibility to shape the program to meet the needs of the smaller, sometimes less experienced borrowers it was meant to serve. “It is its own line of business,” Johnson says. “Everyone is thinking about how to make this business better, more cost-efficient, more reflective of borrowers’ needs.”

For example, when the program first started, it offered just two ways to calculate the maximum size of the loan based on local market conditions; after feedback from lenders and building owners, they soon expanded that to four ways. The business took off after adding that additional level of flexibility — not too much flexibility that it was confusing, but just enough to capture the needs of most of the building owners they were trying to serve.

“What this gives us is a pathway to capital to provide financing on smaller deals,” says Jones. “It’s a natural extension for everything we’re doing.

In line with Jones’ vision, Basis also manages the Emerging Developer Loan Fund on behalf of the NYC Economic Development Corporation, the city’s quasi-public economic development authority. The loan fund provides affordable pre-development and acquisition financing for developers whose revenues are less than $10 million annually. With Basis managing the loan fund, it’s about as close as you can get to a direct onramp into the Small Balance Loan program.

Whatever a building owner’s gender or skin color, getting capital to less experienced building owners with shallower pockets is a key challenge, especially if you believe owners who come from low- and moderate-income neighborhoods are more likely to invest in modernizing and maintaining properties in those neighborhoods without displacing the communities where they grew up. If that’s what you believe, then think how much more it helps to have lenders such as Jones, who also comes from one of those neighborhoods.

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter.

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Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

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Tags: affordable housingreal estateequity

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