In 2007, Congress failed to appropriate money for its contractual obligations with respect to Section 8 subsidies. But with a weak real estate market, the cost of operating many of these buildings was also higher than the market rate rents available if the building was not in the subsidy program. In other words, the subsidized rents were higher than the market rate rents. And investors panicked. They began to demand huge escrows equal to the difference between what HUD was supposed to pay during the course of these 20-year contracts and projected market rents.
"Investors were basically making a decision not to invest in fully occupied buildings because they worried that Congress would abrogate its contracts," Schwartz says, explaining why MacArthur offered to provide a guarantee against this policy risk if investors eliminated the need to capitalize these very large reserves.
The result: the Enhanced Tax Credit Fund, seeded by MacArthur's $20 million unfunded guarantee, which raised $140 million from one subordinate investor (Mass Mutual) and senior investors including JP Morgan Chase, MetLife and United Bank to help finance the preservation and renovation of 18 Section 8 LIHTC properties in difficult markets like Findley, Ohio.
"If Section 8 blows up and disappears, we will have so many more problems," Schwartz says, alluding to the fact that 1.5 million households (many of them elderly) live in housing with this long-term subsidy. "We don't want to over-subsidize. We just want to make it easier enough to get the money raised that we need and to direct it where we want it to go."
In effect, MacArthur is back-stopping the federal government, and if the guarantee is drawn on, it will be a PRI. But without MacArthur's guarantee and Mass Mutual's subordinate equity, the transaction would not have happened. "Market rate impact investments don't come out of nowhere," Schwartz says. "In general, they are engineered."
A former investment banker, Ellie Winninghoff is a writer and consultant specializing in impact investing. Her work can be viewed at dogoodcapitalist.com and she can be contacted at [email protected].